microinsurance in pakistan - mefinmefin.org/files/catalogue/pakistan/05pa_status of inclusive... ·...

MICROINSURANCE in Pakistan : A Diagnostic Study on Demand and Supply | 2

©2012. Securities and Exchange Commission of Pakistan. FIRST Initiative. All rights reserved. This report was compiled by a team from the staff of the Securities and Exchange Commission of Pakistan and from the World Bank/FIRST Initiative. The World Bank team was led by Gabi G. Afram and included Eamon Kelly, Yasuhiko Yuge, Jules Gribbles and Afsheen Shakoor (SBI). The Securities and Exchange Commission of Pakistan team included Faraz Uddin Amjad, Dur-e-Sameen Mufassir and Syed Irfan Habib. The findings, interpretations, and conclusions expressed in this document do not necessarily reflect the views of the organization or the governments they represent. While utmost care has been taken during the compilation and editing of this document, the accuracy of the data included in this work is not guaranteed. The material in this publication is copyrighted; the same may be used for non-commercial purposes with proper citation of references. Reference to names of firms and commercial products and processes does not imply their endorsement by the Securities and Exchange Commission of Pakistan and the FIRST Initiative, and any failure to mention a particular firm, commercial product or process is not a sign of disapproval.


About Securities and Exchange Commission of Pakistan Established since 1999, the Securities and Exchange Commission of Pakistan (SECP) regulates and supervises all companies and the corporate sector, except banks, including capital markets and the insurance industry. The SECP issues insurance regulations and is responsible for licensing insurers, brokers and insurance surveyors. Details may be found at: http://www.secp.gov.pk/ About FIRST Initiative FIRST supports low- and middle-income countries in their efforts to strengthen financial sectors and ultimately achieve greater economic development and poverty alleviation. It offers small scale and short-term grants for Technical Assistance (TA) projects that contribute to more stable, more efficient and more inclusive financial systems. It works in sectors including Banking, Insurance, Capital Markets, Other Nonbank Financial Institutions (NBFIs), Pensions, Financial Architecture, Crisis Preparedness, Access to Finance, and Multisector/Others. The cross-cutting themes of FIRST includes Access to Finance, Crisis Preparedness, Strategic FSAP Implementation, and Legal Reform. Details may be found at: http://www.firstinitiative.org/


Table of Contents Acknowledgements 7 Abbreviations 8 Preface 9 Executive Summary 10 1. Introduction 15 1.1 Background 15 1.2 Defining Microinsurance 15 1.3 The Task 16 1.4 Objective 16 1.5 Methodology Adopted 16 1.6 Structure 16 2. Pakistan Country Overview 17 2.1 Macro-economic Situation 17 2.2 Security Situation 17 2.3 Structure of the Economy 18 2.4 Structure of the labor market 19 2.5 Remittances 20 2.6 Socio-economic Situation 20 2.7 Financial Services Structure 22 2.8 Summary 24 3. Microinsurance Demand 26 3.1 Background 26 3.2 Direct Demand Testing 26 3.3 Key Lessons 33 3.4 Client Research 34 4. Insurance Supply 36 4.1 Insurance Providers 37 4.2 Insurance Products 39 4.3 Distribution and Premium Collection 42 4.4 Capacity in the Insurance Market 43 4.5 Summary 44 5. Microinsurance Supply 47 5.1 Microinsurance Providers and Distributors 47 5.2 Risk Takers 47 5.3 Distributors / Intermediaries 48 5.4 Third Party Operators 49 5.5 Microinsurance Products 49 5.6 Demand and Supply Interaction 52 5.7 Market Size and Current Trends 54 6. Policy, Regulation & Supervision 57 6.1 Political & Legal Environment 57 6.2 Financial Sector Authorities 58 6.3 Social and Insurance Policy 59 6.4 Laws and Regulations 62 6.5 Insurance Core Principles (ICP) Assessment 63


6.6 International Microinsurance Regulation 64 6.7 Dedicated Microinsurers 67 6.8 Summary 68 7. Principle Recommendation 70 7.1 Microinsurance Policy, Regulation & Supervision –

Objectives & Principles 70 7.2 Microinsurance Policy, Regulation & Supervision –

Objectives & Principles 71 Appendices A. Summary of Findings 77 B. Contextual Information 82 C. Demand Research 98 D. Stakeholder Feedback 108 E. Insurance Core Principles of the IAIS 110 F. Emerging Guidelines for Microinsurance Policy, Regulation & Supervision 111 G. Examples of International Approach to Microinsurance Regulation 112 H. Bibliography 113


Acknowledgements We are thankful to the many supporters and respondents who contributed to this study. Some of these are listed below (in alphabetical order).

