Mr. Ahmed joined Jubilee General Insurance in August 2004 and since then the company has positioned itself as provider of innovative insurance solutions Mr. Ahmed is Council Member of Pakistan Insurance Institute (PII) and was its Chairman in 2013-2014. He has also previously held the office of Chairman, Insurance Association of Pakistan (IAP) in the years 2006-07, 2009-10, 2012-13 and 2015-16. Mr Ahmed has also been the Member of the Working Group on Micro-Insurance Development and the Chairman of Insurance Reforms Sub-Committee of Securities & Exchange Commission of Pakistan (SECP), Government of Pakistan.
Following are the edited excerpts of his detailed discussion on insurance sector with BR Research
BR Research: Can you give us your view of the insurance sector today?
Tahir Ahmed: In my opinion, Insurance industry is one of the most honourable sectors in the world for the simple reason that it comes to the individual's or a corporation's rescue at the time of need; unlike other businesses, it indemnifies and compensates corporations and individuals to the extent that can get on their feet again.
It is a very critical and important industry wherever it may be. As far as Pakistan's insurance sector is concerned, unfortunately the insurance penetration in terms of GDP is only 0.8-0.85 percent. We have hovered around 0.7-0.8 percent since last 17 years at least, which I believe is due to the few key reasons.
The first reason, which I personally believe is largely responsible for stopping insurance expansion in Pakistan, is existence of a large undocumented economy. There is no need for insurance sector if it cannot provide you with satisfactory claims service; and to settle the claims it needs physical as well as documentary evidence. Unfortunately, we lack documentary evidence in Pakistan. To give you one example, there is not one jewellery shop in the developed world that is not insured, whereas not a single jewellery shop is insured in Pakistan for the simple reason that they are not documented. So when you are saving so much by evading or avoiding taxes, there is little need for you to get insured; that's what stops people from getting insured.
Another factor is awareness; however, I believe it's not the core issue. Look at life insurance. During the period from 2008 till 2013, the economy was growing very slowly; but, the life insurance segment was growing at a very high rate of 25 to 30 percent year on year, and it continues to grow like that even today with life insurance's share in penetration at 0.5 percent of the total 0.8 percent. My question is that if awareness is that low, why does life insurance continue to grow that fast for the past 10 years?
Third issue is the religious aspect where people believe insurance to non-Islamic. However, Pakistan's insurance industry now has a product called Takaful, which is Islamic insurance.
BRR: But isn't it Group Life Insurance that is triggering the growth, and not individuals seeking life insurance?
TA: Group life insurance has been there for a very long time in Pakistan. When I talk about growth, it is in terms of bancassurance, whole life insurance, and endowment insurance. State Life have always been growing very fast; its market share right now is around 50-55 percent, whereas the private life insurance companies are growing faster as they have tied up with various banks. Today, private life insurance industry is growing through bancassurance mainly in urban centres, while State Life is continuing to grow also in semi urban and rural areas.
BRR: How do you view the regulatory regime of the insurance sector?
TA: Our regulator is very responsive. We have an insurance commissioner, which is part of the SECP. The regulator engages all stakeholders via IAP platform for any new regulation, which has helped the industry tremendously. The draft Insurance Bill 2017 has also been formulated with the interactions between the insurance industry and the regulator. We had some reservations for which we had lots of to and fro discussions with them, and according to the SECP, they have addressed most of our reservations though we have not seen the final draft.
Tax regime comes under the FBR. In non-life insurance industry specifically, technical profitability is very low in Pakistan because of extreme competition; 70 to 75 percent of income of non-life industry comes from investments, while only 25-30 percent comes from underwriting ie technical profits. Insurance industry faced harsh tax regime in the year 2016 due to changes in the tax structure of insurance companies. Income from all sources are now taxed at 31 percent, whereas up till December 2015 dividend income was taxed at 12.5 percent, and tax on capital gains ranged between 0 - 15 percent, depending on the holding period of securities. This led to the industry's effective tax rate increase by 75 percent in one go. This has impeded our ability to develop our reserves to increase our capacity to pay claims, and hence we as industry are relying more on reinsurance, which means more outflow of foreign exchange. Right now 56-57 percent of the premium in the market is reinsured.
