The Pakistan Credit Rating Agency Limited

SECTOR STUDY

GENERAL INSURANCE IN PAKISTAN

December 2012

BANKING
The Pakistan Credit Rating Agency Limited

SECTOR STUDY

RATING REPORT CONTENTS

Summary Report

PAGE
1

Detailed Report:
1. Insurance Key Concepts

World
2. Global Snapshot of General Insurance Industry

3. Review of Insurance Performance Globally

Pakistan
4. Sector Profile

5. Governance

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 segments growth

13

8.4.Profitability

15

9. Risks summarized

17

December 2012

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The Pakistan Credit Rating Agency Limited

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
Regulators focus

ANALYSTS
Amara S. Gondal
amara.gondal@pacra.com
Jhangeer Hanif
jhangeer@pacra.com
Abdul Haye
Abdul.haye@pacra.com
Noman Umar
Noman.umar@pacra.com
+92 42 35869504

ABOUT INDUSTRY:
Pakistans general insurance penetration level (0.3%) is lower than the
regional average (1.6%), and in terms of penetration, is ranked at 18th
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 countrys
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 industrys 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.
Regulators 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
sponsors support is provided.

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
whole or in part in any form or by any means whatsoever by any person without PACRAs written consent. Our reports and ratings constitute opinions, not recommendations to buy or to sell.

Tel: 92 (42) 35869504

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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

1
2

Oxford Dictionary
Definition from The Insurance Association of Pakistan (IAP)

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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 Distribution of General Insurance Premium among Continents
beats
general
insurance
by
dominating the 3worlds premium
of USD 4,597bln with 63% market
America
share in 2011. Nevertheless, the
43%
general insurance business spreads
its wings all across the world, while
North America and Western Europe
Asia
being the leaders in general
Europe
18%
insurance contributes 37% and 33%
36%
World's nonto the worlds market, respectively.
life premium
This makes the global industry
2011
structure highly concentrated with
top eight countries occupying
USD 1,969bln
majority market share (64%); the
United States (US)topping the list.
Insurance
penetration4
varies
Oceania
Africa
greatly across different regions of
2%
the world, reflecting different
1%
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 worlds 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 worlds 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

Swiss Re Sigma 3/2012; Worlds insurance in 2011

Premium as %age of GDP
5
Premium per capita
6
Latin America, Central and Eastern Europe, South and East Asia (Excluding Israel), Central Asia, Turkey, Africa
4

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types of insurance and the market is flooded with specialty and general insurance providers,
which provide the bulk of products. The 7mandatory line insurance workmans
compensation (accidents at work) and third part liability auto insurance generates majority
8
business (~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 GrammLeach-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

United States

667,107

Share
of
world
market
(%)
33.9

Germany

131,292

6.7

3.6

1,578

Japan

130,741

6.6

2.2

1,031

109,486

5.6

3.1

1,188

United
Kingdom
France

98,359

1.9

1,403

China

87,319

4.4

1.2

64

Netherland

79,722

4.1

9.5

4,777

Canada

69,045

3.5

2,010

73

Pakistan

636

0.03

0.3

69.8

3.4%

Rest of the world

1,373,071
595,108

30.2

2.1%

Worlds Total

1,968,179

100

2.8

Rankin
g

Country

Top 8

Premium
(USD mln)

Penetration
(Premium as
%age GDP)

Density
(Premium per
Capita in
USD)

4.5

2,130

283

Source: Swiss Re Sigma 3/2012; Worlds 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. Germanys industry 10generates business mostly from accident and health
(~36%), followed by fire and property damage (~25%), and motor insurance (~20%).

World Bank Financial Sector Development Department: The Regulation and Structure of Non-Life Insurance in the United State
Organization for Economic cooperation and development (OECD): OECD.Stat Extracts complete database available via OECDs
Library
9
Capegemini: World Insurance Report 2011
10
Organization for Economic cooperation and development (OECD): OECD.Stat Extracts complete database available via OECDs
Library
8

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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 countrys 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. UKs
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 sectors 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 13Japanese 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
insurers 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 insureds 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 worlds 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 industrys growth prospects are high. If we further drill
down, Pakistans immediate neighboring country, India, posted USD 12bln premium from
general insurance business in 2011; ranked 1619thin terms of premium. The insurance
penetration is very low (0.7%). The 17motor 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
industrys 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
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; Worlds insurance in 2011
17
Insurance Regulatory and Development Authority (IRDA)
12

