SECTOR STUDY GENERAL INSURANCE IN PAKISTAN€¦ · potential. The sector holds unique strategic significance for the country’s economy as it is predominantly used by the banking

December 2012

The Pakistan Credit Rating Agency Limited

SECTOR STUDY

GENERAL INSURANCE IN PAKISTAN


BANKING

December 2012 www.pacra.com

RATING REPORT CONTENTS PAGE

Summary Report 1

Detailed Report:

1. Insurance Key Concepts 2

World

2. Global Snapshot of General Insurance Industry 3

3. Review of Insurance Performance Globally 6

Pakistan

4. Sector Profile 7

5. Governance 8

6. Management 10

7. Systems and Controls 10

8. Business Risk

8.1.Sector Structure 11

8.2.Business Growth and other trends 12

8.3.Business mix and segment’s growth 13

8.4.Profitability 15

9. Risks summarized 17

SECTOR STUDY


SECTOR STUDY

PACRA 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. PACRA shall owe no

liability whatsoever to any loss or damage caused by or resulting from any error in such information. None of the information in this document may be copied or otherwise reproduced, stored or disseminated in

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Tel: 92 (42) 35869504 Fax: 92 (042) 35830425 www.pacra.com

PAKISTAN GENERAL INSURANCE

– AN OVERVIEW (DECEMBER 2012)

HIGHLIGHTS

2012

Penetration 0.3%

Density USD 4

Gross Premium^ ~PKR 60bln

Gross Sum Insured^ ~PKR 18 trillion

Equity base^ ~PKR 80bln

Loss Ratio* 54%

Investment income

as %age of NPR* 25%

Operating Ratio* 74%

Penetration: premium as % GDP

Density: premium per capita

^public and private sector, estimated

*private sector

KEY DEVELOPMENTS!

Slow growth in gross premium

Intensifying competitive landscape

Diversifying into non-conventional

insurance, and product innovation

evolving Investment strategy, risk

averse stance

Improving Underwriting Risk

Management Framework

Strengthening human resource

Technology up gradation

Regulator’s focus

ANALYSTS Amara S. Gondal

[email protected]

Jhangeer Hanif

[email protected]

Abdul Haye

[email protected]

Noman Umar

[email protected]

+92 42 35869504

ABOUT INDUSTRY: Pakistan’s general insurance penetration level (0.3%) is lower than the regional average (1.6%), and in terms of penetration, is ranked at 18

th

position in Asia. Low penetration is because of various reasons ranging from cultural to sentimental however, low density beams out growth potential. The sector holds unique strategic significance for the country’s economy as it is predominantly used by the banking sector as a tool to mitigate risks associated with the credit exposures. More than half of gross premium is referred through banks. The General Insurance sector comprises 31 active companies, including one state owned and three takaful companies. A majority of premium (~85%) is written by the private sector, and is highly concentrated in top three players.

PERFORMANCE: After having witnessing economic boom until CY07,the slowed down in economic growth in the country gave challenge to the industry; real GPW declined between CY08 and CY10.Meanwhile, law and order situation, equity market turbulence, and natural calamities spurred unique challenges to the industry’s profitability, year after year. Since CY11 the GPW growth is picking up, yet, at slow pace. The motor segment declined with shrinking leasing portfolio of banks; on the other hand, the fire segment witnessed expansion, and health emerged another area of growth to the portfolio. Moreover, the sector shifted to a more risk adverse investment strategy, post stock market bump, diverting funds into risk free securities. This helped to attain relatively stable investment income to support the bottom line.

STRENGTHS: The sector not only sustained its equity base from the pressure times but also took corrective measures in bridging the loopholes identified in crisis; though some smaller players had to quit. The sector witnessed shift towards a more diversified business mix with varied growth patterns observed in each segment. After witnessing saturation in conventional insurance, the sector is exploring opportunities in non-conventional insurance and bringing innovation to its product slate. Meanwhile, the sector is eyeing retail clientele. This is expected to tapper down the concentration risk in the medium to long term. Despite underwriting a large size of risk, the sector retains a small proportion of the exposure on its books on the back of strong reinsurance pool; which in itself witnessed expansion in the number of participants due to emerging regional reinsurers entering the Pakistani market. Sophistication in IT infrastructure and MIS, improving risk management framework, and more professional HR, though raised expense level, has improved ability to handle respective growth strategies. This has also helped in achieving efficiency while improving quality of service. Regulator’s enhanced attention to the sectoral reforms is ensuring better monitoring.

KEY RISKS: Increasing risk of catastrophic disturbance due to recent geographical changes in Pakistan is critical for the insurance sector. In this regard, reinsurers’ strong backing and favorable treaty terms with adequate capacity arrangement would remain vital for the sector. Moreover, reasonable premium pricing plays its role, which is on declining trend. The business growth is expected to follow random walk amidst slow demand and high competition, and, hence, the core underwriting profitability remains uncertain. Reconciliation system of inter-company balances have traditionally remained inefficient, resulting in pilling up of old accounts – write offs may be inevitable in small companies’ books. Small companies remain exposed to regulatory non-compliance, unless sponsor’s support is provided.

mailto:[email protected]


GENERAL INSURANCE

GENERAL INSURANCE Page 2 of 18


1. INSURANCE

KEY CONCEPTS

AND HISTORY

Insurance; Risk

sharing and Risk

transfer

Insurance dates

back as far as

6000 B.C.

Marine

Insurance was

the first ever

form of

insurance

Reinsurance;

liability is joint

Co-insurance;

liability is

several, limited

to each

participants’

respective share

1.1 The concept: Insurance is an arrangement by which a company or the state

undertakes to provide a guarantee of compensation for specified loss, damage, illness, or

death in return for payment of a specified premium1. While the Insurance Association of

Pakistan (IAP) defines it as a method of shifting the responsibility for losses to specialists

(insurance companies) who handle the risk by spreading it over a large number of people or

firms. It is a system of protection against loss in which a number of individuals agree to pay

certain sums of money, called premiums, to create a pool of money which will use the

contribution of these individuals to pay the losses of the few caused by events such as fire,

accident, illness, or death.2

1.2 Insurance categories: Insurance today is broadly categorized in two categories 1)

Life Insurance and 2) General Insurance or Non-Life Insurance as the terms are used

interchangeably.

1.2.1 Life Insurance: Under this policy, the insurance company pays in case of demise of

the policy holder or at the time of maturity of the policy. Hence the products available are

either whole life insurance or term insurance.

1.2.2 General Insurance (Non-Life): Most commonly it is divided into Fire, Marine,

Motor (Auto), Engineering, and Health insurance. However, there are several general,

specific and sub-classifications available in non-life insurance category having variations

owing to geographical regions, cultures, customs and economic environment. The

miscellaneous segment has also received significant growth in recent years with new

innovative products being added to the category inline with the growing consumer needs.

