The emphasis was laid on greater private sector participation in the insurance industry, in particular reinsurance to enhance the week risk-bearing capacity of the sector.
The business of insurance in Pakistan has been regulated under the Insurance Act, 1938. In order to implement and administer the provisions of the aforesaid Act, the Department of Insurance was established in April 1948, under the Ministry of Commerce.
Insurance industry in Pakistan was fragmented and it suffered from operational inefficiencies, lack of professionalism and low ethical standards. The coverage of life insurance barely reached 2% of the total population, and general business also remained underinsured compared with other countries at a similar development stage.
The market was characterised by a general lack of annuity products because consumers prefer to receive lump sum benefits rather than regular income.
Capital adequacy requirements for general insurance companies were inadequate, registration fee for insurers remained modest, and the statutory solvency margin was quite low. Department of Insurance lacked management, administrative, and financial autonomy, and was ill equipped both in terms of facilities as well as trained human resource.
In order to undertake reforms of the insurance sector the Government sought the assistance of ADB and a reform programme was worked out under Capital Market Development Programme (CMDP).
While formulating a programme for reform of the insurance industry, the Government considered two options: either set up an autonomous body exclusively for regulation of the insurance industry or vest the Securities and Exchange Commission of Pakistan (SECP) with the necessary regulatory authority.
Keeping in view the cost constraints and make use of capacity available with SECP and in order to provide for a consolidated regulation of the financial sector it was finally decided to assign the responsibility of regulating the insurance industry to the Commission.
As a consequence, a new insurance law was promulgated in 2000 by replacing the Insurance Act 1938. Under the new law many important functions on regulation of insurance were allocated to the Commission. An Insurance Division was created in the Commission to carry out these functions. Achievements in the insurance sector after the aforementioned legal and structural reforms are as follows:
-- Insurance rules were notified during the year 2002. The insurance rules cover important operational matters relating to accounting and reporting, actuarial reports, reinsurance arrangements, independent insurance survey and market conduct, etc, as applicable to life and non-life insurance companies.
The insurance rules also specify solvency and capital adequacy requirements for insurers.
-- The eligibility criterion for insurance agents/intermediaries has been laid down, which includes minimum educational qualifications at the point of entry, practical on-the-job training, and adherence to the code of conduct and capital requirements for insurance brokers.
-- Under the reinsurance arrangements, the main focus is on ensuring that reinsurance arrangements are made with sound reinsures having minimum 'A' rating from recognised international credit rating agencies.
-- Directives were issued to the insurance companies for the settlement of dispute between insurance companies and financial sector participants that insurance companies should not place their deposits with financial sector participants (banks) to acquire business from banks and banks should waive the condition of compulsory deposits as a pre-requisite for enlistment of insurance companies on their panel.
-- New formats for annual returns were prescribed and necessary regulations were also notified to prepare annual returns.
-- Code of Conduct for surveyors and loss adjusters was prepared to enable surveyors and loss adjusters who constitute an important intermediary between the insurer and the insured.
-- Code of Corporate Governors was introduced for registered insurance companies to promote good business practices and bring; uniformity throughout the insurance industry in Pakistan.
-- The paidup capital requirement was raised to Rs 100 million in case of life insurance company and Rs 50 million in case of non-life insurance companies.
-- In order to overcome the impact of post September 11 developments, a Task Force was constituted for formulation of strategy which recommended that alternate arrangements covering the risk of terrorism be developed as the likely exclusion of cover for terrorism and riot strike damage by international reinsures could create serious problems for the local insurance industry.
-- An insurance guide to create awareness about insurance among the general public.
The insurance industry in Pakistan is growing rapidly but is still underdeveloped. As of 30 June 2005, there were fifty-five private sector insurance companies operating in the country, of which four were foreign, fifty local enterprises while one company was registered as Takaful operator. Of the fifty local companies, forty-eight were engaged in non-life insurance business and two in life insurance business.
In case of foreign insurers, two companies operated in non-life and two in life insurance sectors. As of the close of the year, thirty-four companies were listed on the KSE, having paid-up capital of Rs 5,687 million.
In 1995, there were 62 general insurance companies which were reduced to 57 in the year 1999. Their number further reduced to 48 by 2004 due to consolidations as a result of SECP's directions to comply with enhanced paid up capital requirements.
On the other hand, gross premium in the case of General Life insurance companies and Life insurance companies increased to 46.45% and 335.48% respectively in 1999 from that of in 1995.
The correspondence increase from 1999 to 2004 was recorded as 97.36% and 428.74%, respectively. All this has been mainly due to consolidation efforts and proper regulation/monitoring by the SECP.
Despite considerable growth over the recent past, the insurance industry in Pakistan still lags behind many countries in the region.
Measured by insurance density (premia per capita), the Pakistani market is second lowest in the world.
In the South Asian region, insurance density and penetration are lower than India and Sri Lanka as is evident from the table given below:
In turn, Pakistani insurance market has a potential to continue to grow faster than economy as a whole as it catches up with the level of insurance development in the neighbouring countries.
TABLE: Insurance Density and Penetration in South-Asian Countries.
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Country Insurance Density Insurance Penetration
(US$) (Percent)
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India 16.4 2.88
Sri Lanka 12.5 1.30
Pakistan 2.9 0.62
Bangladesh 2.1 0.57
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