- Adamjee Insurance Company Limited - Asia Care Health and Life Insurance Company Limited - Benazir Income Support Program - EFU Life Assurance Limited - First Microfinance Bank Limited - Jubilee General Insurance Limited - Jubilee Life Insurance Company Limited - Kashf Foundation - Khushhali Bank Limited - National Rural Support Program - Pakistan Microfinance Network - Pakistan Poverty Alleviation Fund - State Bank of Pakistan - State Life Insurance Corporation of Pakistan - Tameer Microfinance Bank Limited


Abbreviations A2ii Access to Insurance Initiative AML Anti Money Laundering BISP Benazir Income Support Program BOP Bottom of Pyramid CBO Community Based Organization CSR Corporate Social Responsibility DFI Development Finance Institution FCR Financial Condition Report FGD Focus Group Discussion FMFB First Microfinance Bank FMIA First Microinsurance Agency FATA Federally Administered Tribal Areas GDP Gross Domestic Product IAIS International Association of Insurance Supervisors IAP Insurance Association of Pakistan ICP Insurance Core Principles KP Khyber Pakhtunkhwa MBA Mutual Benefit Association MFB Microfinance Bank MFI Microfinance Institution MOC Ministry of Commerce NBFC Non-banking and Finance Companies NGO Non Government Organization NHS National Health Services NICL National Insurance Company Limited NRSP National Rural Support Program NSS National Savings Scheme PKR Pakistani Rupees PMN Pakistan Microfinance Network PPAF Pakistan Poverty Alleviation Fund PRCL Pakistan Reinsurance Company Limited PSOA Pakistan Society of Actuaries ROSCA Rotating Savings and Credit Association RSP Rural Support Program SBP State Bank of Pakistan SECP Securities and Exchange Commission of Pakistan SLIC State Life Insurance Corporation TA Technical Assistance USD United States Dollars


Preface It gives me an immense pleasure to introduce to you the report “Microinsurance in Pakistan: A Diagnostic Study” conducted jointly by the Securities and Exchange Commission of Pakistan and the World Bank under the project sponsored by the FIRST Initiative. As you would agree that microinsurance is now considered as the fastest growing insurance product in the world, providing benefits to millions of low income people, farmers, and small business owners around the world, this is the right time to seize the opportunity. I feel that this report will take us to the next level of deliberation that why microinsurance is important and what are its potential benefits? In the devastating floods of recent years, we have seen that population who is vulnerable to the economic shocks has suffered the most. With no proper risk mitigating mechanisms, the population had to suffer heavy losses which were ultimately transferred to the national exchequer and hence had to be paid by the tax payers. I see such incidents not as a threat but as an opportunity for the insurance industry to shoulder the economic burden of the government yet keeping it profitable for itself. You would agree that technology plays a pivotal role here. As access to technology improves, the focus can be put on types of insurance products that can be offered through the technology platforms. The insurance companies are of course the partners in growth, when it comes to microinsurance. The report clearly suggests there is a large microinsurance opportunity, but the sector has a number of challenges which must be overcome to succeed. From the economic point of view, microinsurance can be an effective complement to existing options of social protection programs of the government. It reduces vulnerability and mitigates the negative effects of external shocks on poor households. Simultaneously as it grows, it provides a risk transfer mechanism from the grass-root level to international reinsurance markets where the international players are ready to take the risks of supporting the large numbers of small policyholders. Similarly a conducive and enabling regulatory environment is required for the development of microinsurance. We at SECP are working assertively towards adapting relevant rules and regulations, which support the evolution of more inclusive insurance systems by encouraging the existing insurers to serve the low-income segments and thus facilitating microinsurance business to evolve and integrate with the formal insurance sector. Attributed to this, a formal regulatory framework for microinsurance is expected to be unveiled before end of this year. The assistance from World Bank/ FIRST Initiative has been significant for us and we hope to have continued support and interest from international community for supporting initiatives such as pilot projects on microinsurance, while simultaneously insurance companies are also expected to take initiatives to explore the potential of this market. In the end I would say that the microinsurance is an extremely long-term trend, and it will grow and grow. Interest from reinsurers and other international stakeholders also confirms this. This is a game of efforts and patience. Without proper focus on the business planning and efficient product development, the reaping of benefits would be a miracle. Mohammed Asif Arif Commissioner (Insurance) Securities and Exchange Commission of Pakistan Karachi, October 16, 2012


Executive Summary 1 Pakistan Context Pakistan is a country of over 175 million1 people which achieved independence in 1947. Since its creation it has undergone significant changes internally and within the region. Pakistan had achieved reasonable economic growth and, to some extent, succeeded in poverty alleviation until early part of current century. However, since then the economic situation in and around the country has deteriorated significantly as Pakistan has gone through various difficulties including global financial crisis, a spate of devastating floods and an uncertain political and security situation that reduced private and foreign investment. Also, an ongoing energy crisis and hikes in the food and fuel prices have made the economic situations in Pakistan more unstable. Despite varied government efforts on poverty alleviation, approximately 20 percent of population still lives below the poverty line, and almost 45 percent of population lives in vulnerable conditions. A large proportion of population, approximately 60 to 70 percent, lives in the rural areas, while 80 percent of them live in the vulnerable conditions. At the same time, a number of people have migrated to urban areas, which have led to the expansion of slums in urban areas, such as in the cities of Karachi and Lahore. This process of rapid urbanization has started to threaten the sustainability of large cities in Pakistan. The agriculture sector plays a vital role in the Pakistani economy by contributing to a significant proportion of work force, approximately 44 percent, but a lesser proportion of GDP, approximately 21 percent. This sector was heavily affected by a spate of devastating floods in Punjab and Sindh during years 2010 and 2011, and the situation surrounding agricultural sector has a significant influence on the livelihood of people living in the rural areas. The Informal sector is a dominant part of the labour market, at approximately 70 percent. These labour forces in the informal sector are usually less educated and unskilled, and have a limited access to financial capital. Their productivity and income level is generally less than that of formal sector labour with lower job security. As a result these workers in the informal sector are more susceptible to change in economic and environmental situations surrounding them. One of the difficulties among Pakistani low-income people in getting out of poverty is their low level of literacy rate and education. The overall literacy rate is approximately at 57 percent in Pakistan. There is a large discrepancy of the literacy rate between urban areas which are found