1.2.2.1 Reinsurance: In order to reduce risks involved in writing more risky and large

policies, insurance companies also transfer portion of their risk to reinsurers. The two basic

types of reinsurance are treaty reinsurance and facultative reinsurance; (1) Treaty

reinsurance – written to cover a particular class of policies issued by the reinsured –

automatically passes the risk to the reinsurer for all policies that are covered by the treaty,

not just one particular policy; (2) Facultative reinsurance is issued on an individual analysis

of the situation and facts of the underlying policy. It may cover all or part of the underlying

policy. The reinsurance company after reviewing the associated risk may either accept or

reject the proposed offer. Treaty policies are more general than facultative policies because

the reinsurance decision is based on general potential liability rather than on a specific

enumerated risk. The benefit of Treaty insurance is that it reduces the cost of analyzing

individual risks for the reinsurance company, due to which it is less costly than Facultative

arrangements.

1.2.2.2 Coinsurance: Another way of risk mitigation is co-insurance, whereby, risk is spread

among the insured (in some jurisdiction), and a panel of insurance companies. In a

coinsurance arrangement, the insurance company does not write the risk alone, instead it is

distributed among two or more insurers. In reinsurance arrangement, the insurer transfers the

risk to reinsurer and liability is joint, whereas, the coinsurance contract results is sharing of

risk; the liability is several and each participant is not responsible the proportion of other

participant co-insurer.

1.3 Evolution of Insurance and development: The concept of insurance goes back in

time as far as around 6000 B.C as practiced by Hindus and merchants of Babylon. However,

most of the development came from Europe, mainly London in the formal developmental

stages. Its beginning was simple gradual. As the trade and industry developed, the need of

insurance was also felt and the institution of insurance was invented.

1.3.1 In the earliest days, contracts known as bottomry were used by money lenders to

1Oxford Dictionary

2 Definition from “The Insurance Association of Pakistan (IAP)”


GENERAL INSURANCE



shift the burden of risk from owners of ships or cargoes to themselves. The loan was

cancelled, if the ship or cargo was lost during a voyage. The charge for the bottomry loan, if

the voyage was successful, was very high because it included the amount of interest and cost

of risk. The contract of bottomry loan in fact sowed the seed of the modern insurance idea.

1.3.2 Marine insurance was the first category of insurance business that was developed.

Although marine insurance originated in Italy, its practice gradually spread to other trade

centers of Europe, including London. Until 1720 A.D., marine insurance was entirely in the

hands of individual underwriters, whose main business was trade and commerce and

insurance was a side-business. After the discovery of marine insurance other classes of

insurance such as fire, life, motor, accident etc. appeared in the market. When the Great Fire

of London occurred in 1666 A.D., no fire insurance existed. In the same way, life insurance

made its debut in 1583, when the life of William Gibbons, a sea captain, was insured by

sixteen individual underwriters in London against a premium amount of GBP 383.

2. GLOBAL

SNAPSHOT OF

GENERAL

INSURANCE

INDUSTRY

Average

insurance

penetration

2.8%

USis the largest

general

insurance

market with best

practices around

the globe

Key products;

health &

accident, motor/

Auto, fire

Asia witnessing

growth

Japan, the

largest market in

Asia

2.1 Globally, life insurance out

beats general insurance by

dominating the 3world’s premium

of USD 4,597bln with 63% market

share in 2011. Nevertheless, the

general insurance business spreads

its wings all across the world, while

North America and Western Europe

being the leaders in general

insurance contributes 37% and 33%

to the world’s market, respectively.

This makes the global industry

structure highly concentrated with

top eight countries occupying

majority market share (64%); the

United States (US)topping the list.

Insurance penetration4 varies

greatly across different regions of

the world, reflecting different

stages of economic development

and institutional factors, while

insurance density5 ranges from

USD 5 (Bangladesh) to USD 4,777

(Netherland). These measures help gauge the growth and development potential of insurance

markets. Although average world’s insurance (life and general) penetration is quite decent

(6.6%), the general insurance depicts relatively lower penetration at 2.8% of world GDP; the

general insurance prospects in emerging markets6 though picking up pace rapidly, beams out

small penetration level (1.3%). However, Netherland recorded highest insurance penetration

in 2011 at 9.5%, followed by the United States of America and Switzerland; each at 4.5%.

Key products in majority leading countries fall under accident and health segment, motor

(including third party liability), and fire & property insurance – facing high competition.

2.2 United States is the world’s largest non-life insurance market. The high level of

general insurance penetration in US indicate that the insurance play a central role in risk

management by households and businesses. The majority of households have one or more

3Swiss Re Sigma 3/2012; World’s insurance in 2011

4Premium as %age of GDP

5Premium per capita

6Latin America, Central and Eastern Europe, South and East Asia (Excluding Israel), Central Asia, Turkey, Africa

World's non-life premium

2011

USD 1,969bln

America43%

Asia

18%

Africa

1%

Oceania

2%

Europe

36%

Distribution of General Insurance Premium among Continents


GENERAL INSURANCE



types of insurance and the market is flooded with specialty and general insurance providers,

which provide the bulk of products. The 7mandatory line insurance – workman’s

compensation (accidents at work) and third part liability auto insurance – generates majority 8business (~53%), followed by motor (~25%), fire and property damage (~16%), and others

(~5%).Innovative products, mature distribution and global best practices across the insurance

value chain are hallmarks of the U.S. non-life insurance industry. In 1999, the Gramm-

Leach-Bliley Act legislated that banks, brokerages, insurance firms and other types of

financial institutions can join together to offer their customers a more complete range of

services. In the insurance business, this has led to a flurry of merger and acquisition activity

in the past.

Top countries in term of global premium share 2011

Rankin

g Country

Premium

(USD mln)

Share

of

world

market (%)

Penetration (Premium as

%age GDP)

Density (Premium per

Capita in

USD)

1 United States 667,107 33.9 4.5 2,130

2 Germany 131,292 6.7 3.6 1,578

3 Japan 130,741 6.6 2.2 1,031

4 United

Kingdom 109,486 5.6 3.1 1,188

5 France 98,359 5 1.9 1,403

6 China 87,319 4.4 1.2 64

7 Netherland 79,722 4.1 9.5 4,777

8 Canada 69,045 3.5 4 2,010

73 Pakistan 636 0.03 0.3 4

Top 8 1,373,071 69.8 3.4%

Rest of the world 595,108 30.2 2.1%

World’s Total 1,968,179 100 2.8 283

Source: Swiss Re Sigma 3/2012; World’s insurance in 2011

2.1.1 Germany is the second largest non-life insurance market in the world and the largest

in Europe. In Germany, 9insurance is mandatory for everyone, helping the segment grow

quickly. Most of the major non-life players are German, though a few pan-European giants

also have a tangible presence. With more than 200 non-life insurers, the German market is

highly fragmented. Germany’s industry 10

generates business mostly from accident and health

(~36%), followed by fire and property damage (~25%), and motor insurance (~20%).

