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TRANSCRIPT
Government of Pakistan
Ministry of Commerce
Insurance Sector Policy Review
13th April 2007
By Humayun Akhtar Khan Minister for Commerce
Outline Insurance Industry Growth and International Comparison
Policy Review Objectives
Industry Issues and Proposed Resolution
Takaful – Proposed Way Forward
Proposal to Facilitate Spread of Micro – insurance
Creation of a Dedicated Insurance Institute
Overview and Proposed Way Forward for
o State Life Insurance Corporation of Pakistan
o National Insurance Company Limited
o Pakistan Reinsurance Company Limited
Insurance Industry Growth and International Comparison
Life Insurance (excl Postal Life) Total premiums in 2006
Rs. 22.6 bn.
Life Industry grew at an average of 22% over last 5 years (27% last year)
Major Players (2006)
25,000
23,000
21,000
19,000
17,000
15,000
13,000
11,000
9,000
7,000
5,000 2001 2002 2003 2004 2005 2006
Life Insurer Premium
(Rs. Mission)
Market Share
Total Prm
Reg Prm New Bus
State Life 16,077 71.3% 73.6%
EFU Life 3,338 14.8% 16.2%
New Jubilee 2,291 14.8% 6.0%
Rs.
Mis
sio
n
Total Premium
General Insurance Estimated direct company gross
premiums in 2006 Rs. 34.6 bn
PRCL gross reinsurance premiums for 2006 – Rs 4.5 bn
Non – Life Industry grew at an average of 21% over last 5 years
Major Players (2006)
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000 2001 2002 2003 2004 2005 2006
Insurer Gross Prm (Rs.
billion) Market Share
EFU General 8.459 24.4%
Adamjee 7.394 21.4%
NICL 4.453 12.9%
New Jubilee 2.504 7.2%
Rs.
Mis
sio
n
Gross Premiums
Insurance Penetration – 2005
Characteristic Australia Canada Malaysia S. Korea India B’Desh Pakistan
GNI per Capita 2005 32,220 32,600 4,960 15,830 720 470 690
Premium as % of GDP
Life 3.51 3.05 3.60 7.27 2.53 0.42 0.27
Non – Life 3.09 3.92 1.82 2.98 0.61 0.19 0.40
Total 6.60 6.97 5.42 10.25 3.14 0.61 0.67
Premium per capita (USD)
Life 1,366.7 1,071.9 188.0 1,210.6 18.3 1.7 1.9
Non – Life 1,203.2 1,377.1 95.3 495.5 4.4 0.8 2.8
Total 2,569.9 2,449.0 283.3 1,706.1 22.7 2.5 4.7
Source: Swiss Re Sigma – World Insurance in 2005
Missing Slide
Objectives of Policy Review
Increase insurance Penetration by
o Removing impediments in the development of the insurance industry, including anomalies in the regulatory framework
o Improving the capacity of the insurance industry by encouraging the creation of large professionally managed companies
o Improving the public image of insurance by removing spurious companies and discouraging small and inefficient players
o Encouraging personal lines, and especially life insurance, by giving incentives for individuals to invest in life insurance policies
o Encouraging the spread of insurance to rural areas
o Reviewing the regulatory framework for Takaful to ensure greater penetration
Rationalize the role of the Public Sector, especially in light of
commitments given to international lending agencies.
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Missing Slide
Industry Issues and Proposed Resolution
Insurance Law Changes required in the Insurance Ordinance 2000 (13 agreed between
Ministry and SECP)
o Removal of anomalies
Eg., clarification of relative powers between SECP and Insurance Tribunal
o Increase in SECPs powers for more effective supervision and regulation
Allow SECP to remove unfit CEO/Director
Allow on – site inspections
Clarify SECP’s powers to levy fines
o Development of the sector
Bring Postal life into the regulatory net
Strengthening/ review of Rules/Regulations
o Solvency regulations being reviewed – especially valuation of assets (currently book value – considering change to market value)
o Review of Takaful Rules – including consideration of whether “window” operations should be allowed
Life Insurance Issues Allow deduction of life insurance premiums in
determination of taxable income for individuals. o Exists in India/South Korea/Malaysia/Singapore
Possible reason for relatively high life insurance penetration in these countries
Require that payment of pensions from approved pension schemes be through life insurance companies o As exists in India, Kenya, etc.
o Will provide security to the pensioner and protect the fund from longevity risk
Annuities taken out are currently taxable beyond a negligible limit, even through the single premium paid to effect the insurance is not tax deductible o Amounts to taxation of capital (double taxation)
o Recommended that receipt of annuities be exempt from tax
Allow deduction of annuity premiums in determining taxable income for individuals.
