The Future of Insurance in Pakistan

Omer Morshed

Sidat Hyder Morshed Associates6 November 2008

The Future Starts Here – What is the Future for Pakistan’s Insurance Industry ?• Best Practice does not only apply to individual

entities– It also applies to nations and to industry segments– There are best practices for the governance of

countries and also for how industries organize themselves and develop

– This presentation looks at Pakistan’s Insurance Industry

• Outline of presentation– Where are we at Present– What are the Major Issues being faced by the Industry – What needs to be done with respect to addressing the

issues?

Where are we at Present

Developments over the Past 10 Years

• It is always necessary to review where we have been and identify issues before deciding what needs to be done going forward

• The year 2000 brought about a major change in the insurance industry with the introduction of the Insurance Ordinance 2000 and the shifting of the responsibility of insurance regulation to the SECP

• This was followed over the years by a gradual strengthening of regulations

• I believe these events have positively contributed towards development of the industry by– Eliminating non-serious small players, thereby increasing the

creditability of the industry– Strengthening the entities which remained– Introducing new areas, Takaful being a major one

General Insurance Market• Estimated direct company gross

premiums in 2007 Rs. 35.3 bn

• PRCL gross reinsurance premiums for 2007 – Rs. 4.7 bn

• Non-Life Industry grew at an average of 18% over last 5 years

• Major Players (2007)

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Rs.

Mill

ion

Gross Premiums

Direct Companies (excl PRCL)

InsurerGross Prm

(Rs. Bn)Market Share

Adamjee 9.38 27%EFU General 8.96 25%NICL 4.25 12%New Jubilee 3.43 10%

26.02 74%

• Growth – 3rd Qtr 2008 to 3rd Qtr 2007 (based on sample) – 10%

Life Insurance (excl Postal Life)• Total premiums in 2007 Rs.

30.58 bn.

• Life Industry grew at an average of 24% over last 5 years (36% last year)

• Players (2007)

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Rs.

Milli

on

Total Premium

CompanyGross Prm

(Rs. Bn)Gross Prm

(Rs. Bn)State Life 20.35 66.6%EFU Life 5.96 19.5%New Jubilee 3.21 10.5%ALICO Pakistan 0.94 3.1%Metropolitan Life 0.12 0.4%Total 30.58 100%

• Private sector growth – 3rd qtr 2008 over 3rd qtr 2007– Total premiums – 42%– New Business Reg – 90%

Insurance Penetration (Sample Countries vs Pakistan)

Total Life InsuranceGeneral

Insurance

World 7.5 4.4 3.1

United States 8.9 4.2 4.7

United Kingdom 15.6 12.6 3.0

France 10.3 7.3 3.0

South Africa 15.3 12.5 2.8

Malaysia 4.6 3.1 1.5

India 4.6 4.0 0.6

Pakistan 0.7 0.3 0.4

Summary• There has been significant growth in the recent past,

especially in life insurance• A number of new players have entered in the market :

– Subsidiaries of banks– Takaful players– Specialist health companies (one in existence and one in process

of being established)

• A major policy review was conducted by the Ministry of Commerce in 2007 with many decisions made.– A number of the decisions made have, however, still to be

implemented. Some of the more important ones are included later on in this presentation.

• There has, therefore, been considerable progress.• There is, however, still a long way to go – especially in the

case of life insurance.

Major Issues Being Faced by Industry

Major Issues• I would divide issues into what I call structural issues and apparent

issues• The latter relate to those issues which are apparent and which are

addressed from time to time (or are being addressed)– Eg., bogus third party motor insurance– Increasing non-availability of terrorism cover in general insurance –

Munich Re having currently withdrawn riot cover as well– The lack of penetration of the takaful industry even 3 years after the issue

of the Takaful Rules 2005• What needs more attention, however, are the structural issues –

weaknesses underlying the insurance industry and regulatory environment that impact development of the industry– I therefore intend to focus on these issues as I believe that this is what

needs to be addressed– Lessons can be learned from the fact that the only major change in the

last 60 years (the IO 2000 etc) did not come from an internal effort but through the pressure of an external agency – the Asian Development Bank

• The industry’s role was to try and resist the change which it did – also introducing some very strange provisions in some of the regulation (eg., the asset admissibility rules introduced in 2002)

