Insight into Pakistan Life Insurance Sector - · PDF fileInsight into Pakistan Life Insurance Sector April 2013 Life Insurance Concepts Global Scenario of ... Private sector LIC Total

Insight into Pakistan Life

Insurance Sector

April 2013

LifeInsuranceConcepts

Global Scenario of life Sector

Pakistan’s Sector Profile

Competitive Analysis

Performance Analysis -

Profitability

Performance Analysis - Assets

Strengths and Risk

Snapshot

Life Insurance Key concepts


Life Sector Highlights in selected regions

Sector Profile


Performance Analysis of life Sector

Profitability

Assets Allocation and Investment Strategy

Key strengths of life sector in Pakistan

Risks analysis

Life Insurance Concepts





profitability


Strengths and Risk

The insurance company pays in case of demise of the policyholder or at the

time of maturity of the policy

The Payment of benefit is contingent upon termination or continuation of

human life.

Investment linked contract: the benefit is calculated with reference to either (i)

a running account, or (ii) units.

Participating life Insurance: The policyholder has an entitlement to participate

in distributions by the life insurer of profits or surpluses. This excludes

investment-linked contracts, health contracts, group life contracts and group

health.

Mortality Risk, Morbidity Risk, Longevity Risk







prfitability


Strengths and Risk

Life insurance differentiated in Pakistan

Life Insurance Business Classes General Insurance Business Classes

1 Ordinary life business; 1 Fire and property damage business;

2 Capital redemption business; 2 Marine, aviation and transport business;

3 Pension fund business; and 3 Motor third party compulsory business;

4 Accident and health business. 4 Liability business;

5 Workers’ compensation business;

6 Credit and suretyship business;

7 Accident and health business; and

8 Agriculture insurance including crop insurance;

9 Miscellaneous business;

Company registered as General

Insurance and term of contract

is not greater than one year

H

U

M

A

N

Insurance of

agricultural

Assets

(e.g. livestock)

1 1






prfitability


Strengths and Risk

Life insurance productsRisk and earnings profile

Risk Protection Savings

Products

Term Assurance Whole Life

Deffered Fixed and variable

Annuities

Group Life Universal Life Unit-Linked Savings

Disability Variable Life Guaranteed interest contracts

Long term Care Endowment Insurance Defined Contribution Pension

Critical illness Combined Life Annuity

Payout Annuities

Risk of a Life

Insurance

Company

Mortality Mortality Lapse

Morbidity Morbidity Interest Rate

Longevity Longevity Equity Market

Lapse Lapse

Interest Rate

Equity Market

Main Source of

earning

Underwriting result Underwriting result Investment Income

Investment Income Investment Income Fee Income






prfitability


Strengths and Risk

2

Global Scenario of

Life Insurance Sector


GlobalScenario oflife Sector




profitability


Strengths and Risk

Life Insurance | Global Mix

Regions

2011

Premium

(USD bln)

Market

Share

Premium

% of GDP

Premium

Per Capita

(USD)

America 661 25% 3.0% 704

Europe 940 36% 4.0% 1,082

Asia 924 35% 4.2% 224

Africa 47 2% 2.5% 45

Oceania 47 2% 2.8% 1,298

WORLD 2,619 3.8% 376

Markets Picked

up for

comparisonPremium USD (market share | penetration | Density)

United States: 554 (21%| 3.6% | 1,737)

Germany: 114 (4% | 3.2% | 1,396 )

India: 60 (2.3% | 3.6% | 68.7)

Pakistan: 0.8 (0.03% | 0.7% | 7.7)

Globally, life insurance accounts for 57% of total premium

PREMIUM GROWTH

During 2011, the life sector premium dropped by 3% in real terms (2010: growth of 2.9%);

business in western Europe witnessed a significant dip of 9.5%, while South and East Asia

plunged by 10.6% in real term.

Premium Growth during CY11 in Pakistan (24%) was superior to that of India (negative

6.6%), US (growth 7.3%), UK (growth 4.1%) and Germany (0.1%).