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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 Asias premium share 2011

Ranking

Premium

(Asias
Market

Country

(USD mln)

Share
of
world
market
(%)

Penetration

Density

(Premium

Rank

(Premium

Japan

130,741

6.6

as %age
GDP)
2.2

China

87,319

4.4

11

1.1

64

51,223

2.6

4.6

1,045

South
Korea
Taiwan

14,283

0.7

3.1

614

India

12,187

0.6

13

0.7

10

Singapore

8,188

0.4

1.5

810

Iran

7,555

0.4

1.7

101

20

Pakistan

636

0.03

18

0.3

Top 7
Rest of the Asia

311,496
44,684

15.8
2.3

1.7

Asias Total

356,180

18.1

1.6

Share)

(Asia)

per Capita in
USD)
1,031

1.1
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
18

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 Res 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

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

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underwriting
profits

4. PAKISTAN
SECTOR
PROFILE
35 active
general
insurance
companies in
Pakistan
Low premium
penetration
Positive
correlation
between
economic
expansion and
premium
development

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.
4.1
General Insurance in Pakistan a brief: Pakistans 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 industrys 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 industrys 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 segments 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

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
20

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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

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December 2012

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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 noncompliance.
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.

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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
Five year goal and developmental plan set out by IAP is:
1.
2.

Insurance
Association
of Pakistan
(IAP)

3.

4.
5.

6. MANAGEMENT
Experienced
Human
Resource
Moving towards
insurance
related
professional
qualification
Committee
Structure in
place

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

evolve a process for its strict adherence/compliance by its Members
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.
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.
To ensure that current and future Human Resource needs of the
Insurance Industry are adequately met.
To stop the Motor Third Party Insurance extended by fraudulent or
unrecognized insurance representatives.

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/Coinsurance 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
GENERAL INSURANCE
December 2012

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
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towards advanced industry players to take proactive approach towards decision making system and achieve a
IT solution
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
Real time and
time
insurance
solution has been deployed by most of the players, using client/server
integrated
insurance system 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
Inter-company
changes in its modules from time to time. However, some large insurance companies have
reconciliations a
moved to relatively customized and sophisticated systems. The expansion of business
neglected area
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 (facultative 26)
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

25

8.1 SECTORS 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 industrys major customers are the commercial banks and
other financial institutions, since more than half of the industrys premium is referred
through them. At the same time these banks may be placed in the shoes of suppliers. Large

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)

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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 banks 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 industrys 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

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December 2012

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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,

35%

70

30%

60

25%

50

20%

40

15%

30

10%

20

5%

10

0%

GPW PKR bln

Gross Premium Growth and relationship with Economy

2004

2005

2006

2007

2008

2009

2010

2011

2012E

-5%

(10)

-10%

(20)

-15%

(30)
GPW (R.H.S)

Nominal GPW Growth

Real GPW Growth

Source: Swiss Re Sigma 3/2012 and SBP

(2012E PCRA Team's own estimate )

Real GDP growth (%)

correlation cofficient (7yrs): 0.04%

the assassination of former Prime Minister Benazir Bhutto ignited riots in the country (Dec07), 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,
Industry's segments and composition
emerging markets and developed 100%
12%
13%
14%
16%
economies, where correlation is
90%
higher than in Pakistan.
Marine
80%
8.3 BUSINESS
MIX
SEGMENTS GROWTH:

AND

8.3.1 Fire:
Until
CY08, the
industrys 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 didnt wait for the rising
tide to lift all boats to bolster their
topline. Over the years segmental
GENERAL INSURANCE
December 2012

23%

26%

24%

32%

28%

26%

34%

37%

42%

2009

2010

2011

70%

23%

60%
50%

24%

Misc.
Motor
Fire

40%
30%
20%

31%

10%
0%
2008

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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 industrys 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
Motor Insurance Growth | Auto Loan

Motor Insurance Growth | Vehicles offtake

100

12

175,000

14,000

150,000

12,000

125,000

10,000

100,000

8,000

75,000

6,000

50,000

4,000

25,000

2,000

80
70

PKR bln

50

40
4

30
20

10
-

PKR bln

60

Number of Vehicles

10

CY08

CY09

CY10

CY11

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

Motor Insurance (R.H.S)
Linear (Auto Loans by Banks/Fis (outstanding at year end))

CY08

CY09

Vehicles Offtake
Linear (Vehicles Offtake )

Source: State Bank of Pakistan (SBP)

PKR mln

90

CY10

CY11

Motor Insurance (R.H.S)

Source: Pakistan Automotive Manufacturers
Association (PAMA)

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.

