Presentation to the

Prime Minister on

REGULATION OF INSURANCE SECTER

Government of Pakistan Ministry of Commerce

13 April 2007 By

Humayun Akhtar Khan Minister for Commerce

Background

Charter

• Under the rules of Business 1973, Commerce Division is responsible for:

Law of insurance, regulation and actuarial work; insurance of war, riot and civil commotion risks and life insurance but excluding health and unemployment insurance for industrial labour and post office insurance.

Insurance Regulation in Pakistan - Important Developments

1947: Insurance was regulated through insurance Act 1938.

The insurance to administer the law was “Controller of Insurance Office”.

Controller of Insurance office was an attached Department of Ministry of Commerce.

1952: Pakistan Insurance Corporation was created through “Pakistan Insurance Corporation Act, 1952”.

1972: Life Insurance was nationalized under “Life Insurance Nationalization Order, 1972”.

32 Private companies in Life Insurance business were nationalized to create State Life Insurance Corporation of Pakistan.

…….Continued. Insurance Regulation in Pakistan - Important Developments

1976:

National Insurance Corporation was created through “National Insurance Corporation Act, 1976”.

1993:

Private sector was allowed to operate in Life Insurance Business

2000:

Insurance Act 1938 was replaced by insurance Ordinance, 2000.

The responsibilities to Administrator the new law was placed in Securities and Exchange Commission of Pakistan, an autonomous body under the Ministry of Finance (The office of the Controller of insurance was abolished).

NIC and PIC were converted into companies.

Issue

Ministry of Finance seeks

amendment in rules of business

1973 and transfer to itself all of

Insurance related work.

Finance Division’s View

i. Insurance is essentially a financial sector activity.

ii. Insurance is currently being regulated by SECP which is under the ministry of Finance.

iii. The Asian Development Bank has recommended this change.

iv. Dual responsibility is resulting in contradictions vis-à-vis rules and regulations for this sector.

v. Insurance sector is under developed and requires a boost.

vi. In the number of countries, the subject of insurance is handled by their respective Ministries of Finance like IRDA in India.

Absence of Causal Links

It has not been shown:

Is the sector not growing at a realistically desirable rate?

How MOC’s supervision of Insurance has been an obstacle?

Will a mere change in Ministerial control accelerate growth of this sector?

How control by Finance Ministries in other counties caused rapid growth of insurance sector?

Do SECP and MOF possess capacity to take administrative control of Insurance sector?

Performance of The State run Insurance Organizations Under Ministry of Commerce

State Life Insurance Corporation

Rs, in million

Year Total Premium

2001 6,944

2002 8,364

2003 9,881

2004 11,014

2005 13,090

Performance of The State run Insurance Organizations Under Ministry of Commerce

National Insurance Company Limited

Rs, in million

Year Gross Premium Under Writing Profit

2001 2277 985

2002 2553 1178

2003 3699 966

2004 4012 1019

2005 4249 1399

Performance of The State run Insurance Organizations Under Ministry of Commerce

Pakistan Reinsurance Company Limited

Rs, in million

* Data for 10 months

Year Gross Premium Under Writing Profit

2001 2278* 42.00*

2002 3500 76.00

2003 4697 76.00

2004 5241 51.11

2005 4159 391.43

Current Position

Function/Responsibility/Authority of SECP/Ministry of Finance Vis-à-vis the Insurance Sector under Insurance Ordinance, 2000

The SECP (Ministry of Finance) is the sole regulator of insurance companies/ institutions working in Life, non-life and reinsurance sector.

The power to make rules for its exclusive area of authority and responsibility under the provisions of Ordinance also rests with SECP.

The flow of investment from the funds of insurance organizations, both private and public, into various sectors like Government securities, stock Markets, real estate, etc is controlled by SECP under the Ordinance.

The SECP is the authority to allow operation in the insurance sector by any new business entity, local or foreign.

Any new insurance plan or scheme, in Life, non-life and reinsurance sector has to be approved by SECP before its launch in the market.

…….Continued. Current Position

Function/Responsibility/Authority of Ministry of Commerce

vis-à-vis The Insurance Sector

I. Ministry of Commerce is responsible and accountable to the Government for the efficiency and performance of state controlled insurance organizations.

II. It recommends the composition of the Board of Directors of state owned insurance organizations to the Prime Minister.

III. Implementation of directions of the government vis-à-vis public sector insurance organizations.

IV. Responsible for legal and policy framework for the operation of the entire insurance sector.

V. Responsible for dispute resolution between the clients and the insurer.

No Overlap in MOC/SECP Functions

SECP is acting as a regulator of the insurance sector that needs to be independent and transparent in this capacity.

SECP looks after the interests of share holders only whereas Ministry of Commerce is to look after the interests of policy holders.

There is no evidence of conflict between MOC/SECP – instead good working relationship.

MOC/SECP promulgated rules/regulation under the Ordinance with mutual consultation – thus no overlap or contradiction.

…….Continued. No Overlap in MOC/SECP Functions

MOC & SECP Rules deal with different subjects altogether.

Both rules derive their legal sanctity from the same source i.e. insurance ordinance 2000.