3






profitability


Strengths and Risk

Demographics compared World Pakistan India US Germany

Population7,016,238,890 190,291,129

(ranked 7th)

1,205,073,612

(ranked 2nd)

313,847,465

(ranked 3rd)

81,147,265

(ranked 16th)

Mix 1.01 male(s)/female 1.06 male(s)/female 1.08 male(s)/female 0.97 male(s)/female 0.99 male(s)/female

Population growth 1.1% 1.55% 1.31% 0.9% -0.2%

Death rate 7.99 deaths/1,000 6.8/ 1,000 7.4/ 1,000 8.4/ 1,000 11.0/ 1,000

Urbanization 52% 38% 32% 84% 74%

Savings as %GDP n.a 20% 34% 12% 24%

Pakistan’s potential market;

- younger population, higher growth rate

- Lower death rate

- Growing urbanization

World

Pakistan

India

US

Germany

26%

35%

29%

20%

13%

17%

22%

18%

14%

11%

41%

35%

40%

41%

42%

8%

5%

7%

12%

13%

8%

4%

6%

14%

21%

Age Profile of population

0-14 15-24 25-54 55-64 65 and above

9%

34%

4

5






profitability


Strengths and Risk

Life Sector Highlights

In Selected Regions






profitability


Strengths and Risk

US Life Sector Highlights

Life (20%), Annuities (53%), and Health (27%)

Regular Premium (77%), single premium (33%)

Individuals (63%), Group (37%)

Net Gain from Operations: Life (5%), Annuities (2%), and Health

(6%)

Voluntary

termination

Rate: 6.1%

49%

22%

70%

41%

26%

36%

24%

10%

1%

2%

0%

0%

0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Life Annuity Health Aggregate

US - Claims Experience

Matured endowments

Policyholder dividends

Surrenders

Payment to beneficiaries

Commission

Ratio: 8%

Home- and

field-office

expenses :

9%

6






profitability


Strengths and Risk

US Life Sector Highlights (…continued)

Net return on invested assets

Total Assets: 4.4%

General Account: 5.3%

Stocks79%

Other invested assets6%

Non-invested assets1%

Government securities3%

Corporate securities6%

Mortgage-backed securities

5%

Other14%

Assets - Separate Account

Weighted Average Maturity of bonds: 10 years

Bond Quality: 93% investment grade, and 0.2% default

Note: The general account supports contractual obligations for

guaranteed, fixed-dollar benefit payments, such as life

insurance policies. The separate account supports

liabilities associated with investment risk pass-through

products or lines of business






profitability


Strengths and Risk

Europe Life Sector Highlights

Channels Largest

Bancassurance Malta (92%)

Brokers UK (78%)

Agents Slovakia (60%)

Direct Selling Croatia (39%)

Other intermediaries Sweden (44%)

Most diversified Channel Mix

Poland 32% Direct and Banca each

Croatia 39% Direct

Sweden 44% Others

Lex 46% Agents

Germany 48% Agents

Persistency: Financial Services Authority 2011 Survey (UK)

Reasons why consumers let their policies lapse

Suitability

and

affordability

Product

performance

Changes in

personal

circumstances

Changes in

product

design

Sales

Channel

Economic

environment

7 7

8






profitability


Strengths and Risk

Europe Life Sector Highlights

Persistency: Financial Services Authority 2011 Survey (UK)

Persistency (Average 1993-2010)

After Years (%)Company representatives Independent financial advisers Direct offer advertisements

1 year 2 years 3 years 4 years 1 year 2 years 3 years 4 years 1 year 2 years 3 years 4 years

Regular premium

Endowment 92.2 86.1 80.2 73.7 95.1 90.0 84.4 78.6 93.9 88.7 83.8 79.1

Whole life 90.9 82.5 74.5 67.6 94.2 89.0 83.8 79.4 88.3 83.7 80.8 78.6

Other Life 87.1 74.8 62.6 53.1 91.4 82.6 74.6 67.5 - - - -

Single premium

All others 98.1 94.8 90.6 85.9 98.4 95.9 92.5 88.1 - - - -

Other Operating

Expenses

ratio: 2.4%

Germany | Key take aways from

Commission

Ratio: 10%

4% 4%

41%

56%

14%16%

20% 21%

0%

10%

20%

30%

40%

50%

60%

2010 2011

Claims Experience

Death maturity surrender Others

9

10






profitability


Strengths and Risk

India | Pakistan’s neighbor

Liberalized in early 2000s | one state owned Life Insurance Corporation (LIC) still dominates the market

LIC dominates the market with ~70% market share | top five private sector market share 50%