7World Bank – Financial Sector Development Department: The Regulation and Structure of Non-Life Insurance in the United State

8Organization for Economic cooperation and development (OECD): OECD.Stat Extracts – complete database available via OECD’s

Library 9Capegemini: World Insurance Report 2011

10Organization for Economic cooperation and development (OECD): OECD.Stat Extracts – complete database available via OECD’s

Library


GENERAL INSURANCE



2.1.2 Insurance in the United Kingdom (UK) is availed by almost every adult and every

business, in some way11

. The insurance industry is also one of this country’s major exporters,

with 28% of its net premium income coming from overseas business. Approx. 1,005 general

insurance companies constitute the UK industry, making the landscape competitive. UK’s

major product is motor insurance having 24.3mln private and 4.4mln commercial vehicles

insured. Half of the general insurance premium is sold through brokers, which includes 80%

of the commercial business, whereas 43% of the private car insurance is sold direct. The

business from premium written domestically, in 2010, is spread amongst motor (32%),

accident and health (13%), property (25%), general liability and pecuniary loss (9% each).

Foreign business is driven by motor (5%) and non-motor (4%).

2.1.3 The Dutch general insurance12

is fairly fragmented into small sized companies –

only two insurers holding assets exceeding five percent of the sector’s total assets. However,

the industry is highly concentrated in accident & health (~73%), followed by motor (8.5%),

and fire & property insurance (6.9%). The accident and health segment witnessed

stupendous growth since implementation of health care reforms in 2006, thereby making the

health insurance mandatory. This is why the sector is prospering in Netherlands despite

prevailing Euro crisis.

2.1.4 Japan is the largest insurance market of Asia and third largest in the world. More

than half of the 13

Japanese general insurance is driven by automobile insurance, followed by

fire (17%), personal accidents (14%), and others. Automobile insurance in Japan is operated

under two different systems and policies – compulsory automobile liability insurance

(CALI) and voluntary automobile insurance (VAI), each contributing 11% and 43% to the

industry, respectively. CALI, established under Automobile Liability Security Law

(promulgated in 1995), only covers bodily injury liability, and the law specifies the limits of

insurer’s liability for death, each grade of permanent disability and bodily injury. On the

other hand, VAI includes third party liability coverage (bodily injury liability and property

damage liability), self-incurred personal accident coverage, protection against uninsured

automobiles coverage, passengers’ personal accident coverage and coverage for damage to

the insured’s own vehicle. With respect to liability for bodily injury, voluntary automobile

insurance acts as excess cover to CALI. These policies normally have maturities ranging

from 12months to 60months14

.

2.2 Regional Insurance Industry Preview: General insurance in Asia15

represents 18%

of the world’s share with premium amounting to USD 356bln in 2011. Within the region,

South and East Asia (SEA) is regarded as the emerging market; though average insurance

penetration of SEA is low (1%), the industry’s growth prospects are high. If we further drill

down, Pakistan’s immediate neighboring country, India, posted USD 12bln premium from

general insurance business in 2011; ranked 16

19thin terms of premium. The insurance

penetration is very low (0.7%). The 17

motor insurance constitutes 83% of total general

insurance business in India, of which, comprehensive insurance is a major contributor

(41%), while motor Own Damage (OD) and Third party (TP) generates 24% and 17% of the

industry’s premium, respectively. High penetration of motor insurance is because of

regulatory requirements for the third party motor insurance. However, privately held insurers

11

Association of British Insurers: UK Insurance; Key Facts (Sep 2011) | 300 members account for 90% of UK premium 12

International Monetary Fund (IMF) Country Report no. 11/205 dated July 2011: Detailed Assessment of Observance on Insurance Core

Principles 13

General insurance Association of Japan – Statistical data 14

Non-life insurance rating organization of Japan: a non-profit organization established under law. It advises pure premium rates to

insurers. 15

Excluding advanced countries: Hong Kong, Singapore, South Korea and Taiwan 16

Swiss Re Sigma 3/2012; World’s insurance in 2011 17

Insurance Regulatory and Development Authority (IRDA)


GENERAL INSURANCE



are increasingly looking to penetrate health insurance. The market has opened up since

deregulation in 2001, and 22 firms now sell non-life coverage, though the top four are

public-sector firms. In India, 58% of total premium is generated by public companies. Public

companies generate 64% of the market share in fire, 70% in marine and 68% in engineering.

Top countries in term of Asia’s premium share 2011

Ranking

Country

Premium Share

of

world

market (%)

Penetration Density

(Asia’s

Market (USD mln) Rank (Premium (Premium

Share) (Asia) as %age

GDP)

per Capita in

USD)

1 Japan 130,741 6.6 4 2.2 1,031

2 China 87,319 4.4 11 1.1 64

3 South

Korea

51,223 2.6 1 4.6 1,045

4 Taiwan 14,283 0.7 2 3.1 614

5 India 12,187 0.6 13 0.7 10

6 Singapore 8,188 0.4 9 1.5 810

7 Iran 7,555 0.4 8 1.7 101

20 Pakistan 636 0.03 18 0.3 4

Top 7 311,496 15.8 1.7

Rest of the Asia 44,684 2.3 1.1

Asia’s Total 356,180 18.1 1.6 85

b.

3. REVIEW OF

INSURANCE

PERFORMANCE

GLOBALLY

Premium growth

slowing down in

advanced

markets

Rising

catastrophe

losses posing

high risk to the

industry

globally

Robust premium

growth in

Emerging Asia

while bleak

3.1 Globally, the general insurance premiums expanded 1.9% in real terms during 2011

on the back of solid economic growth in emerging markets and selective rate increases in

some advanced markets (Swiss Re’s sigma 3/12 study reveals). Non-life insurance premium

growth remained strong in emerging Asia, with new car owners and an increase in demand

for health and personal accident insurance being key growth drivers. Product innovation has

driven fast-paced growth in certain insurance segments, including micro insurance and

takaful. Nevertheless, the global financial and economic crisis has affected profitability of

non-life insurance companies around the globe. Claims ratio in many countries has risen as

the number of premiums written dropped and/or claims themselves increased in frequency

and size (a trend that tends to worsen during economic downturns). Moreover, around the

world catastrophe losses18

played havoc in CY11; (i) the earthquake (Mw9.0) in Mar-11

triggered tsunami in Japan, which turned out to be the largest insurance loss of the world,

amounting to USD 35bln, (ii) this was followed by Thailand in Jul-11 where flood caused by

heavy monsoon rains drained USD 12bln from the industry, (iii) New Zealand was hit by an

equivalent amount by an earthquake (Mw 6.3) in Feb-11. Put together, all natural catastrophe

losses caused economic losses of over 370bln which triggered down approximately USD

116bln losses to the insurers around the globe; second largest on record since 1970. Insured

losses were highest in Asia, where they were USD 49bln.