Life Insurance Issues Make insurance of group life cover compulsory.
o Currently compensation in compulsory but insurance is not. Results in compensation often not being paid other than when benefit in insured.
Voluntary Pension Scheme (VPS) rules have been issued for Asset Management Companies. Regulated by Pension Wing of the SECP o Similar rules need to be introduced for Life Insurance to enable there to
be a level playing field for providers of contractual savings products
o Recommend that this should be done under the Insurance Ordinance 2000 Be regulated by the Insurance Wing to avoid duplication of regulation
Currently Postal Life operates without a need to comply with the Insurance Law o Therefore not a level playing field
o Recommended that Postal life be brought within the ambit of the Insurance Ordinance 2000
Review how retirement scheme liabilities can be leveraged to increase insurance penetration o Allow investment of gratuity and provident funds in life insurance
contracts
General Insurance
Motor Vehicle Third Party Liability Insurance:
There are a number of spurious “insurance companies” which issue bogus third party motor insurance policies which are accepted by Motor Registration offices
o It is proposed to develop a common third party motor insurance scheme for which a certificate of insurance would be issued at the Motor Vehicle Registration Office who will also collect the premium
o Certificate would be issued under a policy underwritten by one or more registered insurers – to be tendered for annually by provincial governments
o Claims would be paid directly by the insurance company (ies)
General Insurance – Tax Issues There is an apparent anomaly is the Fourth
Schedule of the Income Tax Ordinance in that realized gains will be exempt (for the same period as for other companies) but unrealized gains are apparently taxable if recognized in the accounts
o This needs to be rationalized.
The taxation of surpluses within the Participant Takaful Fund of Takaful companies is not clear (even though these cannot be accessed by the shareholders)
o Needs to be specifically excluded from the computation of taxable income from insurance business.
Health Insurance Accident and Health Insurance business is written y both life
and general insurance companies
o General insurance companies are required to levy a Federal Insurance Fee (FIF) @ 1% and Central Excise Duty @ 5% on premiums which are then paid across to the Federal Government
o This does not apply to life insurance companies
o It is therefore proposed that Accident and Health business be exempted from the levy of both the Federal Insurance Fee and Central Excise Duty.
Individual health insurance is currently negligible
o Recommend introduction of deduction of health insurance premiums paid by individuals in the computation of taxable income
Takaful – Proposed Way Forward
Takaful – Current Position The Takaful Rules were promulgated in September 2005
o Currently allow only dedicated takaful companies to carry out such business, this policy being due for reconsideration in September 2010
To date 2 companies have been registered by the SECP and a further 5 applications are under consideration
Conventional insurance companies are asking for permission to set up Takaful windows in line with the banking industry
The existing Takaful players (including some of those who have applied but are not yet licensed) are asking for the existing rules to be retained
Takaful – Proposed Way Forward
After hearing all sides to the argument it is proposed to allow Takaful window operations, for the following reasons
o It is believed that allowing existing companies to start Takaful windows will significantly enhance the volume of Takaful contributions
o As Islamic windows are allowed in the banking sector, consistency dictates that the same should be allowed in the insurance sector
The Insurance Ordinance and Takaful Rules do not currently contain a regulatory framework for window operations
o The SECP has initiated an effort to draft revised Takaful Rules (and related Accounting Regulations) to address this
Proposal to Facilitate Spread of Micro – insurance
Salient Features of Micro Insurance (MI) in Asia
Prevalent in Bangladesh and fast growing in India
Initiative taken by private sector in Bangladesh with Govt, joining in subsequently
MI regulation largely unaddressed in Bangladesh
Well planned regulatory environment for MI in India (only country to have explicit MI regulations)
Broad outline of India’s MI regulatory environment are:
o Compulsory for private and public sector insurers to have specified % of business in rural and social sectors
o MI counts for fulfilment of rural and social obligations
o Low maximum commissions prescribed to reduce cost of MI products
o Regulatory body very strict about its compliance
India’s MI Market Facts
Social and rural obligation requirements have been very successful and have resulted in massive outreach and product innovation
India has a wide variety of MI products with innovation led by private sector
