Life_Insurance_SS_APR_13.pdf

8/10/2019 Life_Insurance_SS_APR_13.pdf

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Insight into Pakistan Life

Insurance Sector

April 2013

LifeInsuranceConcepts

GlobalScenario oflife Sector

PakistansSectorProfile

CompetitiveAnalysis

PerformanceAnalysis -

ProfitabilityPerformance

Analysis - AssetsStrengthsand Risk


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Snapshot

Life Insurance Key concepts

Global Scenario of life Sector

Life Sector Highlights in selected regions

Sector Profile

Competitive Analysis

Performance Analysis of life Sector

Profitability

Assets Allocation and Investment StrategyKey strengths of life sector in Pakistan

Risks analysis




CompetitiveAnalysis


profitabilityPerformance



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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 grouphealth.

Mortality Risk, Morbidity Risk, Longevity Risk

Life Insurance Concepts




CompetitiveAnalysis

PerformanceAnalysis -prfitability

PerformanceAnalysis - Assets

Strengthsand Risk


4/33

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

MA

N

Insurance of

agricultural

Assets

(e.g. livestock)

1 1




CompetitiveAnalysis



Strengthsand Risk


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Life insurance productsRisk and earnings profile

Risk Protection Savings

Products

Term Assurance Whole LifeDeffered Fixed and variableAnnuities

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 RateEquity Market

Main Source of

earning

Underwriting result Underwriting result Investment Income

Investment Income Investment Income Fee Income




CompetitiveAnalysis



Strengthsand Risk

2


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Global Scenario of

Life Insurance Sector




CompetitiveAnalysis





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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% 1,298WORLD 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

PREM IUM 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




CompetitiveAnalysis





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Demographics comparedWorld 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%

Pakistans 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




CompetitiveAnalysis





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Life Sector Highlights

In Selected Regions




CompetitiveAnalysis





10/33

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 tobenef iciaries

Commission

Ratio: 8%

Home- and

field-office

expenses :

9%

6




CompetitiveAnalysis





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US Life Sector Highlights (continued)

Net return on invested assets

Total Assets: 4.4%

General Account: 5.3%

Stocks

79%

Other invested assets

6%

Non-invested assets1%

Government securities

3%

Corporate securities

6%

Mortgage-backedsecurities

5%

Other

14%

Assets - Separate Account

Weighted Average Matur i ty of bonds: 10 years

Bond Quali ty:93% investment grade, and 0.2% default

Note: The general accountsupports 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




CompetitiveAnalysis


profitabilityPerformanceAnalysis - Assets Strengthsand Risk


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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

andaffordability

Product

performance

Changes in

personalcircumstances

Changes in

productdesign

Sales

Channel

Economic

environment

7 7

8

Life

InsuranceConcepts

Global

Scenario oflife Sector

Pakistans

SectorProfile

CompetitiveAnalysis

Performance

Analysis -profitability

PerformanceAnalysis - Assets Strengthsand Risk


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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

Dea th m at urity surren der Oth ers

9

10

Life

InsuranceConcepts

Global


Pakistans

SectorProfile

CompetitiveAnalysis

Performance




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India | Pakistans 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 premiumPrivate 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

Life

InsuranceConcepts

Global


Pakistans

SectorProfile

CompetitiveAnalysis

Performance




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India | Pakistans 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

FY11

FY12

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

Life

InsuranceConcepts

Global


Pakistans

SectorProfile

CompetitiveAnalysis

Performance




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India | Pakistans 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)

Centra l Government Securities Sta te Government & Other Approved Securities

Infrastructure Investments Approved Investments

Other Investments

Life

InsuranceConcepts

Global


Pakistans

SectorProfile

CompetitiveAnalysis

Performance



14

*

* Unit Linked Funds


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Life Insurance Sector

In Pakistan15

Life

InsuranceConcepts

Global


Pakistans

SectorProfile

CompetitiveAnalysis

Performance



P ki Lif


18/33

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

GPWG

rowth

PKRbln

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

Life

InsuranceConcepts

Global


Pakistans

SectorProfile

CompetitiveAnalysis

Performance




19/33

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 industrys

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.