3.2 With the decline in investment income, which once provided a constant profit stream

for the non-life industry, insurers have been forced to concentrate on improving the

operational and acquisition ratios. In many markets, the economics of risk pricing call for an

18

Swiss Re Sigma 2/2012: Natural Catastrophe and man-made disasters in 2011


GENERAL INSURANCE



underwriting

profits

increase in premium rates, but insurers are facing competitive pressure19

. Nevertheless, the

premium rates are expected to rise in advanced markets in order to safeguard the

profitability20

. Accordingly, the reinsurers are also to come up with improved treaty terms

benefitting their bottomline.

4. PAKISTAN

SECTOR

PROFILE

35 active

general

insurance

companies in

Pakistan

Low premium

penetration

Positive

correlation

between

economic

expansion and

premium

development

4.1 General Insurance in Pakistan – a brief: Pakistan’s general insurance

penetration21

level (0.3%) is lower than the regional average (1.6%) due to various reasons

ranging from cultural to religious. The premium growth in real terms follows the trend in

GDP growth, reflecting co-relation of the industry with the economic activity in the country.

The general insurance in Pakistan is majorly used by the banking sector as a tool to mitigate

risks associated with the credit exposures.

4.2 Currently, the general insurance sector in Pakistan comprises 3522

active insurance

companies, including one state owned insurer and three takaful operators – Islamic insurers.

The industry’s product slate mostly comprises commercial lines of insurance solutions under

conventional model; Property insurance (fire and engineering), Marine (Cargo and Hull),

Motor and Miscellaneous, whereas Health insurance is a separate category – commercial and

personal line. The health segment has lately attracted industry’s great attention. The

Miscellaneous Insurance category includes a number of other prospective insurance classes

such as aviation, cash related insurance, travel insurance, credit, agriculture, bond, etc. EFU

Allianz is the first specialized insurance company in Pakistan that offers health related

insurance solution. Over time, the concept of specialization has been picked up; TPL Direct

Insurance majorly provides personal line motor insurance, though it is gradually entering

into other personal lines like health and travel. Few of the insurers, though small sized,

specialize in credit insurance, travel insurance, etc.

4.3 In Pakistan, fire insurance is mainly required by the construction and industrial

sector. Higher the growth in industrial infrastructure, the more is the fire and allied insurance

business for insurance companies. Similarly, marine insurance is associated with trade of

goods and services. Marine insurance usually increases with the increase in imports and

exports of goods. Motor insurance on the other hand has two major sub-components:

comprehensive motor insurance and third party or liability insurance. This segment’s growth

is normally triggered by the car leasing business of the banks. Health insurance, which

depends extensively on individuals’ preferences, has attracted considerable attention in the

recent past. Moreover, the recent trend has been in the form of innovative products in the

miscellaneous segment. In the banking sector, Islamic banking has been taking quiet deep

roots in Pakistan within a short span. This riba-free banking model has become very popular

among the people attracting the Pakistan insurance industry towards Islamic insurance i.e.

Takaful. At present three Takaful Insurers are operating. The first Takaful to function was

Pak Kuwait Takaful General Ltd. sponsored by Pak Kuwait Investment Co. Ltd in December

2005. Takaful Pakistan Limited was the second Islamic insurer to arrive on the scene in

2007. Two more Takaful were established during 2007; Pak Qatar General Takaful Ltd. and

Pak Qatar Family Takaful Ltd.

4.4 History & Developments: At the time of partition, in December 1971 when East

Pakistan became an independent sovereign state, Bangladesh, there were 77 foreign

insurance companies dominating Pakistani insurance market. Whereas the strength of local

insurers was only 523

. In 1952 Government established Pakistan Insurance Corporation (PIC)

19

Capgemini World Insurance Report 2012 20

Swiss Re 21

Premium as %age of GDP 22

SECP has issued orders to cease operations of four insurance companies, which have been challenged in the court of law by the insurers;

it is pending final decisions. 23

Financial Sector Assessment 2003; SBP


GENERAL INSURANCE



to promote the local insurance industry. Consequently, the number of local insurance

companies increased to 47 while number of foreign companies reduced to 25 by 1972. In

1976, National Insurance Corporation (NIC) was formed with the purpose of undertaking

General Insurance business relating to public property. In 2000, PIC was converted to

Pakistan Reinsurance Company Limited (PRCL). PRCL has a mandate to provide

reinsurance support to the local insurance industry in respect of treaty & facultative business

as well as managing specialized insurance schemes assigned by the Federal Government of

Pakistan. PRCL enjoys the monopoly in local reinsurance business, being the only company

providing such services.

4.4.1 Whereas, in terms of premium, the partition (in 1971) deprived the Non-Life

premium of PKR 290mln of that region (now Bangladesh). Out of this total of PKR 290mln,

the share of foreign insurers was PKR60mln, West Pakistani companies of PKR 180mln and

East Pakistani companies of PKR 50mln. Later on in 1979, private sector insurers

experienced imposition of tax on exceptional loss reserves, which used to be tax free.

Nationalization policy of the seventies of the government further brought difficulties for the

insurance industry. 31 industries, along with ghee mills, shipping, banks, petroleum

marketing companies, automobile, etc. were bracketed under the umbrella of public sector

and which, in turn, gave a loss of PKR 353mln to the private sector insurance industry.

5. GOVERNANCE

Regulator –

Securities and

Exchange

Commission of

Pakistan

Insurance

Association of

Pakistan (IAP)

5.1 The governance system prevailing in the industry is important in assessing its

feasibility and efficacy towards achieving sustainable development. In Pakistan the

governance of the insurance sector is entrusted to the Securities and Exchange Commission

of Pakistan (SECP). SECP has been regulating the Insurance industry, since January 2001

after it took over from the Controller of Insurance operating under Ministry of Commerce,

Government of Pakistan. The powers of SECP to regulate and monitor the Insurance Sector

are vested in the Insurance Ordinance, 2000 and the Companies Ordinance, 1984. SECP is

an autonomous statutory body established through SECP Act 1997. It also regulates, besides

insurance, corporate and financial sectors and all corporate entities across Pakistan,

including the securities market, non-banking finance sector, stock markets, credit rating

agencies, brokers (including insurance brokers), surveyors (including insurance surveyors)

and auditors.

5.2 SECP, being the apex regulator of the insurance industry, has a strategic priority and

commitment to strengthen and maintain an effective regulatory environment in which

insurance and takaful business can flourish and prosper in Pakistan. SECP has established an

Insurance Division headed by a Commissioner. The current Insurance Commissioner is Mr.

Mohammed Asif Arif. The Insurance Division is been divided into two main departments; (i)

Policy, Regulation and Development Department, and (ii) Supervision Department.