BRR: If the industry's reinsuring around 57 percent of their premiums on average, what is Jubilee's strategy? And have the percentage of premiums being reinsured gone up after the tax changes?
TA: From the very beginning, it is Jubilee General's strategy to be a genuine insurance company; our strategy has been to increase our net premium. Our net retention capacity right now is around 58 percent, and we intend to increase this to 61 percent by 2021.
As for the reinsurance trend, there has been no reduction in the premium going outside since the increased incidence of taxes.
BRR: What are some of the key emerging risks that inflict the insurance industry today?
TA: The most significant emerging risk being talked about around the world is the one posed by driverless cars. When you talk about non-life insurance globally, more than 50 percent of the premiums come from motor vehicle insurance. Even in Pakistan, it is approximately 30 percent currently, which is a huge proportion of the overall premium. So the advent of driverless cars and the likelihood that they will be on the roads by 2030 will significantly affect the motor insurance premiums going forward, as accidents are expected to come down drastically.
Another, more immediate risk is the cyber risk. Even in the developed world where insurance to GDP penetration is 9 to 10 percent, not all firms are insured against cyber risk.
The third pertinent and rapidly emerging risk for Pakistan is that of climate change. Changing weather patterns will affect your crop rotation and agriculture, our country is expected to become more water stressed and eventually the economy will be hurt. Although crop insurance is still not a significant chunk of insurance companies' portfolios here but changing climate will impact all facets of life & economy.
BRR: So, what are the new products and opportunities that the non-life insurance sector of the country can exploit?
TA: As I mentioned earlier, cyber is one key area insurance sector should start focusing on. All the banks, financial institutions, ecommerce businesses and corporations are exposed to it.
Another potential is that of export credit guarantee insurance. In cases where exports are not against LCs or where exporters foray into non-traditional markets, the seller is taking a big risk. Export credit guarantee insurance ensures that our seller is indemnified if the buyer refuses to pay or is unable to pay due to specified reasons. This can help the seller expand the exports as they don't have to maintain a sinking fund. Pakistan is not able to export to non-traditional markets simply because of the risk of the buyer not paying, and export credit guarantee insurance can play a key role here. We are trying to push this as it can really accelerate our exports.
BRR: Moving on to Jubilee General's operations, can you tell us what is Jubilee doing differently? We have seen that gross premiums tapered off in 2016 and this continues in 2017. What is behind this?
TA: Jubilee has been the fastest growing major company from the period of 2004-05 till 2014. While at Jubilee we take fire, marine and motor as traditional business lines that make up around half of our portfolio, our business mix is such that around 50 percent of our premium comes from non-traditional businesses like health, liability and miscellaneous.
We say that while we should grow in fire marine and motor, there is so much competition in these traditional businesses that it's all red oceans. Hence we have our non-traditional business lines where we are somewhat insulated from competition. This has been our strategy since 2004. Within the miscellaneous category, we have our engineering insurance where engineering projects are insured in their construction phase and operational phase. This segment has picked up with CPEC. We employ about 22 engineers in this company from all fields right now be it chemical, mechanical, civil, electrical; and they are able to talk to the engineering clients in their own language.
Also within the miscellaneous segment, is another product, banker's blanket as banks are exposed to multitude of risks. We are the market leaders in this product; it is a much specialised area where you need to showcase your knowledge.
Another field in these non-traditional lines of business is the terrorism insurance, which is one segment that has seen a decline in premiums as the law & order situation of the country has improved leading to lower appetite for terrorism insurance. At the same time, the reinsurance rates on terrorism insurance have gone down as well. There has been a 20-30 percent reduction in uptake, and another 20-30 percent reduction in the reinsurance premiums for Pakistan as the law & order situation has improved.
We always knew that this would happen and what we have to do as a result. Firstly, we knew CPEC was coming and we will be able to compensate that decline with new projects. Secondly, we have a plan that no other insurance company is working on; we are going into retail sector. 99 percent of the insurances bought today in Pakistan are by corporations, and only 1 percent is bought by individuals. In the developed countries, around 40 percent insurance premium comes from individuals. Currently retail is three percent of our business, and our plan is to grow this to 15 percent of our business by 2021. Hence 2018 onwards, you will see that our premiums will start growing once again. We are the only insurance company that has invested in the retail department.
