The insurance business in Pakistan and I would prefer to do describe it as a business rather than an industry – is an interesting application of this paradox. Over the years, the fatalism enjoined by Islam has been underwritten by a more pragmatic mechanism, which has offered various degrees of financial protection – on the assumption that whereas it may be advisable to submit unquestionably to the will of God, one should not necessarily be out of pocket as a result.
Fatalism tempered by pragmatism, therefore, can be regarded as recurring attributes of the insurance business in Pakistan, even from the very first green days of our Independence. When Pakistan was established in 1947, there were 77 insurance companies in all. Today there are 52. In 1947, 70 of those 77 companies were foreign companies and/or their branches. Today there are 10.
The seven local companies have 47 years later become 42, and might have been more had 32 of them not been nationalised on March 18, 1972, when their life insurance business was brought into the public sector, and consolidated under the aegis of the State Life Insurance Corporation of Pakistan. Today, Pakistan has 52 companies conducting general business. They offer primarily Fire, Marine, Motor and Accident cover. The composition of general insurance business is Understandable, considering the lack of sophistication of our domestic environment.
In 1993, Fire (including-Profits) accounted for 32. 2 per cent of the Gross Direct Premiums, Motor for 33. 1 per cent, Marine (including Hull) Premiums for 23 per cent and Accident (including Engineering) for 11. 7 per cent. The concentration of business amongst the insurers themselves presents a curiously disjointed picture. The 10 foreign companies have only a 10. 5 per cent share of the Gross Direct Premiums, and of the 41 Pakistani companies operating in the market, 35 of them share 18 per cent of the business, while only 6 companies command and control 71.
5 per cent of the general business. What these companies share in common, though, is an obligation (an onerous one according to some) to reinsure a mandatory 20 per cant (it used to be 30%) of their insurance business with Pakistan Insurance Corporation (PIC), which was established in 1952 to provide reinsurance facilities within Pakistan and overseas, and to develop the insurance by offering technical and expert advice.
PIC has grown substantially since 1953, with its Gross Premium Income in the last five years being above the 1 billion mark. Its overall profitability has wavered, falling from an all time high of Rs. 119 million in 1991 to below Rs. 50 million in 1991. Apart from this obligation to reinsure with PIC, the general insurance companies are left largely to themselves and expected to be self-regulatory. Their Fire, Motor, Workmen’s Compensation and Marine classes of business are governed by a Tariff which is determined by themselves through their Insurance Association.
Their maximum statutorily approved agency commission rates of 15 per cent for Marine business and 20 per cent for Non-Marine business have become more gentlemanly statements of intent than rigorously enforced standards. In their business, insurance companies are monitored by the Controller of Insurance, an administrative arm not of the Ministry of Industries but of the Ministry of Commerce. They are regulated by Insurance Rules of 1958, approved in the same year as the distant Martial Law coup of Ayub Khan.
And they are governed by a law – the Insurance Act of 1938, promulgated a year before the outbreak of the Second World War. To fatalism and pragmatism, one should perhaps therefore add the world Archaism, for no sector of Pakistan’s financial services market stands so deeply mired in its past, nor has as much need for deregulation and modernisation, if it is to prepare itself for the future. than the insurance business sector in Pakistan. There is no equivalent to the Companies Ordinance 1984 in the insurance sector.
There is no appropriate counterpart to the Corporate Law Authority, to give an impetus to its development or to safeguard the interest of the public. The recent spectacular growth in the financial services sector, in my opinion, was no accident. It was the direct fertile result of an environment made receptive by regulated incentives and governmental initiative. Can the insurance business of Pakistan achieve the same sort of success? I cannot see why not. What than should be the direction of the insurance sector?
What should be its role? An attempt was made seven years ago to answer these questions when, in 1987, a Government Commission was constituted to diagnose the malaise in the insurance sector. The report, submitted to the Government three years later, identified some of its more reprehensible practices – for example, the methods used by insurance companies to obtain business particularly through banks, irregularities in settlement of claims, the indisciplined and unethical practices of insurance surveyors, methods of rebating, commissions to agents, and discounts.