5.2.1 Insurance Ordinance 2001: The insurance ordinance 2001 brought in more

comprehensive approach in governing the insurance sector of Pakistan. It clearly set out

rules and regulations in order to support sector growth while at the same time protecting the

policyholders. The objective was to strengthen the foundations of the industry. Thereon, the

insurance rules 2002 further elaborated the scope of the regulations. They also laid ground

for the Takaful operators for which detailed rules were published in 2005. The insurance

ordinance 2000 (along with amendments later on) became effective with some of the

important highlights. SECP, while exhausting its monitoring responsibilities, issued orders to

many companies prohibiting them to underwrite any insurance business, and has so far

cancelled licenses of ten insurance companies who failed to comply with various

requirements contained in the insurance ordinance and allied laws and regulations.

Moreover, the Commission has also addressed various issues through formulating rules and

regulations pertaining to bancassurance, micro-insurance, takaful, and is also working on

terrorism pool like concepts. The following are the important areas that SECP has taken a


GENERAL INSURANCE



serious note of:

5.2.2 Minimum Paid-up-Capital Requirements: The insurance ordinance 2000 required

stepped increase in the paid-up-capital in life and non-life insurance companies, through a

circular in 2007 as shown in the following table. While most of the medium to large

companies did comply with the requirements, by issuing bonus shares (as allowed by huge

reserves in hand) or fresh cash injection by the sponsors. However, some of the small players

were forced to take exit due to non-compliance24

. At end-Dec-11, although most of the

insurance companies achieved paid-up-capital of PKR 300mln, the equity base of approx.

five insurance companies’ were lower than the paid-up-capital due to losses mounting from

previous years. However, the regulation was silent in this regard and no action was seen

from the regulator side.

5.2.2.1 Going forward, the Commission is considering to take up another round of increase

in MCR (expected: PKR 500mln); which would be a challenge for many small companies to

follow. This may trigger mergers and/or acquisition, if the sponsors of these companies fail

to inject (/mobilize) fresh capital; equity positions are already weak. Furthermore, if the

regulator takes up a more prudent stance by requiring the equity (instead of paid-up-capital)

as the base of compliance, seven insurance companies would fall under the ambit of non-

compliance.

5.2.3 Solvency Requirements: The ordinance provided detailed requirements to be met for

the purpose of solvency. It laid the admissible assets which can be used for the purpose of

preparing solvency statements to be submitted to the regulators. As a general rule, the

admissible assets should be able to meet all the liabilities of the insurer. Although the

requirements have been revamped, making adjustments according to changing financial and

economic environment, strict compliance thereof remains to be seen.

5.2.4 Sound and Prudent Management: While addressing operational issues, the

Commission now requires all executives of an insurance company to be more experienced in

the relevant field, while eradicating conflict of interest. This is the first step that SECP has

taken in bringing operational excellence in the insurance industry.

5.2.5 Miscellaneous: The ordinance provides complete framework on all the possible

issues the industry may face with amendments being made periodically. This includes

providing criteria for agents, reinsurers, statuary deposit requirements and offences.

5.3 Insurance Association of Pakistan (IAP): Before 1947, there were three Insurance

Associations in the subcontinent at Calcutta, Bombay and Madras; Bombay Association had

a branch in Karachi. After the establishment of Pakistan, the Insurance Association of

Pakistan was formed and inaugurated in 1948.The Insurance Association of Pakistan is a

forum for the exchange of information, knowledge, experience and statistics among its

members. IAP provides a professional platform to guide the members in technical matters

related to industry.

5.4 The IAP is managed by 6 committees; 2 Executive and 4 Technical. The Executive

Committees include one at the national level and one at the regional level. Whereas the

24

SECP has issued orders to cease operations of four insurance companies, which have been challenged in the court of law by the insurers;

it is pending final decisions.


GENERAL INSURANCE



technical committees include (i) Accident Committee, (ii) Property Committee, (iii) Marine

Committee, and (iv) Life Committee. Elections are held yearly to induct members in these

committees. The committees provide statistics to the members, conduct workshops, and also

address members in the developmental areas. IAP presented its three year goal and plan in

2010, which is part of its five year plan being set earlier and presented below.

Association Functions

Insurance

Association

of Pakistan

(IAP)

Five year goal and developmental plan set out by IAP is:

1. To have in place a practicable and effective Code of Conduct and to

evolve a process for its strict adherence/compliance by its Members

2. To ensure that IAP Members fully understand and adhere to the

regulatory requirements, thus managing their business based on

sound financial footings with a keen emphasis on the best practices

of corporate governance.

3. To initiate and develop a comprehensively planned campaign of

insurance to create awareness amongst the public to impart its

advantages focusing on specific products and quality customer

service.

4. To ensure that current and future Human Resource needs of the

Insurance Industry are adequately met.

5. To stop the Motor Third Party Insurance extended by fraudulent or

unrecognized insurance representatives.

6. MANAGEMENT

Experienced

Human

Resource

Moving towards

insurance

related

professional

qualification

Committee

Structure in

place

6.1 HR Profile: The industry has been in existence in the region even before the

creation of Pakistan. This has provided ample time for the industry participants to mature in

terms of human resource; however, professional qualification had been a neglected area. The

trend has been taking a shift. Now, the top reputable insurance firms are hiring qualified

MBA-IRMs (Insurance and Risk management), ACII (from Chartered Insurance Institute -

UK), CPAs, FCMAs, MPAs and MCP individuals. Some entities offer sponsored programs

for its employees to achieve professional diplomas such as insurance diploma from Chartered

Insurance Institute, London. The growth of health segment has also included doctors in the

human resource pool having insurance related diplomas. Likewise, life insurance companies

employ human resource related to actuarial sciences.

6.2 Management: The general insurance industry model is not a complicated one in

Pakistan and most of the business is reliant upon marketing efforts. Karachi being the largest,

industrial and coastal city captures most of the insurance business in Pakistan. Since the

industry in early days was dominated by marine business, Karachi remains the hub. Even

today, most of the companies are located in Karachi with branch operations around the

country.

6.3 Management Committees: The sector often manages its operations through

committee structures; Underwriting Committee, Claims Committee, and Re-insurance/Co-

insurance Committee. These committees focus on areas such as underwriting, claims and

reinsurance. These committees have been mandated in 2001 through the insurance ordinance,

which has enabled the industry participants evolve strategic solutions to large risks.

7. SYSTEMS AND

CONTROLS

Increasing trend

7.1 Traditionally, the insurance industry in Pakistan had a great reliance on physical

record system. With the promulgation of insurance ordinance in 2001, the industry was made

to adopt sophisticated records and registers; premium register, claims registers, etc.

Gradually, with the passage of time, with increasing competition, it became inevitable for the


GENERAL INSURANCE



towards advanced

IT solution

Real time and

integrated

insurance system

Inter-company

reconciliations a

neglected area

industry players to take proactive approach towards decision making system and achieve a

competitive advantage. For this the industry had to make use of the standalone computers

and later on moved to insurance solution on advanced technology.