Product mix shifting to non-linked plans as indicated by first year premium

Private sector makes use of relatively diverse mix of distribution channels

Individuals, 83%

Group, 17%

India - Premium Mix

8%18%

24% 20%16%

45%

3%21%

76%

36%

72%

59%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Linked Non-Linked Linked Non-Linked

Private Sector LIC

India - Premium Mix

Single Premium First Year Renewal

India – Premium Mix

Distribution Channels

Premium (%) individual

agents

banks corporate

agents

brokers direct

selling

LIC 97 3 - - -

Private sector

44 39 8 5 4

11

12






profitability


Strengths and Risk

India | Pakistan’s neighbor (….continued)

35%

55%

49%

42%

59%

54%

6%

7%

6%

5%

7%

6%

18%

8%

11%

18%

7%

10%

66%

75%

72%

31%

65%

55%

-28%

-47%

-41%

-6%

-42%

-31%

-1%

-2%

-2%

3%

-3%

-1%

-50% -25% 0% 25% 50% 75% 100% 125% 150%

Private sector

LIC

Total

Private sector

LIC

Total

FY

11

FY

12

India - Policyholders Account

Benefit ratio Commission Ratio Operating Expenses ratio

Reserve ratio Investment Income Other income/expense ratio

94%

94%

93%

96%

96%

96%

Operating

Ratio

13






profitability


Strengths and Risk

India | Pakistan’s neighbor

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Traditional Products ULIPs Funds

39%

18%

8%

32%

94%

4% 6%

India - Asset Allocatio (policyholders)

Central Government Securities State Government & Other Approved Securities

Infrastructure Investments Approved Investments

Other Investments






profitability


Strengths and Risk

14

*

* Unit Linked Funds

Life Insurance Sector

In Pakistan 15






profitability


Strengths and Risk

Pakistan Life sector

Liberalized in early 90s | only state owned insurer is State Life Insurance

Corporation (SLIC)

SLIC dominates the market with ~63% market share | private sector concentrated in

two companies (market share end-Dec12: 73%)

*

*Excluding Asia Care

CY06 CY07 CY08 CY09 CY10 CY11 CY12E

Private Takaful 1 130 516 1,532 2,523

Private Non-takaful 6,149 8,389 11,505 13,227 16,589 22,497 30,439

Public (SLIC) 15,992 18,717 22,695 28,367 35,639 44,812 55,733

Nominal GPW Growth 20% 22% 27% 23% 28% 29% 28%

72%69%

66%

68%

68%

65%

63%

28%

31%

34%

32%

31%

33%

33%

0%

0%

1%

2%

3%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

GP

W G

row

th

PK

R b

ln

Sector Structure and growth

0

1

2

3

4

5

6

7

8

9

CY06 CY07 CY08 CY09 CY10 CY11 CY12

Number of partcipants

Public (SLIC) Private Non-takaful Private Takaful






profitability


Strengths and Risk

Pakistan Life sector

98% of investment linked premium pertains

to unit linked life schemes

At end-Mar13, the product slate comprises

~152 insurance plans, including lately

influxed bancassurance schemes (~84)

premium from endowment plans fetches

more than 33% of the total industry’s

premium (in CY11).

life sector has tide knots with more than 17-

20 commercial banks, fetching approximately

68% of the private sector premium

Bank deposits grew by CAGR 10% -11%

(since CY07)

the health insurance growing rapidly,

however, general insurance sector is working

with relatively more vigor and zest.






profitability


Strengths and Risk

Individuals -

Conventional

83%

Individuals -

Health and

Pension

3%Group

14%

Public sector (SLIC)

Individuals -

Conventional

3%

Individuals -

Investment

Linked

84%

Individuals -

Health and

Pension

0%

Group

13%

Private Sector

Competitive Analysis of the Sector

Suppliers

Reinsurer

• Risk sharing

• High cost if not reinsured

Distribution Channel

• Agents

• Banca

SECP (in the shoes of regulator)

• License

• Product design approval

Low Power

Low dependence of life insurer | low cession level

Moderate Power

Commission structure is higher in Pakistan | higher commission

ratio than India

Moderate Power

When Compared with India’s IRDA and Pakistan’s SBP for

banks

Moderate to low Risk






Profitability


Strengths and Risk


Customers and Demand Dynamics

Low Demand and few players | Moderate Risk

Individuals

• Accepts premium rates quoted by Actuary/ company

• Can substitute life schemes with those of other saving schemes offered by banks and mutual funds, etc