1 Pakistan Economic Survey 2010-11


to be at 73 percent, while the rural areas are somewhat at 49 percent. Only less than 10 percent of Pakistani populations enrol at intermediate school or college/ university level education. Although the government of Pakistan has been providing various social safety net programs for the vulnerable households including the ones such as the Pakistan Poverty Alleviation Fund (PPAF), National Rural Support Program (NRSP) and Benazir Income Support Program (BISP) being the key vehicles, it remains indeterminate in the absence of any clinical evidences if such programs are fully sufficient and completely effective as possible. It is important that SECP play a strong role for assistance in the development of these programs. 2 Regulatory environment Established in 1997 and operational since 1999, the Securities and Exchange Commission of Pakistan (SECP) regulates and supervises all companies and the corporate sector, except banks, and including capital markets, and insurance companies. The SECP issues insurance regulations and is responsible for licensing insurers, brokers and insurance surveyors. The major piece of insurance legislation is the Insurance Ordinance, 2000 with three major sets of associated insurance rules and regulations. At a précis level, the legal and regulatory environment in Pakistan, for insurance, is found to be essentially adequate. There appears to be quite a broad range of powers, within the legislation, which the SECP’s Insurance Division can draw on to support its role in supervising the insurance industry. The regulatory and supervisory system for insurance in Pakistan does not explicitly recognise microinsurance, and hence does not address any of the special requirements that may be needed to support the effective development of microinsurance. However, the SECP started with industry consultations on developing a regulatory framework for microinsurance. During its brief existence, SECP has made significant strides in issuing regulations relating to major aspects of insurance operations, supervising performance and promoting professionalism in the insurance industry. However, SECP is still a young authority and faces a number of organisational and capacity challenges. There is a clear need for capacity building within the Insurance Division in the key areas of modern risk management, and generally supporting the transition from a reactive and compliance oriented supervisory approach to a more proactive and risk based approach. 3 Insurance Supply There are currently 48 insurance providers and 1 reinsurer operating in Pakistan, as follows;

– 7 Life insurance companies, including 1 state-owned company; – 36 Non-Life insurance companies, including 1 state owned company; – 5 Takaful operators, most of which have recently entered the market during last 3 to 5

years; – 1 majorly state-owned reinsurer;

There are no local offices of international reinsurers in Pakistan. However, a number of local insurers reinsure with international reinsurers either directly or through a broker. It is a requirement of all local non-life insurers to cede at least 35 percent of reinsurance business to Pakistan Reinsurance Company Limited (PRCL) on a treaty basis. The state-owned life insurer, State Life Insurance Corporation (SLIC) during the year 2011 had approximately 64 percent market share in terms of premium volume, and hence is a leading


player in the life insurance market. It primarily writes traditional business through a large direct sales force, and insures both government and non-government life insurance risks. The non-life insurance market has three top insurers who have approximately 60 percent market share. The market is found to be extremely price-competitive and is currently in an aggressive pricing dynamic which is putting significant pressure on the overall profitability of the local insurance market. The state-owned non-life insurer, National Insurance Company Limited (NICL), exclusively insures state’s non-life risks, but it does not compete with private insurers for non-state insurance business. All the insurers are regulated by SECP. The two state-owned life and non-life insurers are entirely owned by the Government of Pakistan, through the administrative control of the Ministry of Commerce, but are fully regulated by SECP. The non-life market majorly comprise of three main classes of business, namely motor, property and marine. Motor business is the largest single class of business but has been to have a reducing share of the total premium written whereas the actual amount of premium itself is also reducing, indicating a shrinking motor insurance market. Anecdotal industry estimates indicate that the vast majority of vehicles are uninsured, though if this was reversed then the market would significantly change. Health insurance business is allowed to be written by a life insurer as well as non-life insurer in Pakistan. Typically, this business is largely corporate accounts with very little retail or individual health business. This is also an extremely competitive market and is often part of a broader package of business for a large client. This often leads to under-pricing for the health insurance business as it is part of a total package of insurance business written. Presently there are no specific insurance programs operating on a national scale; though there are few with an insurance component and have the potential to reach a national scale, namely NRSP, the crop loan insurance scheme and the BISP’s life and health insurance program. These programs have the potential to be considered microinsurance programs. The crop loan insurance scheme has been running on a limited basis since year 2008 and is said to be under review with plans to launch another pilot and potentially on a national scale. The BISP was initiated by government of Pakistan in year 2008 to establish a comprehensive social protection system as part of the National Social Protection Strategy. Reportedly, BISP has been testing a pilot to introduce life insurance program for poor households. The life insurance program started in early year 2011 and provides life insurance cover of PKR100,000 to the head of the household. Currently there are over 2 million persons covered in this life insurance program. It is said that there are also the plans to launch a health microinsurance program in 2012 on a larger scale. In general the level of technical capacity in the insurance industry is quite mixed and an area where there is need for significant capacity building. A major challenge for insurers is to move away from managing only the corporate accounts to retail clients. There is then a further learning and stretch to manage microinsurance clients. This movement will require learning and a re-engineering of process with the insurer. It will also require a commitment of time and resources to the microinsurance market which is quiet challenging, given the uncertain business case of microinsurance for an insurer. For those local insurers already writing microinsurance business, it represents nearly 5 percent of total premium written. However, those insurers with experience of microinsurance can see long-term potential, while stating that they are willing to continue in this business and generally believe that it can be sustainable.