7.2 To date, the IT infrastructure has been upgraded with a significant margin. A real

time insurance solution has been deployed by most of the players, using client/server

technology, and capable of running in centralized and distributed environments. The most

common insurance system being used in the industry is the General Insurance System (GIS),

developed by Sidat Hyder and Morshed Associates. It has released various versions with

changes in its modules from time to time. However, some large insurance companies have

moved to relatively customized and sophisticated systems. The expansion of business

requires more control and real time processes, which are often beyond the reach of general

systems. This flexibility also allows implementing hybrid control systems with variation of

centralization and decentralization mode of mechanism.

7.3 Although the industry is taking a major shift towards automation of information

processing and MIS system, the complete transformation would take time in bringing in the

advanced level analytical decision making platform. A special attention is required for

sophisticated MIS related to claims. Furthermore, a large number of to-and-fro transactions25

are taking place between the insurance companies in the capacity of reinsurer (facultative26

)

and co-insurer (own lead/ others lead27

). However, the industry is deficient of advanced tools

and procedures to keep the inter-company balances reconciled; making the balances continue

to appear in the accounts in disputes. Moreover, claims remain subject to long procedures

and delays in assessment processes, which most of the times remains uninformed by the lead

co-insurer to other participant co-insurers.

8. BUSINESS RISK

– PAKISTAN

Top five

insurers

dominating with

more than 70%

market share

Customers

having high

bargaining

power

SECP assumes

absolute

authority to

grant license or

cancel it, as

allowed by the

law

8.1 SECTOR’S STRUCTURE: In the past, the industry comprised reputed families

generating business mainly through personal contacts while the premium rates were fixed

(per type of risk) by the Insurance Association of Pakistan (IAP). However, the situation has

changed entirely, when financial institutions entered the sector. Now, most of the business

line insurance is referred through the financial institutions; mainly commercial banks.

Moreover, most of the conglomerates have established their captive insurance companies.

Besides providing sustainable group premium to these captive insurance companies, the

inclusion of financial institutions (especially commercial banks) in the group helps providing

ready platform in referring business to these companies. Although these captive companies’

business portfolios have grown in recent years to attain the mid size, a majority of private

sector insurance premium is still generated by top three insurance giants (market share;

CY11: 65%, CY06: 70%). Whereas, all public sector business is underwritten by one state

owned insurance company (CY09: PKR 6,034mln28

). With the growth of captive companies

and other emerging players in recent years, the private sector insurance has become highly

concentrated with top ten insurers29

occupying more than 80% of the general insurance

market (CY11).Although insurance penetration is very low in Pakistan, it contributes to the

economic progress of the country and plays an integral role towards economic, social and

technological progress. Without insurance cover major industrial, economic and social

activities could be jeopardized due to high level of risk involved and no fall back avenue.

8.1.1 Insurance market: The industry’s major customers are the commercial banks and

other financial institutions, since more than half of the industry’s premium is referred

through them. At the same time these banks may be placed in the shoes of suppliers. Large

25

Premium (receivable/payable),Claims (receivable/payable), Commission (receivable/payable)

26any insurance company can accept facultative business from other insurance companies in Pakistan, whereas, the treaty arrangement

can only be executed by Pakistan Reinsurance Company Limited and/or other Reinsurers around the globe

27A leader in coinsurance arrangement (may/ may not) manage the cash from the client and distribution among other coinsurer, though

retains liability pertaining to its own share only 28

Latest available data 29

Insurance Association of Pakistan – registered companies are 29 (total 34 private sector insurers including three takaful operators)


GENERAL INSURANCE



Industry

Dominated by

Fire & Motor

segment

Profitability

rests on

investment

income as it

compensates the

declining

underwriting

revenues

Investment

strategy:

conservative

insurance companies, in addition to financial institution business, are directly contacted by

the large corporate and multinationals within Pakistan. The commercial banks, along with

using insurance in managing its own operational risk, undertake insurance solutions as a risk

mitigating tool for the securities underlying their lending portfolio e.g. stocks pledged,

machinery mortgaged, etc. Although the policyholder would remain the borrower of the

bank, the need and adequacy of the insurance cover is required by the banks. The

commercial banks, after having faced heightened losses from non-performing advances and

financial market turmoil, have moved towards centralization. The advice for grant of

insurance contract for bank’s customer, which was previously designated with the banks’

branch managers, now, mostly resides within the head office risk management department;

which has formulated more sophisticated criteria while awarding contract of insurance. Most

of the banks maintain a panel of insurance companies which incorporates maximum limit of

business for each insurance company; a concept of diversification of risk. Although the

policyholder has freedom to choose any insurance company with the limits, mostly relies on

bankers.

8.1.2 SECP in the shoes of Supplier: Securities and Commission of Pakistan (SECP) may

be considered as the key supplier for the industry, through providing license to carry out

insurance business in the country. SECP monitors these companies for the regulatory

compliance and has the authority to cease the operations of the company. To date the SECP

has issued orders to 8 companies prohibiting them to underwrite any insurance business and

has sanctioned winding up orders to 10 insurance companies. Additionally, it also works for

establishing a conducive environment for the industry to flourish. It can dictate, being the

regulator, any condition to be refrained from or to comply with. If SECP cancels the

insurance business license, no company can carry out this business in Pakistan.

8.1.3 Demand and Supply Dynamics: Insurance industry in Pakistan has been facing

increasing level of competition in recent years. The insurance sector has picked up its

momentum since 2001, when SECP took charge of the sector. In countries, where insurance

penetration is high, the regulator plays a critical role in making insurance mandatory for

some segments. In this front, SECP has been lagging behind. Additionally, the dynamics of

intrinsic supply are one of the reasons of low penetration in Pakistan; insurance supply is

limited because of moral hazards.

8.1.4 Although the industry is dominated by few players, all of them compete with each

other. Moreover, the influx of financial institutions led business has improved knowledge

about products, price and cost. High insurance rates induce policyholders to seek substitutes

such as loss prevention, business continuity plans, etc. The traditional business line of

insurance solutions are homogeneous with standard terms of the insurance policies,

mandated by law, and, hence, can be readily replaced from one insurer to another. The

situation has further aggravated on the back of slow GDP growth and muted growth in the

advances portfolio of the financial institutions, and, hence, declining demand of the

insurance products. Accordingly, the industry, in order to attract its customers, has entered

into rate cutting war. This is also reflected in low gross premium per Rupee of risk

underwritten on average for the industry30

(fire: 0.3%, marine: 0.2%, motor: 5.1%, health:

5.3%, others: 0.8%), which has declined significantly in recent years.