Life

InsuranceConcepts

Global


Pakistans

SectorProfile

CompetitiveAnalysis

Performance



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


20/33

Competitive Analysis of the Sector

Suppliers

Reinsurer

Risk sharing

High cost if notreinsured

Distribution Channel

Agents

Banca

SECP (in the shoes ofregulator)

License

Product design approval

Low Power

Low dependence of life insurer |low cession level

Moderate Power

Commission structure is higherin Pakistan | higher commission

ratio than India

Moderate Power

When Compared with Indias

IRDA and Pakistans SBP forbanks

Moderate to low Risk

Life

InsuranceConcepts

Global


Pakistans

SectorProfile

CompetitiveAnalysis

Performance

Analysis -Profitability



21/33


Customers and Demand Dynamics

Low Demand and few players | Moderate Risk

Individuals

Accepts premium rates quoted byActuary/ company

Can substitute life schemes withthose of other saving schemesoffered by banks and mutualfunds, etc

Group | Corporate, FIs andbanks

Negotiates rates

Often switch companies | lowpersistency

High concentration risk

Life

InsuranceConcepts

Global


Pakistans

SectorProfile

CompetitiveAnalysis

Performance




22/33


Barriers to Entry

RISKBARRIERS TO ENTRY

High Moderate Low

High Operational Legal

Moderate Regulatory

Low

9-10yrs break even

Strong IT infrastructurerequirements

SECP puts limit on expenses

High capital injections in

initial years

Less lengthy licensing procedures than banks

and AMCsCommence 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 insurersallowed Takaful window

case in court

Composite Insurance not

allowed

Life

InsuranceConcepts

Global


Pakistans

SectorProfile

CompetitiveAnalysis

Performance




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Performance AnalysisPremium 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

Life

InsuranceConcepts

Global

GeneralInsurance

Pakistans

SectorProfile

CompetitiveAnalysis

Performance



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 productsunit linked

E


24/33

Performance AnalysisClaims 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%

Life

InsuranceConcepts

Global

GeneralInsurance

Pakistans

SectorProfile

CompetitiveAnalysis

Performance




25/33

Performance AnalysisProfitability

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

CY10

CY11

CY12

Statutory Funds

Cla im s ra tio Com mission Ra tio Opera ting Expenses ra tio

Reserve ra tio I nvestment I ncome Oth er income/expense ra tio

Operating

ratio

92%

95%

96%

92%

97%

99%

93%

Life

InsuranceConcepts

Global

GeneralInsurance

Pakistans

SectorProfile

CompetitiveAnalysis

Performance



P f A l i A


26/33

Performance AnalysisAssets

Life

InsuranceConcepts

Global


Pakistans

SectorProfile

CompetitiveAnalysis

Performance



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/

olicyholders

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 Rea l esta te Governm en t secu rities Fixed incom e (includes TFCs) Cash and bank loans


27/33

Performance AnalysisInvestments

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%

Life

InsuranceConcepts

Global


Pakistans

SectorProfile

CompetitiveAnalysis

Performance




28/33

Key Strengths of the

sector in Pakistan




Competitive

Analysis


Profitability

Performance

Analysis - Assets

Strengths

and Risk


29/33

Strengths

Tremendous Growth

Robust profitability

Conservative investments strategy




Competitive

Analysis


Profitability

Performance

Analysis - Assets

Strengths

and Risk


30/33

Risk Analysis




Competitive

Analysis


Profitability

Performance

Analysis - Assets

Strengths

and Risk


31/33

Risks

PersistencyLess efficiency with higher acquisition cost

Solvency requirements

catastrophic coverTransparencylimited disclosures of assets under

management. Takaful firms are better off.

Competition with substitutes | mutual funds




Competitive

Analysis


Profitability

Performance

Analysis - Assets

Strengths

and Risk


32/33

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 213. Analysis based on data published by Swiss Re in Sigma 3/12 titled world insurance 2011 | statistical appendix updatedJan 2013

4. Demographic Analysis based on data extracted from 2012 estimates of The Center of Intelligence, United States ofAmerica [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 byAmerican Council of Life Insurers

7. CEA Statistics N 46 European Insurance in Figures January 2013 | Table 20 Table 20: Breakdown of life insurancepremiums by distribution channel2010 | Page 63

8. Financial Services Authority 2011 Survey of the persistency of Life and Pensions policies | Section 3: Reasons whyconsumers 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 PACRAs inhouse research | figures compiled from annual financial statements of industry participants




Competitive

Analysis


Profitability

Performance

Analysis - Assets

Strengths

and Risk


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DISCLAIMER

PACRA has used due care in preparation of this document. Our information has been obtained from sourceswe 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]:[email protected]:[email protected]:[email protected]

Documents

Life_Insurance_SS_APR_13.pdf