4 Microinsurance Demand In assessing demand, the current microinsurance projects operating in Pakistan were assessed and what such projects indicate about potential demand for microinsurance. The results of direct qualitative demand testing in Pakistan, through focus group discussions, were then assessed. Focus groups were conducted in two main provinces and across urban to semi-urban to rural areas. Secondary demand research was assessed and finally conclusions were drawn and potential demand, or need, for microinsurance in Pakistan was also estimated. It has been found that the profile of microinsurance clientele in Pakistan would mostly coincide with the profile of microfinance clients. However, it could be broader than the typical microfinance target clientele and include people who do not necessarily need a loan but are low-income and face insurable risks. The life events where people had a preference for insurance, in decreasing order of importance, are found to be health/illness, natural disaster, marriage, education, death, business loss, childbirth and accidents. Natural disaster was particularly important for rural people especially given the recent floods of 2010 and 2011. Marriage, education and childbirth are costly events but these are more where savings would be more appropriate. Typically these 3 events had the highest cost impact, especially marriage which can cost on average an 18 months income. Cultural preferences naturally have a larger impact on peoples spending on events of this nature. In the rural areas, people often face higher costs for some events especially health where there is limited services and they need to travel a significant distance to the nearest health care centre. Also, they have been found to have lower and less secure income. Such people now also see the natural disasters as a major risk for them and worth insuring against, to protect their land, house and livestock. Premium affordability is found to be a major issue, especially in rural areas, for people with low and insecure income. Another common issue is lack of insurance awareness which is typically quite low, especially in rural areas. In developing the market for microinsurance, one needs to estimate the need and then create the demand through various enabling mechanisms such as consumer education, financial subsidies, mandatory insurance coverage, etc. The current market size for life microinsurance is estimated at 3.7 million. The potential number of policies is estimated in the order of 31.5 million2. This potential market is based on estimates of the potential microfinance market. For the health microinsurance, the potential market would be similar to the life microinsurance market of 31.5 million policies. However, if one also includes dependents, then the potential health microinsurance market would be approximately 2 to 3 times increased, which may be in the order of 80 million people insured. Simply put, there is a significant market potential for microinsurance, though with very low insurance penetration to date. 5 Strategy and recommendations It is important that recommendations focus on the need to expand regulatory options for innovative and cost-effective distribution mechanisms. This is a key priority that will provide immediate developments in opening the insurance and microinsurance market. In particular, allowing all currently regulated financial institutions, including Microfinance Banks (MFBs), Microfinance Institutions (MFIs) and other Non-banking and Finance Institutions (NBFIs), to act as both insurance agents and brokers will have an immediate impact.

2 This is based on potential microcredit clients and there will be some potential that include both spouses from the household. Therefore when adjusting for Family size one needs to factor this in.


Another quick option would be the requirement for all microcredit programs to have credit life insurance from a regulated insurer. This would also have an immediate impact on the size of the microinsurance market. Given the significant challenges in reaching the rural population, it would make sense to focus initial microinsurance efforts on reaching the urban populations. Existing groups within a community, such as cooperatives, associations, teachers or borrowers would seem to be the easiest market to reach. As insurers are still learning from the existing microinsurance projects, focusing pilots in areas with higher population concentrations and more developed distribution channels will allow significant learning to be achieved more quickly. These lessons can then be extrapolated to expand projects into more challenging segments. Before developing any microinsurance regulations, it is important to lay a foundation and clear vision for the market. It is strongly recommended that a national strategy for microinsurance developed in consultation with stakeholders should be put in place. This will help guide the microinsurance regulations and improve chances of successful implementation. In summary, the development of microinsurance in Pakistan needs to be considered within the context of overall insurance market development and the regulatory environment. It is difficult to grow the microinsurance market without a viable non-life insurance sector or a strong retail insurance focus in the life sector. While certain achievements within the regulatory framework have already been made, there is also an urgent need to improve the overall regulation and technical capacity of the insurance sector before the microinsurance segment can be developed in a sustainable manner.