Whatever good that three volume report contained was interred with its bones; the evils it hoped to exercise continued to live long after it. More recently, last year in August 1993, another review took place when, in an Overview of the Insurance Industry by one of the leading brokerage houses, Khadim Ali Shah Bukhari Limited, the major problems were identified as: * Excessive Government controls * Compulsory reinsurance with PIC * High capital gains tax on investment gains.
* Higher rate of tax on dividend income than 10% * Inaccessibility to public sector business, which is the domain of the National Insurance Corporation * Poor quality of manpower and limited training facilities It would be hard to question the justification for these complaints. It would be even harder to justify why the insurance companies have done so little to assuage them. If the future role of the insurance business sector is to grow and match the expanding requirements of Pakistan’s economy, there are key areas in which the insurance companies must themselves take the initiative.
The first must be education. No one should be allowed to forget that insurance being a customer service oriented business, its success depends heavily on the quality and calibre of its personnel. In the United Kingdom, it was once considered enough for a new entrant into the business to have five GCEO levels and then spend his life within the same organisation learning the job on the job. Today, anyone wanting to make a career in Insurance should expect to be ready to tackle very focused courses, like those conducted by the College of Insurance in London.
Apart from such foundation topics as Personnel Development Skills, Surveying and Risk Management, Reinsurance, Aviation and Marine, the students at the College are also offered such specialised subjects as European Law, the Use of Annual reports and Accounts for Errors and Omission Avoidance, Insolvency Rules and Regulations, and Financial Reinsurance and Derivatives. Insurance may have been a business by men; it is rapidly becoming one managed by women.
An interesting aftermath of the second income phenomenon has been that in the United Kingdom, out of a total employment in the insurance business of almost 400,000 employed, 49. 3 per cent have been women. Another significant feature has been that 8 per cent are the total strength is self-employed.
This emphasis on education, though needs to go beyond the potential or existing employees in insurance companies. Another audience whose knowledge of the insurance business should never be presumed but whose ignorance can have damaging consequences is that of the lawmakers themselves. It took Great Britain over a century to recognise the significance of this advantage.
Only as recently as 1991 was an All Party Parliamentary Group on Insurance and Financial Services formed to act as a bridge between the lawmaking MPs and a law-abiding industry. Without a better understanding of the business of insurance, should one honestly expect legislators to be able or equipped to promulgate sound and appropriate laws? And what about the laws themselves? Can there be legislation of any adequacy without an accepted definition of such simple but crucial words in a policy as ‘theft’, or ‘flood’, ‘accidental bodily injury’ or ‘reasonable steps to safeguard any property insured?
Are we ourselves clear on what we all understand by Warranties, Responsibilities for Disclosure, Misrepresentations, and the Broker’s responsibilities to his or her clients? Such legislative clarity is difficult to achieve but necessary to attain, for without such a suitable legal framework, and a regulatory environment which is both sensitive to and responsive to changes, the future growth of the insurance business in Pakistan will continue as before – a blind perpetuation of arcane laws and the mindless repetition of previous practices.
Can Pakistan afford such an addition to history? Can our insurance Industry avoid the responsibility for developing new products more attuned to the specific needs of our economy? The future of the insurance sector must connect with the permanent features of our economy. If we are still fundamentally an agrarian society, we have to expand crop, livestock and other such agrarian insurance schemes. The 1988 National Commission on Agriculture, incidentally, makes no mention of insurance anywhere in its 644 page report.
If we are gradually expanding into an urban economy, we have to consider widening schemes which provide household and personal effects insurance. If we want to build our own motor cars to speed on our own multi-lane highways, we have to fashion policies which provide cover not simply for the vehicles, its passengers, third party liability, but also anticipate the responsibilities incumbent on highway authorities regarding the condition of the roads. If we want to maximise the safer and more efficient use of our railway system, we must encourage the Pakistan Railways to obtain cover for risks which are germane to their operations.
Similarly, insurance cover of transport by road should not be left to the goodwill of the transporters, many of whom regard self-insurance, like rash driving, as the best form of protection. If we are veering towards industrialisation, products coverage should have to go beyond fire insurance of the factory and stocks Loss of profits insurance, safety standards, more open disclosure of actual replacement values, a fairer participation of the premium/risk are some of the more brittle realities businessmen will have to learn to accommodate.