Main Structural Issues• Inadequate regulatory capacity

– Although insurance regulation has seen much improvement since the SECP took over (as compared to the Controller of Insurance) there is still a large gap between what is needed and what is there

• Lack of adequate human resources

• Inadequate effort by the industry to effect change

Regulatory Capacity• There is no doubt that the SECP is a more effective regulator than

the Controller of Insurance was (after the period of Mr Khalfe)• The SECP has, however, very little in the form of internal capacity

– There is a dire need to increase this capacity• The SECP also suffers from a structural problem with regard to

insurance– It’s focus tends to be the capital markets and insurance suffers in the

bargain - lack of understanding of the industry’s needs and problems leads to lop-sided priorities

• There has been a call from some quarters for the establishment of a dedicated insurance regulator (the original idea of the IO 2000 was to establish the Pakistan Insurance Regulatory Authority- this did not happen and the responsibility for insurance regulation was given to the SECP).– I would tend to support this idea which, however, will be very difficult to

implement without concerted industry effort– I believe that a dedicated PIRA based in Karachi would be able to

attract professionals who would not be attracted to (or even appreciated in) the SECP

Human Resources• In order to develop an industry must have a number of

ingredients– The ability to sell itself, thereby creating the market without

which all other aspects become meaningless– Technical ability – especially to innovate new products, to enable

individual companies to plan and strategise better and to ensure that

• The insurance industry is dominated by marketing professionals– Whereas this is extremely important (as without this aspect

being addressed the industry would not grow) there is a serious lack of technical ability

• This is especially so in the area of general insurance• Whereas we have a number of life insurance actuaries there are no

specialist general insurance actuaries – In contrast in India there are a large number of members of the Casualty Actuarial Society of the US

• The approach to pricing and reserving in the non-life side tends to be very simplistic.

• Approach to determining retention capacities also rule of thumb rather than following any scientific pattern

Human Resources (continued)• The actuarial profession is one which has managed to organize itself

over the last 10 years – the Pakistan Society of Actuaries has developed itself into a relatively active body– The profession has, however, been hit by a large brain drain – from a

qualified membership of around 40 it has lost 9 members to the UK and UAE in the last 18 months alone

• The survey/loss adjusting profession is highly underdeveloped– There is no trend to try and obtain internationally recognized qualifications– Run more as businesses then as professional firms

• On the positive side some programs have been started in the Karachi and Punjab Universities. However there is still a significant shortfall.

• There are insurance institutes – the Pakistan Insurance Institute and regional institutes– Capacity, however, remains extremely low– Compare with the insurance institutes in India

• There was a proposal to set up a dedicated insurance institute which was included in the Insurance Policy statement issued by government. This does not, however, appear to have got any further than a statement of good intent.

Inadequate Industry Effort• The Insurance Association of Pakistan (IAP) exists but

falls well short of an effective industry body– Does not currently represent the Takaful industry (who choose to

stay out) or the state insurers• A strong industry body is a must for driving change. The

IAP should– Organize forums for analyzing industry issues and formulate

solutions– Partner with the regulator in terms of regulatory reform – rather

being at the recipient end and reduced to the rule of commenting on what the regulator develops

– Have some level of self-regulation• The only major reform that has come about in the last 60

years has been from external pressure– Efforts have been made by the government to have the industry

reform itself (in the form of an insurance commission and then a committee) but these failed to produce any results

What Needs to be Done

What Needs to be Done

• The answer to this is relatively simple– We need to strengthen regulation by either

strengthening the Insurance Wing of the SECP or by setting up a dedicated Insurance Regulator

– We need to open insurance institutes, attract more young people to insurance related professions and employ more technical persons in the industry

– We need to strengthen the industry association and make it more pro-active, including bringing in the Takaful Industry and possibly the state insurers

• The IAP must organize itself into a policy formulating body and not just one to react to government initiatives

Who Will Do It ?

• This is the big question and one to which there is no answer.

• It is clear that the effort must come from within– Whereas it is the government’s role to implement

policy, the formulation of policy is usually driven by industry professionals

– The IAP needs to do something serious in two major areas

• Re-organizing itself to ensure that the process of identifying industry issues and related solutions is an ongoing one

• Seriously promoting (financially and technically) the creation of dedicated insurance educational institutions

Thank You