CHAPTER 1

Introduction 1.1 Background International experience has shown that insurance can play an important role in helping the poor manage their risks by protecting the assets and incomes of low-income households when financial losses occur. This can help prevent them from falling further into poverty in the first place, or falling deeper into poverty, as a result of having to take children out of school to work, utilise savings, sell hard-earned assets, or obtain credit or other expensive means of post event risk management available to them. This does not, however, imply that microinsurance (and particularly formal microinsurance) is the appropriate risk-management tool for all low-income individuals. Some may never be able to afford microinsurance, while others may opt for other risk management mechanisms at their disposal. For those at very low levels of income, microinsurance may not be able to fully replace the need for government-funded social protection. The market for microinsurance in Pakistan remains severely underdeveloped due to the lack of awareness about the potential benefits of microinsurance among micro-entrepreneurs, small and landless farmers, women, and low-income households, and due to the lack of effective mechanisms and targeted products to provide microinsurance services and address the existing or potential demand. Moreover, most of the activities in this sector remain broadly unsupervised due to the inexistence of a specific regulatory framework. 1.2 Defining Microinsurance The definition of microinsurance as offered by the International Association of Insurance Supervisors (IAIS) and endorsed by the Access to Insurance Initiative is the following.

Microinsurance is defined as insurance accessed by low-income people, provided by a variety of institutions, run in accordance with generally accepted insurance principles, and funded by premiums.3

This definition includes within it a number of important principles. Firstly, microinsurance is not a stand-alone concept or financial product, but is integrated into and influenced by the overall insurance environment, as well as the general financial services sector. Products included under microinsurance schemes can therefore include insurance for any risk or contingency covered by traditional insurance products. The definition of microinsurance explicitly indicates that such insurance should be funded by premiums, and run in accordance with accepted insurance principles, which provide that premiums should be proportionate to the risk. It therefore excludes social welfare programs as

3 http://www.access-to-insurance.org/home.html


well as emergency assistance by governments. However, it can include providers of insurance other than insurance companies or microfinance organisations, such as government, other commercial entities, and non-profit organisations, including cooperatives. It is also not only limited to insurance for individuals, but can include insurance products developed for small businesses or other groups. 1.3 The Task The task is to identify the demand for and provision of microinsurance services in Pakistan; analyse the gaps; identify best practices, methods and guidelines in microinsurance; and develop a comprehensive regulatory framework that would safeguard the interests of all stakeholders. Developing a legal and regulatory framework that supports an enabling environment for the promotion of microinsurance is an essential pre-cursor to the gradual building of capacity of sustainable microinsurance providers. 1.4 Objective The first phase of this assignment is to conduct a country diagnostic of the microinsurance landscape in Pakistan. This diagnostic considers the scope for, opportunities and challenges to the development of the microinsurance market in Pakistan. The review covers demand-side, supply-side and regulatory dimensions of the market, including the relevant macro and socioeconomic, agricultural, health and financial sector contexts. This also includes a review of the regulatory environment against the IAIS Insurance Core Principles (ICPs). This diagnostic seeks to provide the information basis for dialogue amongst the key microinsurance stakeholders in the development of a microinsurance strategy and regulatory framework. The second phase of this assignment is to assist SECP in developing a comprehensive microinsurance regulation and supervision framework for Pakistan so as to safeguard the interest of all stakeholders; and to suggest ways to promote microinsurance coverage. 1.5 Methodology Adopted The material for this diagnostic comes from a wide variety of sources, including previously published material, industry data provided by the SECP, and interviews and a seminar conducted in Pakistan. The primary in-country visit of international experts was conducted over two weeks in September 2011, and consisted of individual meetings with a wide range of industry participants. This included interviews with the SECP, State Bank of Pakistan, Pakistan Microfinance Network, Insurance Association of Pakistan, Pakistan Society of Actuaries and many others. Organisations and individuals within not only the insurance industry but also the wider financial services market appear to be very active and engaged, and the dialogue was very open. 1.6 Structure This report documents the first phase of this assignment being the country diagnostic of the microinsurance landscape. The rest of this report is structured as follows;

– Section 2 describes the macro and socio economic situation in Pakistan – Section 3 describes the potential demand for microinsurance and possible product fit – Section 4 describes the current supply in Pakistan for conventional insurance – Section 5 describes the current supply in Pakistan for micro-insurance – Section 6 describes the regulatory, supervision and policy environment – Section 7 sets out the regulatory principles and recommendations


CHAPTER 2

Pakistan: Country Overview 2.1 Macro-economic situation Pakistan enjoyed a higher economic growth rate during the last decade, though the macroeconomic situation has deteriorated in recent years (see table 1). Particularly, since year 2008, Pakistan’s macro-economic situation has further weakened, severely hit by global financial crisis, a spate of devastating floods and an uncertain political and security situation that resulted in reduced private and foreign investment4. Also, the economic growth has slowed down since year 2007 while the inflation remained stubbornly high. The fiscal deficit has remained chronic since the fiscal year 2006, reflecting the structural problems of revenue side where Pakistan has one of the lowest tax-to-GDP ratios in the world5.