Group | Corporate, FIs and banks

• Negotiates rates

• Often switch companies | low persistency

• High concentration risk






Profitability


Strengths and Risk


Barriers to Entry

RISKBARRIERS TO ENTRY

High Moderate Low

High Operational Legal

Moderate Regulatory

Low

•9-10yrs break even

•Strong IT infrastructure

requirements

•SECP puts limit on expenses

•High capital injections in

initial years

•Less lengthy licensing procedures than banks

and AMCs

•Commence operations 0.5-1year after

incorporation

•PKR 500mln (4% of avg premium) Vs. India

Rs. 1,000mln (0.8%)

•Solvency requirements

•Private sector allowed in 90s

•Conventional insurers

allowed Takaful window

– case in court

•Composite Insurance not

allowed






Profitability


Strengths and Risk

Performance Analysis – Premium Mix and Growth

30% 30% 31%

19% 21% 16%

50% 50% 53%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

CY10 CY11 9M12

Conventional

Public sector - Individual

Premium Mix

First Year Premium second Year renewal

Subsequent Renewals


Global General

Insurance




Profitability


Strengths and Risk

0%

5%

10%

15%

20%

25%

30%

35%

40%

0%

5%

10%

15%

20%

25%

30%

35%

40%

CY07 CY08 CY09 CY10 CY11 CY12E

Premium Growth

Private sector Public sector Total Nominal Growth

35% 31%24%

36% 34% 31%

26%21%

20%

22% 20% 19%

37%47%

56%38%

37%35%

2% 1% 1% 5% 9% 14%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

CY10 CY11 CY12 CY10 CY11 CY12

Conventional Unit-linked

Private Sector- Individual Premium Mix

First Year Premium Second Year Premium Subsequent renewals Single

Growth pattern of Public sector premium has

remained more stable than the private sector

Private sector first year premium is majorly

driven by unit-linked products, reflecting

changing trend in product mix

Influx of Single Premium products – unit linked

E

Performance Analysis – Claims Experience

5% 8% 5% 2% 2% 2%

44% 42% 40%

2% 2%1% 5%

12% 12% 14% 19% 10% 16%

22% 26% 27%

0%

10%

20%

30%

40%

50%

60%

70%

80%

CY10 CY11 CY12 CY10 CY11 CY12 CY10 CY11 CY12

Conventional Unit-linked Group

Private Sector - Claims Experince

Death Maturity Surrenders Others* * includes experiencerefund

6% 5%

94% 86%

25% 20%

11% 12%

4%

0%

20%

40%

60%

80%

100%

120%

CY10 CY11 CY10 CY11

Conventional Group

Public Sector- Claims Experience

Death Maturity Surrenders Others

6%


Global General

Insurance




Profitability


Strengths and Risk

Performance Analysis – Profitability

26%

48%

41%

23%

43%

37%

22%

26%

26%

26%

24%

25%

25%

21%

13%

15%

14%

12%

14%

14%

11%

49%

87%

75%

53%

83%

73%

70%

-21%

-77%

-60%

-20%

-69%

-54%

-31%

-100% -75% -50% -25% 0% 25% 50% 75% 100% 125% 150% 175% 200%

Private sector

SLIC

Total

Private sector

SLIC

Total

Private sector

CY

10

CY

11

CY

12

Statutory Funds

Claims ratio Commission Ratio Operating Expenses ratio

Reserve ratio Investment Income Other income/expense ratio

Operating

ratio

92%

95%

96%

92%

97%

99%

93%


Global General

Insurance




Profitability


Strengths and Risk

Performance Analysis – Assets






profitability


Strengths and Risk

Private Sector

CY11 CY12

1.7years 0.6years

Mix Mix

41% 3.3yrs 8% 0.8yrs

59% 0.5yrs 92% 0.6yrs

Public Sector

Weighted

Average

Maturity

Security CY11 CY12E

Gov Sec 14.2years 12.8years

Mix Mix

PIBS 96% 14.2yrs 97% 12.8yrs

T-bills 4% 0.0yrs 3% 0.0yrs

PKR mln CY11 CY12

Investments

Shareholders Funds 4,752 5,145

Statutory Funds 323,802 396,656

328,554 401,801

Total Assets

Shareholders Funds 6,616 6,425

Statutory Funds 413,593 339,072

420,209 345,497

Liquid Assets/

policyholders

liabilities

1.0 times 1.0 times0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Shareholders Fund Statutory fund Shareholders Fund Statutory fund

