INTRIGUING WORLD OF INSURANCE

SHAMSUL GHANI
(feedback@pgeconomist.com)
Sep 19 - 25, 20
11

For some apparently mysterious reasons, Pakistan's financial sector growth has been lop-sided. The twins, insurance and banking, have grown with the stigma of contrasting physique. Pakistan's total insurance assets are hardly 6 percent of the total banking assets. The known reasons for the dwarfed growth of insurance sector are: lack of awareness; failure on part of the business to recognize the ever looming threat of loss; and shortage of educated and skilled human capital. The lack of awareness is directly related to the low literacy rate. Poorly educated businessmen, mostly forming part of the informal sector, wish away the probability of uncertain yet potent threats of calamitous and catastrophic happenings. In the well-educated business societies, as Kenneth Arrow has said, most of the people prefer a gamble that has a hundred percent chance of a small loss (payment of premium) and a small chance of a large gain (insurance payout), to a gamble that has a 100 percent chance of a small gain (avoidance of premium payment) but an uncertain chance of a huge loss (no insurance payout).

Unfortunately, in our case, it is just the opposite. The CEO of IGI once pointed out: the insured losses of the major events of the last few years were only 2.3 percent of the economic losses of Pakistan. Tracing the lack of awareness to the poor education and backwardness, Niall Ferguson writes in his book The Ascent of Money: "the earliest forms of insurance were probably the burial societies, which set aside resources to guarantee a tribe member a decent interment. (Such societies remain the only form of financial institution in some of the poorest parts of East Africa).

COMPARISON OF ASSET-GROWTH OF INSURANCE, BANKING SECTORS

PARTICULARS 2004 2005 2006 2007 2008 2009

% SHARE IN ASSETS:

-Life Insurance 71.0 70.6 67.1 58.8 62.2 64.3
-Non-Life Insurance 25.2 26.6 30.0 37.2 33.5 31.7
-Reinsurance 3.8 2.8 2.6 3.5 3.6 3.2
-Takaful - - 0.3 0.5 0.7 0.8
Total Insurance assets (billion Rs) 175 202 246 325 341 387
Total Banking Assets (billion Rs) 3,043 3,660 4,353 5,172 5,628 6,516
Insurance assets as % of banking assets 5.8 5.5 5.7 6.3 6.1 5.9

Insurance has become an integral part of the developed and emerging economies' financial systems. The free market capitalism has tied insurance and banking sectors to act in tandem by advancing each others' business interests. The synergies developed by these two sectors have strengthened the financial system on one hand and widened the gulf of income inequalities on the other. The flow of wealth from the poor and the common tax payers to the rich and elite segment of societies has been guaranteed under the free market speculative operations. The recent global financial crisis saw investment bankers Lehman Brothers totally wiped off, and AIG insurance pulled back from the brink of disaster through the US government bailout packages which provided $130 billion to the insurance sector alone.

The damage wrought by the combo of insurance companies and banks was precipitated by the abolition of Glass-Steagall Act. Alan Greenspan, the ex Fed chairman writes in his book The Age of Turbulence: "Years in the making, the Financial Services Modernization Act finally did away with the Glass-Steagall Act, the Depression-era law that limited the ability of banks, investment firms, and insurance companies to enter one another's markets."

The German insurance expert Alfred Manes defined insurance in the following words: An economic institution resting on the principal of mutuality, established for the purpose of supplying a fund, the need for which arises from a chance occurrence whose probability can be estimated. Niall Ferguson, tracing the history of insurance funds, maintains that The Scottish Minister's Widow's Fund established in 1744 was the first such fund. He writes: "A fund that had originally been intended to support the widows of a few hundred clergymen grew steadily to become the general insurance and pension fund we know today as Scottish Widows...Today Scottish Widows alone has over Pound 100 billion under management. Insurance premiums have risen steadily as a proportion of gross domestic product in developed economies, from around 2 percent on the eve of the First World War to just under 10 percent today...What no one anticipated back in the 1740s was that by constantly increasing the number of people paying premiums, insurance companies and their close relatives the pension funds would rise to become some of the biggest investors in the world - the so-called institutional investors who today dominate global financial markets."

Coming back to the low insurance penetration in Pakistan (less than one percent), we observe that despite the onslaught of an earthquake and two floods and a multitude of looting and arson incidents, no worthwhile inclination to get insurance coverage has surfaced. In case it was the question of awareness alone, then the last four or five years should have been enough to convince the businessmen and the individuals to safeguard their life and property by taking out proper insurance policies. Besides education, the tax avoidance culture is also a major factor contributing to the low insurance penetration / density. To save tax, people indulge in under-invoicing and under-statement of their assets and suffer when unforeseen calamities strike. Developed and poor nations are hit by natural disasters without any discrimination. The difference is that the developed nations know how to dilute their financial risk in the face of calamities, and they do act accordingly. The poor and uneducated nations take the calamities as Divine retribution that needs to worldly measures to fend off. Our insurance companies emerge almost unscathed in the wake of devastating earthquakes and floods. On the contrary, Katrina in the US gave rise to more than 1.75 million insurance claims valuing $41 billion.