Table 1: Key macroeconomic indicators

FY2006 FY2007 FY2008 FY2009 FY2010 Real GDP growth rate % 6.2 5.7 1.6 3.6 4.1 GDP per capita(PPP adjusted) PKR 2,310 2,468 2,516 2,606 2,688 GDP per capita (Nominal) PKR 789 871 979 949 1,019 Inflation rate (Consumer Price) % 7.9 7.6 20.3 13.6 13.9 Real Interest Rate % 0.5 3.8 -2.8 -4.5 1.9 Current Account Balance to GDP % -5 -6 -10 -2 -1 Fiscal deficit to GDP % -4.3 -4.3 -7.6 -5.3 -6.3

2.2 Security situation Pakistan assumed the role of a frontline state in the war against terror after year 2001, and since then the Pakistani economy has been heavily affected by the damage it has suffered due to the aggravated security situation. Also, since year 2006, more than 35,000 citizens and 3,500 security personnel have lost their lives6, and the infrastructure has been heavily damaged, especially in the provinces of Balochistan, Khyber Pakhtunkhwa (KP) and Federally Administered Tribal Areas (FATA), which has increased the cost of trading significantly. Internal and external migration of millions of people, mostly from Afghanistan, has caused unemployment issues as well as social and economic disruption in the country. Due to the growing anxiety about security situation in Pakistan, inflows of foreign investment have remained almost stagnant for several years.

4 Pakistan Economic Update -September 2011, The World Bank 5 Tax-to-GDP ratios in FY 2010 are 14.2 percent, and it is expected to be 12.5 percent in FY 2011 6 Pakistan Economic Survey 2010-11, Ministry of Finance


Chart 3: Foreign Direct Investment to Pakistan (Source: World Development Indicator, the World Bank)

Although the impact of war on terrorism and aggravating security situation on the financial sector in Pakistan remain uncertain, it could safely be said that the increasing uncertainty about security situation has had substantial impact on the sector, in particular in the field of access to finance. From a geographical perspective, the provinces of Balochistan, KP and region of FATA have been suffering most from the instable security issues. In these provinces, it is usually seen that the outreach of major commercial banks is limited to larger cities such as Quetta and Peshawar, whereas the microfinance providers (MFPs) are the major players who could serve the low-income population living in the remote areas. Reportedly, in Balochistan, KP and FATA, there are 26, 72 and 2 branches of MFPs respectively. It is understood that the total number of MFP branches in the above three regions is close to the total number of branches in the city of Faisalabad in Punjab province, which is usually considered as relatively safer place to live as compared to the above mentioned regions7. It is sometimes believed true that geographical difficulty and underdeveloped infrastructure have made it strenuous for MFPs to expand their outreach in the regions like Balochistan, KP and FATA. However, a number of staff in major MFPs mentioned during the course of this study that they avoid the risk of operating in these regions because of the growing anxiety over security issues mainly caused by the war on terrorism8, and hence the disproportionate distribution of MFP branches is partly seen as created by MFPs’ security concerns about their operations in these affected areas. 2.3 Structure of the Economy Composition of Economy by Sectors The table below summarises the proportion of GDP and employment share for the three major sectors of the economy.

Table 2: Sector-wise GDP and employment share9

Sector Share of GDP Employment share Agriculture 21% 45%

Service sector 53% 35%

Industry 26% 20%

2.3.1 Agriculture Agriculture sector in Pakistan continues to play a vital role in the economy by contributing to a significant proportion of work force (44 percent) and GDP (21 percent)10. Among these includes

7 The data is from “Microwatch: issue 18 Annual”, Pakistan Microfinance Network 8 The World Bank team confirmed this when they had a stakeholder discussions with MFPs such as Tameer Microfinance Bank and NRSP 9 Reference Table 3 and Chart 1


cotton, sugarcane, rice, wheat and maize which have been the major products in the sector, while the province of Punjab is considered as the breadbasket of these products. It is reported that around 70 percent of Pakistan’s population live in the rural area, and the situation surrounding agricultural sector usually has a significant influence on their livelihood. The sector was heavily affected by a spate of devastating floods in the provinces of Punjab and Sindh, to a greater extent in year 2010 and largely in year 2011 as well. However, extended heavy monsoon rains have improved water availability, including the underground water, in reservoir which is supposed to help the sector recover from devastating floods in a quicker manner. The agriculture sector is believed to continue to be one of the most important sectors as the largest employer and the main source of output in the short-to-medium term. From a long-term perspective, however, it is yet to be certain whether Pakistan is prepared for various issues such as looming climate change which might have a significant negative influence on the production of crops and the livelihood of rural areas. 2.3.2 Service Sector The service sector in Pakistan accounts for approximately 53 percent of domestic output and serves as the second largest provider of employment. Among these, three segments (Wholesale/ retail trade sector, Transportation, storage and communication sector, and Community and social and public services sector) constitute the majority of the output11. Although the sector contributes to almost half of GDP growth, its base is narrower with two sectors, the Public administration & defence, and Social services, driving employment and incomes. 2.3.3 Manufacturing Manufacturing is the third largest sector of the economy, and accounts for 19 percent of GDP and 13 percent of total employment. Among them, textile industry is seen as one of the most important sectors such that it generates a high quantum of country’s export earnings and also significantly contributes to GDP (8.5 percent)12. Other important areas of manufacturing sector includes agro-based industries (including sugar industry and grain milling industry) which accounts for 38 percent of manufacturing13. 2.4 Structure of the Labour Market The table below depicts the official unemployment rate in Pakistan by area and gender;