Micro Health Insurance mainly being developed by public sector insurers
Few insurers treat MI as self supporting and majority of commercial insurers received donor funds to initiate schemes
Lessons learnt from MI experience to date
Proper regulatory environment is necessary to promote healthy growth of MI
Commercial insurers are reluctant to enter MI field unless mandated
MI development needs to be a mix between private and public sector players
State insurance companies have a role in making MI more effective
Current State of MI in Pakistan
Negligible prevalence at present
Insurance laws not conducive to MI development (basically designed for commercial insurers)
Public sector has played little role in this segment to date
Microfinance Institutions have difficulty in offering appropriate MI products to their clients.
Suggested Strategy for Promoting MI in Pakistan
Mandate public sector insurers to develop MI (particularly for health insurance)
Formulate a task force (comprising of representatives of the Ministry of Commerce and SECP) to develop the regulatory framework to
o Mandate MI for private sector insurers
o Update Insurance Ordinance in various relevant areas which inhibit development of MI
o Allow specialized micro insurers
Important to have specialized training of manpower in MI sector
Creation of a Dedicated Insurance Institute
Background
There is a dire need to address the scarcity of human resources (HR) issues being faced by the insurance industry which warrants the emergent requirement of study about training need analysis (TNA) issues. In this context it was strongly recommended to the establishment of college of insurance, first in Karachi and later on in Lahore.
It was accordingly felt to strengthen the Pakistan Insurance Institute (PII) and rename it as the Pakistan College of Insurance and Takaful (PCIT).
PCIT will be a self – reliant degree awarding centre of academic and professional excellence in insurance, Takaful and related topics, effectively meeting the current and future HR needs of the insurance industry.
Independent Board nominated by the Federal Government.
Proposed Programmes
Graduate Degree programme (4 years)
o General Insurance & Risk Management
o Actuarial Science & Life Assurance
Post Graduate Diploma Programme (1 year)
o Property & Business Interruption Insurance
o Marine Insurance
o Motor & Miscellaneous Insurance
o Actuarial Science
o Life Assurance
o Takaful
(Except Takaful, the Institute’s application is already being processed at University of Karachi for approval of the above PGD Programmes)
Various certificate programmes of varying durations (for sellers/ presenters of insurance products, agents, insurance surveyors, etc.)
Public Sector Corporations – Overview and the Way Forward
Separate Presentations on each of the three entities setting out current status and strategy
o Main recommendations summarized in this presentation
Major common issue needing resolution by Government with regard to SLIC, NICL and PRCL presented at end
State Life Insurance Corporation of Pakistan
SLIC – Background and Current State
Formed under the Life Insurance Nationalization Order 1972 (LINO)
SLIC and Postal Life were the only life insurers until 1992
Open to competition with private sector since 1992. Has resulted in o Loss of market share (although in a limited way)
o Loss of personnel (more serious for the longer run)
Gross Premiums (2006) o Rs. 14.074 million
o 71% of total life insurance market share
Total assets (31 December 2005) o At Book Value Rs. 130.8 billion
o At Market value Rs. 180.2 billion
o Shareholders’ Funds Rs. 1.0 billion
Realistic Valuation
SLIC carries out a Statutory Valuation annually but on a very conservative basis
o Values all assets at book value
o Reserves for liabilities using conservative assumptions
ABD consultants carried out a Realistic Valuation as at 31.12.2005
Compared results with assets at Market Value to determine free reserves
RESULTS
Free Reserves – Excess of Net assets at market value over realistic liabilities
Amount in Rs. Billion
Net Assets at Market Value Total Gross Premium Reserves Shareholder’s Share of Future Bonus
172.22 (100.60)
(1.19)
Free Reserves 70.42
Realistic Valuation (continued) Free reserves plus shareholder funds are available for
o Support the writing of new business (including “new business strain”)
o Meet fluctuations in experience
Asset values (particularly equities and properties)
Inflation
Mortality / morbidity
o Catastrophe claims (particularly for group life)
Estimate of “unencumbered” free reserves after hypothecation
Free Reserves – Excess of Net assets at market value over realistic liabilities
Amount in Rs. Billion
Total Free Reserves Hypothecation
70.43
39.90
Unencumbered Free Reserves 30.54
97.5% of unencumbered free reserves attributable to with profit policyholders. - Therefore can only be used to increase bonuses
Major Issue – Low Shareholder Profitability 97.5% of Surplus from ALL lines of business have been historically
distributed to with profit policyholders. Distribution in past years as follows.
