Aug 9 - 15, 2010

Insurance companies play an important role in the growth of economy of any economy and Pakistan can't be an exception. These companies not only help in risk mitigation but also play a key role in the capital formation. The growing incidents of terrorist attacks require coverage of the commercial buildings and properties owned by various government departments under terrorism clause.

The number of deaths resulting from these heinous acts also demands that each and every individual must be insured. It is true that claims paid by the insurance companies can't be the compensation for the loss of near and dear and property but certainly help in recovery from the trauma. In an exclusive interview with Saifuddin Zoomkawala, Managing Director, EFU General, this scribe explores the role played by the insurance companies, the performance of non-life insurance companies in general and performance of EFU General in particular and need for bringing change in the regulatory framework for enhancing insurance penetration in Pakistan.


A closer examination of the earnings reveals comparatively better earnings as compared to previous two years. But it must also be kept in mind that 2007 and 2008 were rather unusual. Though, during last two years economy of the country remained subdued for a number of reasons certain incidents have a lasting impact on the performance of insurance companies. In 2007 assassination of Mohtarma Benazir Bhutto and the carnage and burning of properties in the aftermath resulted in the payment of huge claims by the insurance companies, affecting income from the core activity of non-life companies. However, bottomline of insurance companies didn't reflect the impact because capital gains made were exceptionally high.

Though, no untoward incident took place in 2008, plunging of stock market in deep and prolonged bearish spell and subsequent imposition of floor pushed the benchmark KSE-100 index to very low. Impairment of value of shares of the listed companies forced the insurance companies to make heavy provision. Neither the economy nor the stock market got any impetus during 2009. Baring one off or specific transactions, earnings didn't grow significantly. However, the strength of leading companies, controlling bulk of the market share was evident by the payment of dividends, despite posting nominal profit or loss.


Performance of insurance companies is the mirror image of performance of the economy. Over the last few years performance of the economy remained far from satisfactory. High cost of doing business impaired performance of corporations leading to retrenchment, though not at a massive scale. Higher inflation shrunk disposable income and looming uncertainty forced people to defer their investment decisions, particularly purchase of consumer durables. Worst hit was automobile sector where sales reduced to nearly half. Till 2007 a substantial portion of premium was coming from auto insurance. Declining trend in imports also had a toll on marine business. On top of this re-insurers also started demanding hike in tariff. It was not Pakistan specific but a global phenomenon.


Over the years I have been saying that the regulators will have to play a proactive role in resolving the key issues facing the insurance companies. In this regard certain amendments must be made in the Insurance Ordinance 2000; nearly a decade has passed since promulgation of this ordinance and many of the ground realities have changed. There was an embargo on conventional companies for opening up Takaful windows till 2010. The time has come to make a crucial decision. In my opinion, conventional insurance companies are better poised to undertake Takaful operations through their Takaful windows simply because of their better understanding of the risk mitigation business and greater outreach. Permission to conventional commercial banks to open designated Islamic banking branches also strengthens our case.


Pakistan is the frontline partner in 'War against Terror' and now the war is being fought within its borders. In this war militants are targeting all sorts of installations from hotels to government offices and from mosques to schools. Their only objective is to cause maximum damages. While forces are trying to weed the foreign as well as local militants out, it also becomes the collective responsibility of all the stakeholders to minimise incidences of damages. After 9/11 as well as Mumbai attacks all the governments have either established 'Terrorism Pool' or are in the process of creating this resource. Since the cost of terrorism cover is high it is deemed necessary that the governments should also make the contribution. In Pakistan clients have started acquiring terrorism cover, despite being expensive. The need of the time is that the government also joins the insurers to make this cover affordable.


Signs of economic revival have started appearing. Private sector credit takeoff is improving but load shedding of electricity and gas is hampering the growth. Foreign investment in the stock market has once again enabled the KSE-100 index to cross 10,500 mark. There is also growing realisation for bringing the interest rate down. Rupee has started showing strength against dollar and foreign exchange reserves are on the rise. I strongly believe that there is no scarcity of resources in Pakistan. Over the years we have been suffering because of lack of long-term planning, mismanagement and above all bad governance. Even the prevailing energy crisis is the outcome of gross inefficiencies, mismanagement and rampant corruption. Entering into a standby arrangement with the International Monetary Fund has provided the country the much needed breathing space and now it is the turn of economic managers to avail the opportunity in the best possible manner.