Private Sector SLIC

22% 15% 9%1%

65%69%

69%

72%

6%

1%

11% 10%

2%

9%

2%

29%

8%

Assets Allocation | Investment Book

Equities Real estate Government securities Fixed income (includes TFCs) Cash and bank loans

Performance Analysis – Investments

Average Yield (%) CY11 CY12

Statutory Funds investments 11.9% 12.6%

Shareholders Funds Investments 10.0% 14.0%

Comparison CY11 CY12

Money Market Mutual Funds 12.1% 10.3%

Balanced Mutual Funds -2.2% 24.5%

Asset allocation Mutual Funds -5.5% 22.9%

Min Bank Deposit Rate 5% 6%

KSE-100 Index -4% 49%

Discount Rate 13.1% 11.0%






profitability


Strengths and Risk

Key Strengths of the

sector in Pakistan






Profitability


Strengths and Risk

Strengths

Tremendous Growth

Robust profitability

Conservative investments strategy






Profitability


Strengths and Risk

Risk Analysis






Profitability


Strengths and Risk

Risks

Persistency

Less efficiency with higher acquisition cost

Solvency requirements

catastrophic cover

Transparency – limited disclosures of assets under

management. Takaful firms are better off.

Competition with substitutes | mutual funds






Profitability


Strengths and Risk

Bibliography

1. Insurance Ordinance section 3 (Division of insurance business into life and non-life) and section 4 (Classes of life and

non-life business)

2. Swiss Re Sigma no. 1/2012: understanding profitability in life insurance | Figure 16 | Page 21

3. Analysis based on data published by Swiss Re in Sigma 3/12 titled world insurance 2011 | statistical appendix updated

Jan 2013

4. Demographic Analysis based on data extracted from 2012 estimates of The Center of Intelligence, United States of

America [https://www.cia.gov/library/publications/the-world-factbook/geos/uk.html]

5. The World Bank: Gross savings are calculated as gross national income less total consumption, plus net transfers

6. Analysis of American Life sector is based upon figures and information extracted from US Factbook 2012, issued by

American Council of Life Insurers

7. CEA Statistics N 46 European Insurance in Figures January 2013 | Table 20 Table 20: Breakdown of life insurance

premiums by distribution channel — 2010 | Page 63

8. Financial Services Authority 2011 Survey of the persistency of Life and Pensions policies | Section 3: Reasons why

consumers let their policies lapse | Page 8,9,10

9. Financial Services Authority 2011 Survey of the persistency of Life and Pensions policies | Annexures | Page 13-16

10. Statistical Yearbook of German Insurance 2012

11. Insurance Regulatory and Development Authority, India | Annual Report 2001-2012

12. Insurance Regulatory and Development Authority, India | Annual Report 2001-2012 | Table 11.3 | Page 11

13. Insurance Regulatory and Development Authority, India | Annual Report 2001-2012 | Statement 21 | Page 162

14. Insurance Regulatory and Development Authority, India | Annual Report 2001-2012 | table 1.43 | Page 60

15. Analysis based on PACRA’s inhouse research | figures compiled from annual financial statements of industry participants






Profitability


Strengths and Risk

DISCLAIMERPACRA has used due care in preparation of this document. Our information has been obtained from sources

we consider to be reliable but its accuracy or completeness is not guaranteed. The information in this

document may be copied or otherwise reproduced, in whole or in part, provided the source is duly

acknowledged. The presentation should not be relied upon as professional advice.

Analysts

Amara S. Gondal

[email protected]

Jhangeer Hanif

[email protected]

Anam Pirzada

[email protected]

Abdul Hayee

[email protected]

Noman Umar

[email protected]

Contact Number: +92 42 3586 9504

mailto:[email protected]

mailto:[email protected]

Documents

Insight into Pakistan Life Insurance Sector - · PDF fileInsight into Pakistan Life Insurance Sector April 2013 Life Insurance Concepts Global Scenario of ... Private sector LIC Total