As at 31-12-2004 Rs Million
As at 31-12-2005 Rs Million
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read
Left Empty as digits here are difficult to
read
Surplus 6,317 7,311
Other companies have to distribute 90% for with profit business and can pass 100% of non-participating business to shareholders o If, therefore, SLIC were to be treated as another company, the
shareholders’ share of surplus could increase significantly It is therefore planned to:
o Move non-profit business (including Group Life) to a separate statutory fund
o Covert SLIC to a company and also increase shareholder share of surplus to 10%, compensating existing policyholders from free reserves for the change
Conversion to a Company under the Companies Ordinance
SLIC must be converted into a Company under the Companies Ordinance 1984
There are certain issues which must be addressed in this conversion process, the main one being the protection of the rights of existing policyholders. It is proposed to:
o Reduce the share of surplus payable to with-profit policyholders to 90% from 97.5%;
o Remove the government guarantee currently given under LINO; and
o Compensate policyholders accordingly
SLIC has asked the Privatization Commission to initiate the process for the privatization of the Alpha Insurance Company which SLIC currently owns.
Options Available for Privatization
Once SLIC has been converted into a company, the following Three options are available for privatization.
o Float a proportion of the shares of the (new) company in the stock market (like done for National Bank and OGDC). Management control retained with government.
o Sell a majority (or all) of the shares to a single buyer and hand over management control
There may be a possible issue with handing over effective control of a very large asset portfolio to a single party
o Split the company (or the policyholder funds) into three or four parts and sell each to a different buyer
ADB consultants estimate the present value of SLIC in the range of Rs. 4.6 billion to Rs. 9.16 billion.
National Insurance Company Limited
History and Function
NICL’s genesis was in the form of National Coinsurance Scheme set up in 1955. This was converted into the NATIONAL INSURANCE FUND FOR PUBLIC SECTOR RISKS in 1973 and finally into a corporation – National Insurance Corporation – in 1976. This was finally converted into a company under the Companies Ordinance 1984 in the year 2000.
NICL’s Main Function is the insurance of Public Assets at minimum cost (right accorded to it under the Insurance Ordinance 2000). Public Assets include
o Strategic Assets (eg., Chasma Power Plant, POF Wah)
o Government Assets
o Public Sector Corporations
Although no restriction is placed on NICL insuring private sector assets it does not do so in order to preserve a clear line of demarcation between:
o Public assets which it insures and which the private sector is not allowed to insure; and
o Private sector assets which are insured by the private sector.
Legal Structure & Financial Highlights
Currently NICL is a public limited company (unlisted) wholly owned by the Federal Government. The Board of Directors is appointed by the Government (includes private sector and government functionaries).