8.2 BUSINESS GROWTH AND OTHER TRENDS: The sector witnessed accelerated growth

and robust profitability soon after the introduction of insurance ordinance in 2001 as well as

in unison with benign economic environment. The industry’s premium grew inline with

GDP growth, reflecting high correlation. By 2004-05, the conducive business and economic

environment spurred growth in various sectors including real estate, telecommunication,

automobile, agriculture, and large scale manufacturing. The marine and accident business

almost doubled in the period. Higher production and demand in automobile industry (local

30

Based 65% market shareon premium


GENERAL INSURANCE



and imported) lead to robust growth in motor segment. Until 2007, when the GDP growth

remained above 5% mark, the industry kept on capitalizing the intrinsic strength of the

industrial and the trade sector. From that time onwards the economic growth started to slow

down by a significant gap and the inflation rate touched its peak at 20% in 2008. Meanwhile,

the assassination of former Prime Minister Benazir Bhutto ignited riots in the country (Dec-

07), causing damage of billions of rupees, forced the insurance industry to rethink and

reshape its underwriting practices and a focus towards cautious underwriting approach.

Moving on, the industry suffered natural calamities (floods 2010 & 2011) damaging property

and lives resulting in losses for the industry and negative real premium growth.

Nevertheless, the growth trends have shown revival in 2011 with positive growth number

outpacing real GDP growth. Whereas, the premium correlation with GDP has been thinned

down (CY04-CY11: 0.05%). This is

not the case with regional players,

emerging markets and developed

economies, where correlation is

higher than in Pakistan.

8.3 BUSINESS MIX AND

SEGMENTS GROWTH:

8.3.1 Fire: Until CY08, the

industry’s premium was earned from

fire and the motor segment alike

(31% and 32%, respectively). Even

in economic conditions as

challenging as these, however, the

industry didn’t wait for the rising

tide to lift all boats to bolster their

topline. Over the years segmental

31%

34% 37% 42%

32% 28% 26%24%

23% 26% 24% 23%

14% 12% 13% 16%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2009 2010 2011

Industry's segments and composition

Marine

Misc.

Motor

Fire

(30)

(20)

(10)

-

10

20

30

40

50

60

70

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

2004 2005 2006 2007 2008 2009 2010 2011 2012E

GP

W P

KR

bln

Gross Premium Growth and relationship with Economy

GPW (R.H.S) Nominal GPW Growth Real GPW Growth Real GDP growth (%)

correlation cofficient (7yrs): 0.04%Source: Swiss Re Sigma 3/2012 and SBP (2012E PCRA Team's own estimate )


GENERAL INSURANCE



mix has tilted more towards the fire segment (CY11; fire: 42% and motor: 24%). Although

the average premium rate31

is low in the fire segment (CY11 industry’s average: 0.3%), the

business from the construction sector picked up momentum (FY11: 6%32

) due to

rehabilitation of the flood affected areas, increased investment in small scale construction;

generating business avenues for the fire segment. Moreover, accelerated investment in the

power sector (CY09 to CY11: USD 2.8bln33

) spurred insurance premium in the segment.

The motor insurance is the second largest segment of the insurance industry, whose

contribution has declined over the years.

8.3.2 Motor: The motor insurance segment is facing stagnation on the back of decline in

consumer financing (auto loan/ auto leasing). The Motor insurance, in Pakistan has

traditionally been dependent on the financial institutions’ auto leasing, which kept its growth

in check. Keeping note of the fact, the large industry players have initiated concerted efforts

to tap the huge potential inherent in personal line insurance. In the last four years, auto loans

has declined by 21% (CAGR) which directly impacted the insurance business prospects in

the segment, whereas, the vehicles offtake has been on the rising side; offering huge

untapped potential for the industry players. This is why the average premium rate in the

segment has been adjusted downwards to 4.9% in CY11 from 6.7% last year.

8.3.3 Miscellaneous and Marine: Amidst various challenges for the

insurance growth, the industry

continued to explore new avenues

and develop specialty products to

generate additional sales. In this

regard, the miscellaneous segment

has received due attention of the

industry players, bringing innovation

to their product lines – especially in

the health segment – achieving

appreciable response from the

market. A major proportion of the

health business comprises health

coverage for corporate customers, on

the personal lines side; new products

31

Gross premium as %age of sum insured – based on PACRA’s universe constituting more than 60% of market share in terms of premium 32

Economic Survey of Pakistan 33

NEPRA State of industry report 2011

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

0

25,000

50,000

75,000

100,000

125,000

150,000

175,000

CY08 CY09 CY10 CY11

PK

R m

ln

Nu

mb

er o

f V

eh

icle

s

Motor Insurance Growth | Vehicles offtake

Vehicles Offtake Motor Insurance (R.H.S)

Linear (Vehicles Offtake ) Source: Pakistan Automotive Manufacturers Association (PAMA)

-

2

4

6

8

10

12

-

10

20

30

40

50

60

70

80

90

100

CY08 CY09 CY10 CY11

PK

R b

ln

PK

R b

ln

Motor Insurance Growth | Auto Loan

Auto Loans by Banks/Fis (outstanding at year end)

Motor Insurance (R.H.S)

Linear (Auto Loans by Banks/Fis (outstanding at year end))

Source: State Bank of Pakistan (SBP)

-

1,500

3,000

4,500

6,000

7,500

9,000

10,500

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

CY08 CY09 CY10 CY11

PK

R m

ln

US

$ m

ln

Marine Insurance | Pakistan's Trade

Pakistan's Exports Pakistan's Imports

Marine Insurance Source: State Bank of Pakistan


GENERAL INSURANCE



are being launched to offer individuals various health insurance solutions. Now, many of the

players’ health portfolios occupy more ten percent share of the respective business book. The

premium quotes are better than any other single large segment in Pakistan – provides high

cashflows to the insurer, though loss ratio is higher. On the other side, the business from

marine insurance though experienced volumetric growth, the rates squeezed down, touching

as low as 0.1% on average. Whereas during CY09, the ship breaking business was increased

(not reflected in the graph above), which made the marine insurance business grow despite

decline in overall trade business in the country.

8.4 PROFITABILITY OF THE SECTOR IN PAKISTAN: The size of topline is very important

in deriving profitability in any

business. However, this

phenomenon becomes more

critical when it comes to the

insurance sector. Moreover,

higher the premium rate so will

be the underwriting profits;

adequately pricing risk

underlying the insurance policy

as well as covering the

acquisition costs and expenses

would generate profits.

However, the Pakistan’s industry

premium rates have been

declining year on year basis, as

depicted by adjacent graph.

Accordingly, the loss ratio has

been following

an increasing

trend. Until

2006, the

industry

continued to

generate

positive

underwriting

results

(combined ratio:

97%34

), which

was topped up

with robust

investment

income (74% of

NPR) making

the operating

ratio to stand at

23%. However,

the situation has

turned worse

and worse year

by year since

34

Combined ratio above 100% means underwriting is in losses. Combined Ratio is calculated as all expenses (claims, commission,

management and admin expenses as %age of premium)

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

2008 2009 2010 2011

Sector's Average Premium Rate

Average Premium rate*

*GPW as %age of Gross Sum Insured (PACRA's universe )

-24,000

-16,000

-8,000

0

8,000

16,000

24,000

32,000

40,000

48,000

-75%

-50%

-25%

0%

25%

50%

75%

100%

125%

150%

CY06 CY07 CY08 CY09 CY10 CY11 CY12*

PK

R m

ln

Performance - Private Sector

GPW (R.H.S) Pre-Tax profits (R.H.S) Loss Ratio Combined Ratio Operating Ratio

Stock Market Crash

Stock Market Boom

Political leader assasination led riots

Floods

*annualized 9M12


GENERAL INSURANCE



then.