And if we are to have a population which is refusing to stop at 120 million, and is taking longer to grow older, clinical risk management will become continuing rather than occasional features of our economic society. Health insurance will become more than simply reimbursing medical bills. It could and must in time cover risks in obstetrics and gynaecology, health care management, managing financial risks like contract clauses and indemnities, drugs cases and claims associated with environmental hazards.
And if we are a nation that attaches a value to the life and well-being of our citizens, a nation which advocates the work ethic, and a nation which encourages life insurance as a means of channelling savings into productive investment, the future role of the insurance sector – both of Life and General – will be a translation of these responsibilities and opportunities into productive action. The largest mobiliser of funds in the insurance market has been unquestionably the State Life Insurance Corporation of Pakistan. Since 1972, following the traumatic nationalisation of life business, SLIC has grown tremendously.
Its premium income has increased from Rs. 316 million in 1973 – the first year of its consolidation to Rs. 5 billion in 1994, equalling the total Gross Direct Premium of all the 52 companies in the general sector. SLIC’s investment portfolio grew from Rs. 1. 4 billion to Rs. 21 billion, and not surprisingly SLIC’s investment income has now become almost one-third of its total income. Its yield on Life Funds is about 14. 4 per cent which may explain why the new companies which have been granted permission to do life business are displaying an understandable hesitancy.
Nothing is secret in the public sector, and certainly the use of SLIC’s funds over the years to finance Government has been no secret. SLIC’s portfolio consists primarily of Government securities. That in itself is not a problem. What one needs to identify is the impact on the Government’s reliance upon SLIC as a resource, should SLIC be privatised to the point where its policies could be brought more in line with market imperatives and competitive investment options. It is already six years since the Insurance Reforms Commission was established.
During this period, because of Deregulation and Privatisation, the whole financial services market has undergone an irreversible change. Further privatisation will bring about additional responsibilities, which means more costs, as insurance of commercial risks becomes no longer a matter of choice but an inescapable requirement. Businessmen of tomorrow will have to accept that insurance policies are not a chance talisman against calamities. Used prudently, they can be a resilient and reliable safety net, providing them and the economy with a level of confidence to take risks which are quantifiable and knowingly and prudently underwritten.
In another six years Pakistan will be in the 21st century. No one would expect that all of the aspects of the insurance business whether legislative, regulatory or commercial – will be in place by then. A reasonable expectation would be that significant steps would be taken to move in those directions. Talleyrand once said that war is much too serious a business to be left to military men. Similarly, perhaps, the future role of Insurance in Pakistan is too serious to be left only to insurance men.
Its future lies in the hands of better informed legislators, more responsible insurance professionals, and perhaps most importantly of all, more discerning and demanding customers themselves. Collectively they can, and I am sure, will fashion the future role of the insurance sector in Pakistan.
COPYRIGHT 1995 Economic and Industrial Publications COPYRIGHT 2008 Gale, Cengage Learning Bibliography for: “Future role of insurance industry in Pakistan” F. S. Aijazuddin “Future role of insurance industry in Pakistan”. Economic Review. FindArticles. com. 26 Dec, 2010.
http://findarticles. com/p/articles/mi_hb092/is_n3_v26/ai_n28654897/ COPYRIGHT 1995 Economic and Industrial Publications COPYRIGHT 2008 Gale, Cengage Learning Economic Review View more issues: Articles in March, 1995 issue of Economic Review * The new wave of killing in Karachi by Raza Moosi * The 3rd round of privatisation: – government needs cautious approach by Khushnood Ali Shaikh * Performance of banking finance sector by Iqbal Haidari * The feasibility of plastic money in Pakistan by S. Sabir Ali Jaffery * Leasing: – a convenient mode of financing by M.T. Salam.
* Certificates of musharaka by Rauf B. Kadri * Modarabas: – excessive control stunts development * Investment banks in Pakistan by M. T. Salam * Who’s who in banking and finance sector * Future role of insurance industry in Pakistan by F. S. Aijazuddin * Major issues in agricultural financing and their possible solutions by Rao Abdul Rauf Khan * Need for a guideline for pharmaceutical industry by Fazal Hameed * Crisis in Nigeria – dawning of a new dark age * ICI record sales all round – a determined effort for expansion * Steep downturn by Rafat Hameed.