DEVELOPING ROBUST INSURANCE SECTOR
PAKISTAN NEEDS AN AUTONOMOUS INSURANCE REGULATORY AUTHORITY
SHABBIR H. KAZMI
May 21 - 27, 2012
After witnessing a decline of 16 per cent in its profitability during CY11, the nonlife insurance sector profits bounced back during 1st quarter calendar year (1QCY12) showing an enormous growth of 765 per cent quarter on quarter (QoQ) and 39 per cent year on year (YoY) in net profits. However, sector's topline (net premiums) remained in a depressed mode as it recorded a decline of four per cent YoY, while it was flat QoQ basis.
As expected, the claim ratio of the sector stayed around 59 per cent, similar to the last year's level. While claims expense showed a marginal decline of four per cent YoY, it posted an increase of 14 per cent QoQ. However, the management expense of the sector witnessed a rise of 13 per cent causing the combined ratio (core profitability ratio) to decline by five per cent YoY, 1.2 per cent QoQ, to 10.5 per cent in 1QCY12.
The top-2 players of the nonlife insurance sector, Adamjee Insurance Company and EFU General, recorded decline of 77 per cent and 23 per cent YoY respectively in underwriting results due to slow economic activities in the country.
Investment income has helped in boosting bottomline of the insurance sector, contributing 80 per cent to the sector's profit before tax, increasing by 101.5 per cent YoY, 66 per cent QoQ (mainly due to massive equity market surge resulting in huge gains).
Sector's administrative and general expenses, which plunged earnings during CY11, posted two per cent YoY decline but were massively down by 54 per cent QoQ in 1QCY12.
During outgoing quarter, market capitalization of the sector (representing its market performance) showed healthy recovery and increased by 32 per cent QoQ amid expectations of better 1QCY12 results as the equity market surged by 21 per cent during 1QCY12. As the major investment portion of the sector remained invested in the equity market, analysts expect any relief package on capital gains tax (CGT) would bode well for the insurance companies in improving their bottomline.
Insurance companies play two important roles 1) risk mitigation and 2) capital mobilization. In the prevailing scenario, both the things are of extreme importance. Since the country suffers from precarious law and order situation, all sorts of risks have to be mitigated, the most important being terrorism.
In any incident, there are two types of losses one pertaining to properties/assets and other to human lives. While any asset can be rebuilt taking care of the people suffering from temporary and/or permanent disability, compensating loss of earning members is just impossible. However, payment of claims helps in recovery from trauma and readjusting to harsh realities of life.
The other important role insurance companies can play is underwriting risk related to lending to farmers. The government aims at achieving food security. The objective can be achieved by meeting credit requirement of farmers.
Since agriculture is exposed to natural calamities, which are highly unpredictable and often most devastating, one of the possible available options is introduction of comprehensive crop scheme. It is encouraging to note that insurance companies are striving hard to achieve this objective, which cannot be achieved without active participation of the government.
A harsh reality is that insurance penetration in Pakistan has not improved despite commencement of business by Takaful operators. They were given ample time to overcome teething problems by not allowing conventional insurance companies to open Takaful windows. This was contrary to the policy followed in case of banking; conventional banks were allowed to open designated Islamic banking branches. Some of the experts say that in Pakistan people just don't realize the importance of risk mitigation. Previously, they were arguing that insurance is contrary to Shariah teachings and now they say Takaful is too expensive.
It is believed that granting of permission to conventional insurance companies to open Takaful windows would allow the existing players to not only bring down cost of acquiring Shariah compliant risk cover but also create awareness among the masses. This can be gauged from the fact that now conventional banks are involved in selling conventional insurance and Takaful products. Since commercial banks enjoy greater outreach, they are able to offer both the products and allow the customers to make their own choice.
One of the common complaints around the world is that insurance agents, termed the smartest salespersons, sell those products which a person or corporate does not require. The situation is worse in Pakistan because 1) bulk of the population is illiterate and 2) insurance agents are concerned about their own commission rather than offering appropriate product/cover. This dismal state of affairs can be attributed to lack of education and professional expertise of insurance agents.
This could be best understood that every year billions of rupees are collected by the fake insurance companies offering 'third party insurance'. The scam has been going on right under the nose of the regulator and government for decades. Despite brought to the notice several times, this illegal activity has yet to be curbed by the securities and exchange commission of Pakistan (SECP). It may be said that the commission does not have appropriate expertise at its disposal.
Ironically, the commission is not ready to let power to oversee insurance companies to any other regulatory. In India and even Bangladesh, the governments have established autonomous insurance authorities. One completely fails to understand the stubbornness of high-ups at the commission. If the state bank of Pakistan is the designated authority to monitor performance of commercial banks, why can't a standalone and autonomous entity such as Pakistan insurance regulatory authority be established in the country?
Additionally, if 90 per cent of nonlife insurance business is controlled by less than half a dozen companies why the remaining companies should be allowed to operate? Since many of these companies have been placed on 'defaulters' counter' long ago and have also failed in showing any signs of improvement, it would be most appropriate to ask the sponsors to opt for voluntary liquidation. However, protecting the interest of investors must be the prime objective. Insurance sector can be made robust only when it will be operating under an autonomous authority. The SECP has enough in its plate and letting insurance out of its control would make no difference.