Marine Insurance | Pakistan's Trade

70,000

10,500

60,000

9,000

50,000

7,500

40,000

6,000

30,000

4,500

20,000

3,000

10,000

1,500

CY08
Pakistan's Exports
Marine Insurance

PKR mln

US $ mln

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

CY09
CY10
Pakistan's Imports

CY11
Source: State Bank of Pakistan

31

Gross premium as %age of sum insured based on PACRAs universe constituting more than 60% of market share in terms of premium
Economic Survey of Pakistan
33
NEPRA State of industry report 2011
32

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December 2012

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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.

PKR mln

8.4 PROFITABILITY OF THE SECTOR IN PAKISTAN: The size of topline is very important
in deriving profitability in any
business.
However,
this
Sector's Average Premium Rate
phenomenon becomes more
0.8%
critical when it comes to the
0.7%
insurance sector. Moreover,
0.6%
higher the premium rate so will
be the underwriting profits;
0.5%
adequately
pricing
risk
0.4%
underlying the insurance policy
0.3%
as well as covering the
acquisition costs and expenses
0.2%
would
generate
profits.
0.1%
However, the Pakistans industry
0.0%
premium rates have been
2008
2009
2010
2011
declining year on year basis, as
depicted by adjacent graph.
Average Premium rate*
Accordingly, the loss ratio has
*GPW as %age of Gross Sum Insured (PACRA's universe )
been following
Performance - Private Sector
an
increasing
trend.
Until
150%
48,000
Political leader assasination
2006,
the
Floods
Stock Market Crash
led riots
industry
125%
40,000
continued
to
generate
100%
32,000
positive
underwriting
75%
24,000
results
(combined ratio:
50%
16,000
97%34), which
was topped up
25%
8,000
with
robust
investment
0%
0
income (74% of
CY06
CY07
CY08
CY09
CY10
CY11
CY12*
NPR) making
-25%
-8,000
the
operating
ratio to stand at
-50%
-16,000
23%. However,
Stock Market Boom
the situation has
-75%
-24,000
turned
worse
GPW (R.H.S)
Pre-Tax profits (R.H.S)
Loss Ratio
Combined Ratio
Operating Ratio
and worse year
by year since
*annualized 9M12
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)

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December 2012

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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 Pakistans 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 didnt 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.

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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.
Analysis of impact on Reinsurers of rising losses in Pakistan
96%
9.2
Pakistans
insurance
industry 90%
depends heavily on
79%
reinsurers
muscles. 80%
Treaty
arrangements
70%
65%63%
with
reinsurers
of
61%
59%
59%
international repute and 60%
54%
52%
sound financial strength
46%
have stabilized heavy 50%
38%
losses in the past. The 40%
36%
declining
trend
of
commission income is 30%
reflecting that reinsurers 20%
24%
have
taken
a
17%
conservative view on 10%
14%
14%
13%
13%
Pakistans market. Since
0%
CY11, the reinsurers
2007
2008
2009
2010
2011
1H12
loss ratio has been
Gross Loss Ratio
Reinsurers' loss ratio
Commission income from Reinsurers
sustained
at ~60%;
which is high keeping
A sample of large insurance companies (80% market share) likely to influence large reinsurers'
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.
100%

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.

GENERAL INSURANCE
December 2012

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GENERAL INSURANCE
The Pakistan Credit Rating Agency Limited

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-upcapital, 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.

GENERAL INSURANCE
December 2012

Inter-Company Debt
5,000

4,000

3,000

2,000

1,000

CY08

CY09

CY10

CY11

1H12

(1,000)
Amounts Due to other Insurers/Reinsurers

Amounts Due from Other Insurers/Reinsurers

Net payable/ (receiveable)

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