2004 2005 2006 Incr. over
2005
Paid up Capital 2,000 2,000 2,000 -
Reserves / Provisions 11,637 13,779 14,493 5%
Total Investments 10,649 12,285 13,673 11%
Gross Premium 4,012 4,249 4,453 5%
Retained Premium 1,989 2,145 2,045 -5%
Underwriting Surpluses 1,019 1,399 * 1,511 8%
Net Profit Before Tax 1,852 2,475 2,380 -4%
Income Tax Paid 610 728 837 15%
Dividend Paid to Govt 500 500 500 -
Rs. In Millions
SWOT Analysis
Strengths Opportunities
Strong financial base (Rs. 15 bn Capital & Reserves) Insurance of national economic assets
and government sponsored national schemes, like; Presidents Razor Scheme etc
Institutional arrangements (reinsurance) for underwriting large risks
Core competence and experience in specialized risk; oil & gas, fuel & power, energy, aviation and nuclear power.
Innovative products (for national requirements); inland cargo for national trade corridor, earthquake fund, group healthcare, terrorism pool etc. Qualified professionals:
ACII-16 FCII-1 CA-2 ICMA-4
Government ownership and control with low expense ratio
Specialized expertise in underwriting major risks in aviation & energy can reclaim the business of privatized companies with marketing efforts
Significant contribution to public exchequer
Continued need to insure strategic assets
SWOT Analysis
Weaknesses/Threats Action Proposed
No experience in business acquisition (due to being in a monopoly situation)
Building a marketing and sales capability
Outdated systems and lack of IT infrastructure
Implement a state of the art solution
Excessive non - productive staff Rationalize staffing/ induct professionals
Dwindling market due to privatization
Enter the private sector insurance market while allowing private sector insurers to insure non – strategic public assets but with a proviso to ensure that external outflows of premiums are restricted
Main Issue to Address
NICL has, by far, the strongest balance sheet amongst insurers in the country.
NICL handles large insurance risks and Helps arrest outflow of otherwise substantial reinsurance premium (as private sector insurers have capacity limitations)
However its role is reducing as public sector entities get privatized and premiums move from NICL to private sector insurers
o Although in some cases privatized entities have reverted to NICL
o However such incidents will reduce as private sector insurers build up their capacity to underwrite large risks
Keeping so much financial and human capital tied up in a run off operation would not be prudent
Proposed Strategic Direction
To open up the insurance of public property (other than strategic assets) to the private sector
o Subject to the limitation that a minimum of Rs. 500 million (current retention of NICL) of the risk is retained within Pakistan (to prevent excessive outflow of reinsurance premiums from country)
NICL to become a lead risk capacity provider for the Pakistan Insurance Market (including the private sector)
o Recommended by the SECP and supported by the ADB (as NICL’s current capacity is much greater than that of PRCL)
o To do this initially by
o Accepting inward facultative reinsurance from private sector insurers
o Acting as a co – insurer in large risks underwritten and led by private sector insurers
Medium Term Strategy
To act as a wholesale insurer underwriting large risks in the private sector
o As a co – insurer
o As a facultative reinsurer
o As a participant in reinsurance treaties
To introduce and manage schemes of national importance such as crop insurance, terrorism cover, earthquake pool, etc.
To act as the national co – coordinator for introducing micro – insurance
Eventually to be involved in direct sales after developing its capacity with respect to marketing
Planned Initiatives
Pakistan Reinsurance Company Limited
PRCL – Current State Registered as a company under the Company’s Ordinance
1984 o Converted from a statutory corporation in the year 2000 to
enable the company to take independent operational decisions
Registered as a non – life insurer under the Insurance Ordinance 2000
Shares are listed on the Karachi Stock Exchange o Therefore regulated by the listing rules of the KSE, including
those related to corporate governance.
Authorized Capital o Rs. 1 bn
Paid Up Capital
o Rs. 450 million
Shareholding Pattern %
Federal Government 51
State Life 24
Individuals 14
Insurance Cos & Others 11
PRCL – Brief History of Compulsory Regime
PRCL was historically reliant on regulatory protection for obtaining business, with direct non – life companies being required to reinsure risks with PRCL.