8.4.1 In 2007, the assassination of a political leader, Ms. Benazir Bhutto, led tremendous

riots, causing the loss ratio to jump over 70%; a significant drag on the underwriting

profitability (combined ratio: 106%). However, the stock market remained at boom

throughout the year until the assassination incidence at end-Dec07, resulting into huge

investment income for the industry (1.7times of Net Premium). The entire investment

income comfortably absorbed the net burden on Pakistan’s industry players, though adequate

reinsurance treaties in place at that time were the major stabilizer to the bottomline.

8.4.2 The suffering of the industry didn’t stop there, and in 2008, the country was hit by a

paramount crash in the stock market in Aug-08 which inflicted nearly 50% loss of the

investment book. The large players had more than 75% of the book invested in equity

market, and the investment loss wiped away 20% of the net premium (NPR); the industry

experienced worst loss in the bottomline in the last two decades, though the intrusion of

SECP saved the industry by relaxing the requirement to fully record the impairment on

equity investments. SECP allowed to defer some portion of the total charge till one year, to

be recorded on quarterly basis after adjusting any reversal in the stock market.

8.4.3 Although in 2009, the country remained insulated from any major incident, the low

premium rates and negative growth in real GPW resulted in underwriting losses for the

industry. Then, the industry was working to rationalize the investment book by investing in

risk free Govt securities and mutual funds. Though underwriting remained in losses, the

bottomline posted positive results on the back of revival in the stock market.

8.4.4 The industry had not even took a complete sigh of relief when the industry got another

shock from huge devastation caused by floods in 2HCY10. The premium rates had dropped

further down amidst rising competition, which further made the situation poor. Although the

loss ratio was lower at 63% than previous high in 2007 (71%), the combined ratio crossed

the previous highest (CY10: 108%, CY07: 106%). Nevertheless, the rationalized low risk

investment portfolio generated investment income at 20% of NPR, bringing the bottomline

in positive territory.

8.4.5 During 2011, the industry has resumed its position by depicting a positive growth in

real GPW (2.9%). Moving on in 2012, the sector is expected to sustain the growth trend

(2012E: 10%, 2011: 11%) and the private sector is projected to report a GPW close to PKR

47bln. The combined ratio is still sticking above 100% although loss ratio has further

improved. However, with reference to investment income, the resilience in the Pakistan

stock exchanges has supported the insurance sector to take an opportunistic move and gain

out of cautious trading activity. Moreover, stable stream of income from money market

mutual funds and government securities is providing persistence to the bottomline.

Resultantly, the operating ratio of the sector significantly improved to 77% (2011: 85%,

2010: 87%). Nevertheless, the insurers had a stark reminder that they cannot rely on

investment income alone to deliver results; they must refocus on the core drivers of

operational excellence, especially the factors that drive underwriting ratios, to achieve

sustained growth. Many of top players are working on solid ground in improving

professional excellence and revamping operational efficiencies, revisiting risk management

practices.


GENERAL INSURANCE



9. RISKS

Declining

premium rates

Catastrophe risk

Reinsurers

statistics reflects

potential change

in treaty

arrangements

and/or other

conditions

Intercoperate

debt

reconciliation

system

inefficient

Regulatory Risk

9.1 From the above discussion we can clearly establish that the business avenues have

been opening up in the fire, marine and the miscellaneous segments, though motor have

declined. Despite this the real GPW has showed very slow growth, attributable to inadequate

premium pricing owing to heightened competition amongst large (dominating) industry

players. These results into high expense ratio and, hence, negative underwriting profitability.

If the trend continues for long the sector may face sustained trend of loss in the combined

ratio.

9.2 Pakistan’s

insurance industry

depends heavily on

reinsurers muscles.

Treaty arrangements

with reinsurers of

international repute and

sound financial strength

have stabilized heavy

losses in the past. The

declining trend of

commission income is

reflecting that reinsurers

have taken a

conservative view on

Pakistan’s market. Since

CY11, the reinsurer’s

loss ratio has been

sustained at ~60%;

which is high keeping

the history in view. If

the industry continues to transfer heavy losses to reinsurers, caused by squeezing premium

rates and/or rising catastrophe risk, it is likely to put further pressure on treaty terms. The

situation at Pakistan becomes more relevant for the reinsurers as they are already faced huge

losses from catastrophic blows in many of the countries all across the world. There must be

pressure on these reinsurers to review their risk management practices and policies and adjust

their pricing strategies in order to remain profitable.

9.3 According to experts, Pakistan is exposed to catastrophe risk; earthquake, floods, and

wind storms. The major risk emanates from floods which have been hitting the industry from

the last three years consecutively, followed by monsoon rains each time. Although, the key

players are taking pre-emptive measures to obtain reinsurers cover (Nat Cat, etc), absence of

sophisticated tools within the industry for identifying the area of risk, estimating the

maximum probable loss (MPL) keeps the arrangement relatively less effective. This leaves

the industry facing risk to catastrophe damages.

9.4 The industry has been witnessing surge in inter-company debt balances since CY07

and reached a record level in CY10 – an event of historical loss year for the industry.

Keeping in view the circular nature of the debt, major portion going bad would impact the

small industry players.

65%

59%

54%

79%

52%

61%63%

46%

36%

96%

38%

59%

24%

17%13% 13% 14% 14%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011 1H12

Analysis of impact on Reinsurers of rising losses in Pakistan

Gross Loss Ratio Reinsurers' loss ratio Commission income from Reinsurers

A sample of large insurance companies (80% market share) likely to influence large reinsurers'


GENERAL INSURANCE



9.5 Some of the small

industry players are already

going through financial distress

in the wake of tightening in the

pricing strategy, squeezing the

fiscal space, and, hence,

declining equity due to losses.

The business profile of these

companies leaves a nominal

room to increase the paid-up-

capital, if the SECP further

increases the minimum capital

requirements (MCR), the

sponsors’ support (fresh equity)

would be inevitable in order to

avert regulatory no-compliance.

Furthermore, if the regulator

comes up with a stricter stance,

requiring equity (instead of

paid-up-capital) to be

maintained above a threshold,

the risk would penetrate to a

greater number of insurers.

(1,000)

-

1,000

2,000

3,000

4,000

5,000

CY08 CY09 CY10 CY11 1H12

Inter-Company Debt

Amounts Due to other Insurers/Reinsurers Amounts Due from Other Insurers/Reinsurers

Net payable/ (receiveable)

Documents

SECTOR STUDY GENERAL INSURANCE IN PAKISTAN€¦ · potential. The sector holds unique strategic significance for the country’s economy as it is predominantly used by the banking