Table 3: Unemployment Rate by Area and Gender14

FY2010 Area/ Gender Total Male Female Pakistan 5.6 4.4 9.5 Rural 4.8 3.9 7.2 Urban 7.2 5.3 20.8

(Source: Labour Force Survey 2009-2010, Federal Bureau of Statistics) Pakistan’s employment situation remains relatively stable with the official unemployment rate at 5.6 percent in FY2010 (see Table 2). The official unemployment rate is seen to be higher in urban areas compared with rural areas, said to be partly because unpaid family helpers in the 10 Pakistan Economic Update -September 2011, The World Bank 11 Federal Bureau of Statistics 12 Year Book 2009-2010, Ministry of Textile Industry, Textile Industry Division 13 Pakistan Economic Update -September 2011, The World Bank 14 The official unemployment rate using standard formula. This appears low and may be disguising true or productive employment. In certain sectors (e.g. agriculture, service, government) often more people are working than is necessary, and these people are counted as employed although their labor productivity is very low


rural area are classified as employed15. Also, it is notable that unemployment rate of females is significantly higher than that of male, especially in urban area. This implies one of the aspects that the labour market in Pakistan could not absorb female workers effectively. 2.5 Remittances Foreign remittances to Pakistan have been seen to be increasing at a considerable rate as a significant number of Pakistani labour work overseas. The amount of workers’ remittances in year 2010 (USD9.4 billion) appears to be higher than twice the amount in year 2005. The largest amount remitted is reported to be from United States (27.3%), followed by Saudi Arabia (19.4%). The 70 percent of inward international flows are said to come through the formal banking channels16. Remittances to Pakistan play a vital role not only in improving the household economy of low-income people but also in sustaining the macro-economic situation of Pakistan itself17. 2.6 Socio-economic Situation 2.6.1 Demographic and Poverty Profile Since its independence, Pakistan has struggled with achieving economic growth and improving the living standard of its people throughout the country.

Table 4: Poverty Profile of Pakistan18

Poverty Band Percentage of Population (percent)

Estimated headcount (million)

Extremely Poor [<50% of Poverty line] 0.5 0.81

Ultra Poor [ >50% and <75% of poverty line] 5.4 8.69

Poor [>75% and <100% of Poverty Line] 16.4 26.39

Vulnerable [>100% and <125% of poverty line] 20.5 32.99

Quasi Non-Poor [>125% and <200% of poverty line] 36.3 58.41

Non-Poor [>200% of poverty line] 20.9 33.63

Total Population 100 160.9 (Source: Pakistan Economic Survey 2007-8, Ministry of Finance)

Despite varied government’s and other efforts on poverty alleviation, approximately 20 percent of population still lives below the poverty line, and almost 45 percent of population still lives in vulnerable conditions (see Table 4). A large proportion of population, approximately 70 percent, lives in the rural areas, of which 80 percent is believed to be living in vulnerable conditions. At the same time, a number of people have been migrating to urban areas to seek opportunities for better jobs, which has led to increase in the urban population. This process of rapid urbanization may also threaten the sustainability of larger cities in Pakistan. The potential market for Microinsurance in Pakistan could be considered to be the vulnerable population (20.5 percent) and the quasi non-poor (36.3 percent). This effectively represents 57 percent of the total population. The population below the poverty line would not be expected to

15 Pakistan Economic Survey 2010-2011, Ministry of Finance 16 Bringing Finance to Pakistan’s Poor, Access to Finance for Small Enterprises and the Underserved (2009), The World Bank 17 For comparison : Net FDI inflows were USD5.4 billion, net ODA received was USD1.5 billion, total international reserves were USD9 billion, and exports of goods and services were USD21.1 billion in 2008 (Migration and Remittances Factbook 2011, The World Bank) 18 Poverty line is USD1.25 of earnings per day


be able to fund an insurance premium and are usually best served through sponsored or social security schemes. It can be inferred at the non-poor are best served by conventional insurance, some of which may be currently insured, or underinsured or even not insured at all. 2.6.2 Income Levels of Low-income Populations The minimum monthly income in Pakistan, as prescribed by the government, is PKR7,000 (USD78 approx.). However, a large disparity has been observed in the household income between urban and rural areas in Pakistan. In most of the provinces, with the exception of Balochistan, the average household income in urban areas is about 50 percent higher than that of respective rural areas. Lower monthly income in rural areas suggest that a large number of low-income households encounter difficulty in earning their living. In addition, the irregular income from agriculture or daily labour has undermined their financial stability to make ends meet in the household economy. As a result, these low-income households in rural area frequently rely on informal money lenders who usually charge exorbitant interest rates on the loans, further deteriorating the household economy. 2.6.3 Household Size of Low-income Populations

Table 5: Average Size of Household in Pakistan19

Pakistan Punjab Sindh NWFP Balochistan Urban Area 6.31 6.28 6.04 7.23 8.17

Rural Area 6.72 6.35 6.97 7.71 7.59 (Source: Pakistan Household Survey 2007-08)