Over the past decade the protection accorded to PRCL is being gradually phased out as part of program conditionalities with the Asian Development Bank (apparently supported by the private sector insurance companies). Hence
o A compulsory quota share regime (originally at 30% of all risks) has been completely phased out
o A right to be offered 35% of all surplus treaties of direct companies (to be accepted by PRCL to the extent it considers appropriate) is now being phased out over time, reducing to NIL for year 2010
From 2010 PRCL will have to continue without the regulatory protection it has been provided.
Sources of Business
From being 32% of gross premiums in 2004 business from compulsory cession has completely disappeared.
Has been replaced by increased facultative reinsurance which has increased significantly especially in 2006 (up 20% on 2005)
The phasing out of the protection given to PRCL on the treaty side by 2010 is likely to impact premiums even further
2004 2005 2006
Compulsory Cession 1,680 158 -
Facultative Reinsurance 2,370 2,556 3,074
Treaties 1,191 1,445 1,424
Total 5,241 4,159 4,499
PRCL Premiums as proportion of Insurance Market
The impact of removal of the compulsory cession is more clearly demonstrated in terms of loss of premium as a proportion of total market premium.
Year Insurance
Market Gross Premium
PRC’s Gross Premium
%
2003 16,611 4,697 28
2004 20,672 5,241 25
2005 26,786 4,159 16
2006 29,709 4,499 15
Removal of the
compulsory quota share
regime
Rupees in Million
Threat and Need for Action Phasing out of the 35% first right of refusal of surplus treaty business
will almost certainly impact PRCL’s business
o Chances are that companies with good risks will move away while those with poor risks will continue to stay
It is proposed that this decision needs to be reconsidered keeping in view the following:
o Pakistan has a much lover insurance penetration and a much smaller insurance market than countries such as India, Iran, Malaysia and Turkey.
o The insurance industry is as yet not mature, with a dearth of qualified manpower.
o All the above counties have compulsory cession regimes in order to support the domestic insurance industry as well as ensuring maximum retention within the country.
As PRCL is also embarking on an institutional strengthening phase it is proposed that:
o The provision for insurers to offer PRCL 35%of their treaties be retained
Increase of Capital Base Current capital is Rs. 450 million
Total equity plus reserves Rs. 2.7 bn as at 31.12.06
Unrealized gains of Rs. 5.3 bn (as at 31.12.05) not recognized in financial statements
Need to increase capital to improve market image o First step taken by proposing a bonus issue of 20% for 2006 to
take capital to Rs. 540 million
It is proposed to recognize capital gains and then capitalize reserves. Recognition of capital gains will
o Bring on the books the gains currently unrealized. It is not possible to recognize unrealized gains under the current accounting regulations.
o Exemption from tax of capital gains may be phased out which will result in gains subsequently realized being taxed.
Increased demonstrated capital base will enable PRCL to increase its retention of risks and thereby further improve profitability.
Public Sector Insurers – Common Issue
A major issue with respect to all three public sector insurers is their inability to take independent operational, financial and administrative decisions.
o Currently these decisions are subject to Government approval and all Government directives issued from time to time are also required to be complied with by these entities
It is proposed that each public sector insurer be allowed to take all operational, financial and administrative decisions through its Board of Directors (where Government is duly represented through its nominees) without reference to Government.
E.C.O. REINSURANCE COMPANY
ECO Reinsurance pool The idea of engagement in Reinsurance operations was adopted in 1964
by Iran, Pakistan and Turkey. ECO Reinsurance Pool head quarter shifted to Pakistan on 1.1.1996.
ECO Reinsurance Company the ECO Reinsurance Company is to be established with paid – up
capital of US $ 30 Million with equal contribution made by the participating countries.
In the 14th meeting of the Regional Planning Council Meeting it was retreated that the ECO Reinsurance Company and ECO trade and Development Bank both will commence operation simultaneously.
FINALIZATION OF ECO REINSURANCE COMPANY ARTICLE OF AGREEMENT
Ministry of Commerce is hosting a high Level Export Group Meeting followed by Trilateral Interim Committee Meeting for the Establishment of the ECO Reinsurance Company is tentatively proposed to be held on 14th – 15th May, 2007 to finalize and sign the Articles of Agreement of the ECO Reinsurance Company at Islamabad (Pakistan).
Thank You