We are also the only insurance company to go online. From our online portal (www.getinsurance.pk), you can buy all our individual products like home insurance, personal accident, personal health, family health, critical health, travel insurance including international travel, domestic travel, etc., and the transaction is paperless and cashless. Instead of paying via credit/debit card, you can also choose cash-on-delivery payment mode.
We have been very selective in our traditional business line; until 2012-13 when Karachi operation had not begun, no insurance company was making profit in motor insurance except us since we have been very selective. The reason is that motor insurance is a very volatile portfolio. However, we now want to grow our motor insurance segment from 16-17 percent to about 25 percent.
BRR: With growth planned in the retail and motor sector, where do you see Jubilee in the next four to five years?
TA: I believe that our retail strategy is going to act as a catalyst for us. By 2021, we project ourselves to be a Rs 15-16 billion company. Of this, around Rs 2.5 billion (15 percent) would be the retail segment, and around 99 percent of this would be retained by us because of little need for reinsurance.
BRR: Being online, do you see yourself partnering with the likes of Easypaisa, Omni, or maybe PPAF?
TA: Yes, we would love to. We are probably the only insurance company that has a call centre with 20 people, and we intend to take this number up to 40 by the end of the year.
BBR: Jubilee General also has Takaful operations. What's the progress?
TA: We started Takaful operations in 2015. In 2017, we have plans to go up to Rs 700 million from Rs 400 million business in 2016. We foresee growth in the next five years especially in the retail segment again. Takaful is experiencing robust growth in motor and health segments. By 2021, we expect our Takaful business to be around 18-20 percent of our total business.
BRR: Does Jubilee General provide micro insurance? And do you think there is a potential for transition in so far as micro insurance is concerned because it is about people living in the micro segment?
TA: I can gladly tell you that there is no insurance company other than State Life that is involved in micro insurance as much as we are. We have insured around 4 million people in micro insurance sector against micro health and personal accident all over Pakistan in the rural areas in partnership with the likes of NRSP, SRSO, RSPN, TRDP. These are our partners on the grounds who act as our gatekeepers. We started 4-5 years ago with just about quarter million people, and by the end of this year we will hopefully have around 5 million people. In terms of premium, this segment is very small - around Rs 200-250 million by the end of this year.
And as and when these people graduate into a higher income bracket we are sure that they will stick with us for other products we have. However, be mindful that these people are literally below the poverty level and are even unable to pay premium. Their premium is being paid to us by the NRSP, SRSO, RSPN, European Union etc. and we are providing the insurance service.
BRR: Given the last few years of economic recovery and the current political and economic uncertainty, what is your stance on the economy?
TA: I would say cautiously optimistic. The reason is very simple that the government is the same. I think very soon they will consolidate themselves once again and will be able to move ahead with their business agenda. However, the uncertainty has affected the economy already. The international rating agencies have termed this negative for the economy. All this is also telling on our stock market.
And Pakistan's economy strongly impacts Jubilee. We are the highest rated company in the country both by the local and foreign rating agencies. PACRA and JCR-VIS both have rated us AA+. We are also the highest rated company in Pakistan by A. M. Best - a very reputable and oldest insurance rating organisation of the world; they have given us a B++ rating, which is equivalent to S&P's A rating. No other insurance company in Pakistan has this international rating and none of the Pakistani banks carry international rating. Our high rating helps us in getting not only high profile clients but also better reinsurance rates.
Our sanguine ratings also recognise Jubilee General's robust risk management framework facilitating the company in sustaining sound underwriting performance. The Enterprise Risk Management System that we are working hard on is our brain child. We have formally established ERM program to monitor the risk management. The ERM program is based on a framework which is designed on compilation of company's traditional risk management practices and latest techniques. The framework offers the necessary foundation and organisational arrangements for managing risk across Jubilee General Insurance.
The framework also ensures that the company manages its risks and opportunities effectively and efficiently. At Jubilee General Insurance, it is an integral part of Internal Control Framework where the Chief Risk Officer (CRO) is responsible for the ERM, which directly reports to the CEO under the supervision of the Board Risk Committee.
Copyright Business Recorder, 2017