Insurance Industry Scenario In Pakistan

The insurance industry in Pakistan, which should be described as a business rather than an
industry – has shown some rapid progress in recent years. When Pakistan was established in
1947, there were 77 insurance companies in all. Today there are 52. In 1947, 70 of those 77
companies were foreign companies and/or their branches. Today there are 10. The seven local
companies have 47 years later become 42, and might have been more had 32 of them not been
nationalised on March 18, 1972, when their life insurance business was brought into the public
sector, and consolidated under the aegis of the State Life Insurance Corporation of Pakistan.

Today, Pakistan has 52 companies conducting general business. They offer primarily Fire,
Marine, Motor and Accident cover. The composition of general insurance business is
Understandable, considering the lack of sophistication of our domestic environment. In 1993,
Fire (including-Profits) accounted for 32.2 per cent of the Gross Direct Premiums, Motor for
33.1 per cent, Marine (including Hull) Premiums for 23 per cent and Accident (including
Engineering) for 11.7 per cent.

The concentration of business amongst the insurers themselves presents a curiously disjointed
picture. The 10 foreign companies have only a 10.5 per cent share of the Gross Direct Premiums,
and of the 41 Pakistani companies operating in the market, 35 of them share 18 per cent of the
business, while only 6 companies command and control 71.5 per cent of the general business.

What these companies share in common, though, is an obligation (an onerous one according to
some) to reinsure a mandatory 20 per cant (it used to be 30%) of their insurance business with
Pakistan Insurance Corporation (PIC), which was established in 1952 to provide reinsurance
facilities within Pakistan and overseas, and to develop the insurance by offering technical and
expert advice. PIC has grown substantially since 1953, with its Gross Premium Income in the
last five years being above the 1 billion mark. Its overall profitability has wavered, falling from
an all time high of Rs. 119 million in 1991 to below Rs. 50 million in 1991.

Apart from this obligation to reinsure with PIC, the general insurance companies are left largely
to themselves and expected to be self-regulatory. Their Fire, Motor, Workmen's Compensation
and Marine classes of business are governed by a Tariff which is determined by themselves
through their Insurance Association. Their maximum statutorily approved agency commission
rates of 15 per cent for Marine business and 20 per cent for Non-Marine business have become
more gentlemanly statements of intent than rigorously enforced standards.

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In their business, insurance companies are monitored by the Controller of Insurance, an
administrative arm not of the Ministry of Industries but of the Ministry of Commerce. They are
regulated by Insurance Rules of 1958, approved in the same year as the distant Martial Law coup
of Ayub Khan. And they are governed by a law - the Insurance Act of 1938, promulgated a year
before the outbreak of the Second World War. To fatalism and pragmatism, one should perhaps
therefore add the world Archaism, for no sector of Pakistan's financial services market stands so
deeply mired in its past, nor has as much need for deregulation and modernisation, if it is to
prepare itself for the future. than the insurance business sector in Pakistan.

There is no equivalent to the Companies Ordinance 1984 in the insurance sector. There is no
appropriate counterpart to the Corporate Law Authority, to give an impetus to its development or
to safeguard the interest of the public. The recent spectacular growth in the financial services
sector, in my opinion, was no accident. It was the direct fertile result of an environment made
receptive by regulated incentives and governmental initiative.

Can the insurance business of Pakistan achieve the same sort of success? I cannot see why not.
What than should be the direction of the insurance sector? What should be its role? An attempt
was made seven years ago to answer these questions when, in 1987, a Government Commission
was constituted to diagnose the malaise in the insurance sector. The report, submitted to the
Government three years later, identified some of its more reprehensible practices - for example,
the methods used by insurance companies to obtain business particularly through banks,
irregularities in settlement of claims, the indisciplined and unethical practices of insurance
surveyors, methods of rebating, commissions to agents, and discounts.