Some area like Reinsurance, Insurance Agents and Insurance Brokers are reflected in both rules.

…….Continued. No Overlap in MOC/SECP Functions

Reinsurance SECP (Reporting requirements)

MOC (Procedure)

Insurance Agents SECP (Conduct & Qualifications)

MOC (Registration Procedure)

Insurance Brokers SECP (Reporting Requirements)

MOC (Licensing Procedure/qualification)

Why Insurance should remain with MoC

Regulatory control of a sector by SECP (Autonomous/independent

Organization) does not justify the administrative control by Ministry of Finance merely because SECP is attached with it.

Finance Division has a stake in all sectors of economy and by this logic

could take on the work of most of the ministries.

Ministry of Finance off-loaded its control of Banks through

privatization and same is envisaged for the state owned insurance companies.

There are significant costs involved in changing status quo, whereas

benefits are neither clearly articulated nor certain.

ADB Recommendation

Initially ADB had recommended creation of an independent Regulatory Authority.

While ADB recommended transferring the subject of insurance from MOC to Finance, it has not indicated/ provided.

I. Reason for changing its stance and how MOC has been an obstacle to the expansion of insurance sector

II. How Finance Division will be better.

ADB’s Financial (non-bank) Markets Governance Programme (FMGP)

Actions taken by Ministry of Commerce

I. Insurance ordinance 2000 was drafted and promulgated.

II. Insurance Rules 2002 were framed and notified.

III. Necessary powers were delegated to SECP.

IV. Code of Corporate Governance has been implemented.

V. Compulsory cession entitlement has been eliminated completely w.e.f. 01.01.2005

VI. The following schedule has been given for elimination of right of first refusal:-

10% reduction in treaty share in the year 2007.

10% reduction in the year 2008 and remaining 15% will be eliminated to the end of year 2009.

…….Continued. ADB’s Financial (non-bank) Markets Governance Programme (FMGP)

VII. List of public sector organizations to be made free to insure with

private sector insurer has been identified.

VIII. Work has been started to make suitable amendments in NICL Act.

IX. Initial Public Offering of 10% shares of SLIC for sale being processed by

the Privatization Commission.

X. Privatization Commission has been requested to initiate the process of

privatization of Alpha Insurance Company currently owned by SLIC.

Ministry of Commerce also working on:

Corporatization and privatization of SLIC.

Report submitted by the consultants of ADB for strengthening of

investment management and Actuarial Strategy for SLIC.

Drafting and enactment of new Marine Insurance Act.

Implementation and fine-tuning of recently notified Takaful Rules

to conduct Islamic Insurance in Pakistan.

New role of NICL after withdrawal of its monopoly to insure public

sector property.

Enhancement of risk retention capacity of PRCL.

Establishment and functioning of the office of Insurance Ombudsman

and Insurance Appellate Tribunals.

Establishment of ECO Reinsurance Company.

Advantage of Insurance remaining with to Ministry of Commerce

MOC has developed expertise and institutional links on insurance

matters vis-à-vis our trading partners. These links are sustained through our trade offices network abroad – Examples are.

I. Insurance coverage for transshipments to CIS States.

II. War risk insurance matters.

III. ECO motor third party liabilities.

IV. Proposed ECO Re-insurance Company. .

Disadvantages of proposed change

Will entail additional workload and adjustment costs for all

stakeholders – A learning curve involved for all.

Some change induced friction will be introduced in the present

functioning system resulting in slow down of this sector rather than desired acceleration.

The management of this change will use up a lot of government's

human resource energy – an avoidable opportunity cost.

Present use of insurance as a trade support and facilitation instrument

will be reduced due to changed emphasis. This will adversely impact trade and export growth.

By placing the policy making and regulations under the same Ministry,

the policy holders will be pushed to the wall.

Recommendation

Ministry of commerce may continue to perform its existing role in the insurance sector for the following reasons:

I. The performance of sate owned insurance organizations in the last five years has shown appreciable improvement.

II. The reform process is continuing and the Ministry of commerce has ensured proper implementation of recommendations of ADB through its consultants.

III. Ministry of Commerce has remained associated with the insurance industry since 1947, and it has the institutional memory and capacity for its current role. This capability may not be available with any other ministry.

…….Continued. Recommendation

IV. Insurance is a service industry and government has placed emphasis on boosting the export of services. Such export promotion of insurance products can best be performed through the Ministry of Commerce as it has a network of overseas outposts.

V. Insurance as a service sector comes within the purview of global compliance through WTO. Ministry of Commerce is the link with the WTO for continuous ongoing process of negotiations under GATS.

VI. Ministry of Commerce is not acting as a regulatory body nor it is influencing the flow of investment funds. This function is already with SECP/Ministry of Finance. Ministry of Commerce is only promoting and facilitating the insurance business.

VII. Ministry of Commerce does not have any knowledge about the alleged difficulties faced by any stakeholder of insurance industry, due to so called “dichotomy of control”.

VIII. There is no evidence to support the point that divesting the Ministry of Commerce from its existing role in the Insurance industry would lead to improvement in the performance of this sector.