TWO-PRONGED BENEFITS OF INSURANCE
SHABBIR H. KAZMI
Sep 19 - 25, 2011
Commonly insurance companies are known for mitigating risks. Since they have ample cash at their disposal, received as premium, with the passage of time these have also become one of the major providers of capital. They mainly invest in the shares and debt instruments issued by the companies listed at the local stock.
In Pakistan, history of insurance companies predates independence as a number of foreign companies were operating in this part of the world.
Eastern Federal Union Insurance Company (now known as EFU General Insurance) was the first insurance company owned by Muslims that moved its head office to Pakistan soon after independence. The number of players proliferated but nationalization of life insurance business by the Government of Pakistan (GoP) in early seventies changed the entire landscape.
For decades, State Life Insurance Corporation of Pakistan (SLIC) remained the sole provider of life insurance policies in the country.
As the government decided to adopt policy to liberalize, decontrol, and privatize, private sector was also encouraged to establish life insurance companies. Though, new companies have been established, SLIC continues to enjoy lion's share in the business and will most probably remain the biggest player for many years to come.
Over the years, EFU Life Assurance has emerged as the second largest and the fastest growing private sector life insurance company.
Lately, Adamjee Life Insurance has been created with foreign equity participation and seems to be making good progress. Other than these, nearly half a dozen life insurance companies are operating in the country.
Insurance business in Pakistan is done by private sector as well as public sector companies. State Life Insurance Corporation of Pakistan, National Insurance Corporation and Pakistan Reinsurance Corporation are the leading players from the public sector. Within the non-life insurance segment, bulk of the business is shared by four entities namely Adamjee Insurance Company, EFU General, IGI Insurance and New Jubilee Insurance.
Some of the companies fall in the category of 'captive' insurance companies because these have been sponsored by the commercial banks and/or by some large groups.
It may be true that they also cater to the needs of other clients but draw bulk of the business from the associate companies.
A point of real concern is that only one reinsurance company is operating in the country and local insurers are forced to acquire reinsurance from foreign companies.
About a dozen foreign reinsurance companies are actively doing business in Pakistan. They offer competitive rates but have been forced to raise these because of global financial debacles, catastrophes, and rising incidents of sabotage and terrorist attacks.
Due to deteriorating law and order situation, increasing suicidal attacks and sabotages securing 'terrorism cover' has become unavoidable for many of the government and commercial entities. The tariff for this kind of cover is very expensive and unless the government takes active part by creating terrorism pool, it would remain unaffordable.
This type of cover has gained popularity in India because clients were paid claims promptly after the Mumbai attacks. Many of the commercial establishment had to incur huge losses and to be compensated by the government in Pakistan because those commercial entities had hardly bothered to acquire this cover or only a partial cover was obtained.
The activities of insurance companies can be clubbed under two major heads: risk mitigation and capital formation. Risk mitigation business is normally divided into four major segments: 1) marine, 2) property, 3) auto and 4) miscellaneous. Billions of rupees are collected as premium every year. Out of this, a portion is used for acquiring reinsurance cover and bulk of it is invested in equities market and real estate.
Investments made by the insurance companies in stock market (shares and debt instruments) runs into billions of rupees. Enjoying ample liquidity insurance companies not only make long term investments but also trade following the much talked about rule 'buy on dip and sell on strength'. The income from investment in equities comes in the shape of dividend income as well as capital gains.
Often, the time income from investment exceeds the profit earned from the core underwriting activity. This is often termed strength on an insurance company.
Till recently capital gains used to contribute substantial share towards the overall profit of the insurance companies. However, with the introduction of capital gains tax (CGT) these companies are no longer keen in making medium-term investment in equities market.
The policy of insurance companies to stay away from equities market has led to shrinking of trading volume.
The major inflow of life insurance companies come from first year premium followed by annual renewals, whereas the nonlife insurance companies draw bulk of their premium from 'mandatory requirement of the lenders' i.e. foreign trade, property and automobile.
However, the demand for business interruption, travel, and health insurance is on the rise. More and more businesses are seeking business interruption cover because of growing incidences of riots in the country.
Similarly, one cannot get visa of many countries unless travel insurance cover is obtained.
While only one specialized company-Allianz EFU, is in health insurance business-almost all the issuers offer health policies for the groups as well as individuals.
There is growing realization that following this strategy not only helps the corporate in curtailing medical expenditures but also offering better facilities to the employees. This also enables hospitals to take good care of patients as it ensures regular and enhanced cash flow for them.
Over the years, introduction of mandatory insurance of the credit extended to farmers has helped the banks in boosting disbursement of loans to the farmers.
The lenders feel more secure and probability of loans turning delinquent is lower in case any natural calamity hits. This became evident after 2010 torrential rains and deluge.
The lending to farmers has lately exceeded Rs250 billion. However, there is also a realization that lending of Rs250 billion is only a miniscule amount for the agriculture that contributes around 25 per cent to the GDP of Pakistan. To make agriculture more robust and achieve food security more loans have to be disbursed among the farmers. However, the objective cannot be achieved without participation f the government. We can benefit from the Indian experience.