Whatever good that three volume report contained was interred with its bones; the evils it hoped
to exercise continued to live long after it. More recently, last year in August 1993, another review
took place when, in an Overview of the Insurance Industry by one of the leading brokerage
houses, Khadim Ali Shah Bukhari Limited, the major problems were identified as:

* Excessive Government controls

* Compulsory reinsurance with PIC

* High capital gains tax on investment gains

* Higher rate of tax on dividend income than 10%

* Inaccessibility to public sector business, which is the domain of the National Insurance
Corporation

* Poor quality of manpower and limited training facilities

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It would be hard to question the justification for these complaints. It would be even harder to
justify why the insurance companies have done so little to assuage them. If the future role of the
insurance business sector is to grow and match the expanding requirements of Pakistan's
economy, there are key areas in which the insurance companies must themselves take the
initiative. The first must be education. No one should be allowed to forget that insurance being a
customer service oriented business, its success depends heavily on the quality and calibre of its
personnel. In the United Kingdom, it was once considered enough for a new entrant into the
business to have five GCEO levels and then spend his life within the same organisation learning
the job on the job. Today, anyone wanting to make a career in Insurance should expect to be
ready to tackle very focused courses, like those conducted by the College of Insurance in
London.

Apart from such foundation topics as Personnel Development Skills, Surveying and Risk
Management, Reinsurance, Aviation and Marine, the students at the College are also offered such
specialised subjects as European Law, the Use of Annual reports and Accounts for Errors and
Omission Avoidance, Insolvency Rules and Regulations, and Financial Reinsurance and
Derivatives.

Insurance may have been a business by men; it is rapidly becoming one managed by women. An
interesting aftermath of the second income phenomenon has been that in the United Kingdom,
out of a total employment in the insurance business of almost 400,000 employed, 49.3 per cent
have been women. Another significant feature has been that 8 per cent are the total strength is
self-employed.

This emphasis on education, though needs to go beyond the potential or existing employees in
insurance companies. Another audience whose knowledge of the insurance business should never
be presumed but whose ignorance can have damaging consequences is that of the lawmakers
themselves. It took Great Britain over a century to recognise the significance of this advantage.
Only as recently as 1991 was an All Party Parliamentary Group on Insurance and Financial
Services formed to act as a bridge between the lawmaking MPs and a law-abiding industry.

Without a better understanding of the business of insurance, should one honestly expect
legislators to be able or equipped to promulgate sound and appropriate laws? And what about the
laws themselves? Can there be legislation of any adequacy without an accepted definition of
such simple but crucial words in a policy as 'theft', or 'flood', 'accidental bodily injury' or
'reasonable steps to safeguard any property insured? Are we ourselves clear on what we all
understand by Warranties, Responsibilities for Disclosure, Misrepresentations, and the Broker's
responsibilities to his or her clients?

Such legislative clarity is difficult to achieve but necessary to attain, for without such a suitable
legal framework, and a regulatory environment which is both sensitive to and responsive to
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changes, the future growth of the insurance business in Pakistan will continue as before - a blind
perpetuation of arcane laws and the mindless repetition of previous practices. Can Pakistan
afford such an addition to history? Can our insurance Industry avoid the responsibility for
developing new products more attuned to the specific needs of our economy?

The future of the insurance sector must connect with the permanent features of our economy. If
we are still fundamentally an agrarian society, we have to expand crop, livestock and other such
agrarian insurance schemes. The 1988 National Commission on Agriculture, incidentally, makes
no mention of insurance anywhere in its 644 page report. If we are gradually expanding into an
urban economy, we have to consider widening schemes which provide household and personal
effects insurance.

If we want to build our own motor cars to speed on our own multi-lane highways, we have to
fashion policies which provide cover not simply for the vehicles, its passengers, third party
liability, but also anticipate the responsibilities incumbent on highway authorities regarding the
condition of the roads. If we want to maximise the safer and more efficient use of our railway
system, we must encourage the Pakistan Railways to obtain cover for risks which are germane to
their operations. Similarly, insurance cover of transport by road should not be left to the goodwill
of the transporters, many of whom regard self-insurance, like rash driving, as the best form of
protection.

If we are veering towards industrialisation, products coverage should have to go beyond fire
insurance of the factory and stocks Loss of profits insurance, safety standards, more open
disclosure of actual replacement values, a fairer participation of the premium/risk are some of the
more brittle realities businessmen will have to learn to accommodate. And if we are to have a
population which is refusing to stop at 120 million, and is taking longer to grow older, clinical
risk management will become continuing rather than occasional features of our economic
society. Health insurance will become more than simply reimbursing medical bills. It could and
must in time cover risks in obstetrics and gynaecology, health care management, managing
financial risks like contract clauses and indemnities, drugs cases and claims associated with
environmental hazards.

And if we are a nation that attaches a value to the life and well-being of our citizens, a nation
which advocates the work ethic, and a nation which encourages life insurance as a means of
channelling savings into productive investment, the future role of the insurance sector - both of
Life and General - will be a translation of these responsibilities and opportunities into productive
action.

The largest mobiliser of funds in the insurance market has been unquestionably the State Life
Insurance Corporation of Pakistan. Since 1972, following the traumatic nationalisation of life
business, SLIC has grown tremendously. Its premium income has increased from Rs. 316 million
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in 1973 - the first year of its consolidation to Rs. 5 billion in 1994, equalling the total Gross
Direct Premium of all the 52 companies in the general sector.

SLIC's investment portfolio grew from Rs. 1.4 billion to Rs. 21 billion, and not surprisingly
SLIC's investment income has now become almost one-third of its total income. Its yield on Life
Funds is about 14.4 per cent which may explain why the new companies which have been
granted permission to do life business are displaying an understandable hesitancy.

Nothing is secret in the public sector, and certainly the use of SLIC's funds over the years to
finance Government has been no secret. SLIC's portfolio consists primarily of Government
securities. That in itself is not a problem. What one needs to identify is the impact on the
Government's reliance upon SLIC as a resource, should SLIC be privatised to the point where its
policies could be brought more in line with market imperatives and competitive investment
options.

It is already more than eight years since the Insurance Reforms Commission was established.
During this period, because of Deregulation and Privatisation, the whole financial services
market has undergone an irreversible change. Further privatisation will bring about additional
responsibilities, which means more costs, as insurance of commercial risks becomes no longer a
matter of choice but an inescapable requirement. Businessmen of tomorrow will have to accept
that insurance policies are not a chance talisman against calamities. Used prudently, they can be a
resilient and reliable safety net, providing them and the economy with a level of confidence to
take risks which are quantifiable and knowingly and prudently underwritten.

In another six years Pakistan will be in the 21st century. No one would expect that all of the
aspects of the insurance business whether legislative, regulatory or commercial - will be in place
by then. A reasonable expectation would be that significant steps would be taken to move in
those directions.

Talleyrand once said that war is much too serious a business to be left to military men. Similarly,
perhaps, the future role of Insurance in Pakistan is too serious to be left only to insurance men.
Its future lies in the hands of better informed legislators, more responsible insurance
professionals, and perhaps most importantly of all, more discerning and demanding customers
themselves. Collectively they can, and I am sure, will fashion the future role of the insurance
sector in Pakistan.

List of Major Insurance Companies

Operating in Pakistan
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1. ACE Insurance Ltd.

2. Adamjee Insurance Co. Ltd.

3. Agro Gen. Ins. Co. Ltd.

4. Alfalah Insurance Company Ltd.

5. Alpha Insurance Co. Ltd.

6. American Life Insurance Co.(Pak.) Ltd.

7. Asia Insurance Co. Ltd.

8. Askari Gen. Ins. Co. Ltd.

9. Atlas Insurance Limited

10. Capital Insurance Co. Ltd.

11. Central Insurance Co. Ltd.

12. Century Insurance Co. Ltd.

13. Cooperative Ins. Society of Pak. Ltd.

14. Crescent Star Ins. Co. Ltd.

15. East West Insurance Co. Ltd.

16. East West Life Assurance Company Ltd.

17. EFU General Ins. Ltd.

18. EFU Life Assurance Limited

19. Excel Insurance Co. Ltd.

20. Habib Insurance. Co. Ltd.

21. IGI Insurance Limited

22. New Hampshire Ins. Co.

23. New Jubilee Ins. Co. Ltd.

24. New Jubilee Life Insurance Company Ltd.

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25. Pakistan Gen. Ins. Co. Ltd.

26. PICIC Insurance Limited

27. Premier Insurance Limited

28. Reliance Insurance Co. Ltd.

29. Saudi Pak Insurance Company Ltd

30. Security Gen. Insc. Co. Ltd.

31. Shaheen Ins. Co. Ltd.

32. Silver Star Ins. Co. Ltd.

33. Trakker Direct Insurance Limited

34. UBL Insurers Limited

35. United Ins. Co. of Pak. Ltd.

36. Universal Ins. Co. Ltd.

References:
• Insurance Assosiation OF Pakistan, Year book, 2007-2008
• www.iap.net.pk

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• Wikipedia Encyclopedia
• F.S. Aijazuddin, Economic Review Of Pakistan, 1996

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