As in other developing countries, size of low-income household in Pakistan is larger than that of middle and high-income countries because of higher fertility rate compared with more developed societies. Like in other developing countries, children are seen as economic investment goods that would bring about returns in the form of child labour and financial support for their parents20. According to a study conducted in year 2008, average size of Pakistani household is 6.58 with 3-5 children per household21. However, there is a contrast between rural area and urban area in most of the provinces in Pakistan. Although these children contribute to the low-income household economy, the actual cost of rearing them (education, hospitalization and marriage) makes it difficult for the low-income family to manage the household economy, bringing their livelihood under the vulnerable condition. 2.6.4 Literacy and Education

Table 6: Level of Education in Pakistan and Provinces (Percent)

FY2010 Province /Area

Total Male Female A. Literate 57.7 69.5 45.2

No formal education 0.5 0.6 0.5 Below Matriculation 37.5 44.9 29.5 Matriculation but less than Intermediate 10.7 13.1 8 Intermediate but less than Degree 4.7 5.6 3.8

19 Total number of samples is 15,512 in this survey 20 Economic Development (10th edition), Michael p. Todaro and Stephen C. Smith 21 According to the population census conducted in 1998, average size of household was 6.8. It means size of household remains the same even after about 10 years


Degree and above 4.3 5.3 3.4 B. Illiterate 42.3 30.5 54.8 Total (A+B) 100 100 100

(Source: Pakistan Labour Force Survey 2009-2010)

One of the difficulties found among Pakistani low-income households in getting out of poverty is the low level of literacy rate and education. According to a study conducted in FY2010, the overall literacy rate is estimated at 57.7 percent. At the same time, the data indicates the large disparity of the literacy rate between urban areas (73.2 percent) and rural areas (49.2 percent). The lower literacy rate in rural areas makes it difficult for the people living there to seek an opportunity for better jobs which requires reading/writing skills and higher education. The other characteristic about literacy rate in Pakistan is the literacy rate of women which is significantly lower than that of men, in both urban and rural areas. Lower literacy rate among women has also hindered Pakistani women from entering the formal labour market. It has been observed that a large number of women serve for household economy as home-based workers or informal micro entrepreneurs. Most of the low-income people in urban and rural areas usually stop having education at primary or middle school level, and thus have a limited opportunity for well-paid jobs which requires higher educations. In rural area, most of them work as peasant, servant, day labourer or informal micro entrepreneur whereas, in urban area, they work as domestic servants, low-level office worker or informal micro entrepreneurs. 2.7 Financial Services Sector In Pakistan, finance and insurance represent 4.9 percent contribution to GDP, at PKR278 billion approx in FY2010. However, this sector has been to slightly decline after FY2008 due to the global financial crisis. Although banking sector has remained the main driving force of financial sector, it is significantly important to nurture other parts of financial sector such as non-banking & finance companies and insurance, to create sound and resilient financial system in this country Access to Finance

Chart 1: Access to Finance in Pakistan

(Source: Bringing Finance to Pakistan’s Poor, Access to Finance for Small Enterprises and the Underserved (2009), and the World Bank)

Although, various financial services (such as bank loans, deposit products and insurance) are available in Pakistan, the majority of Pakistani households still remain outside the ambit of formal financial system. Only 14 percent of Pakistanis are reported to be using the financial products or services offered by formal financial institutions. If informally served products are taken into account, 50.5 percent of Pakistan’s population is counted as the users of financial products or


services22. The rest of the population is broadly excluded from overall scope of financial system. Compared with regional peer countries such as India, Sri Lanka and Bangladesh, the share of the population with formal access to financial services in Pakistan is significantly lower23. Also, from a product-wise perspective, the outreach of most of the products (including savings) is limited to few people (see Chart 4). 2.7.1 Banking Sector It has been observed that traditionally, the main driving force of Pakistan’s financial sector has remained the banking sector, especially private commercial banks. The banking has overwhelmingly dominated the financial sector with approximately 90 percent of total assets in the entire financial sector. After going through the reform period in the 1990s, many state-owned banks have been privatized and shifted into commercial banks. In this process, banking sector has enhanced competitiveness by improving management capabilities and increasing its financial capital base. Although the sector remains relatively robust even after the financial crisis, non-performing loans (NPL) continued to accumulate, raising the perception of credit risk in the sector. The gross NPL ratio to total loans reached 14.7 percent at the end of December 2010, which is significantly higher than NPL levels in comparators such as India and Bangladesh. In addition, continued public sector borrowing from banks for fiscal support makes it more difficult for private sector, especially the small and medium enterprises, to secure funding from the banking sector. Coupled with the National Savings Schemes (NSS), the public sector has mobilized funding from the banking sector, and its excessive reliance on these funding schemes has undermined the sound growth of private sector as well as domestic market-based capital raising structures in Pakistan. 2.7.2 Non-Bank Financial Companies Non-Bank Financial Companies (NBFCs) have remained relatively smaller compared with the banking sector. Mutual funds lead the sector with approximately 50% of the share in NBFCs total assets while Development Financial Institutions (DFIs) are in the second place with about 20% of share in total assets (see Figure 6). Although the NBFC sector has been growing gradually, it has been seen to be struggling to remain commercially viable even in normal circumstances. Asset management companies were severely impacted by the capital markets crisis of late 2008, and investor confidence has been found to be returning slowly. 2.7.3 Microfinance Sector Pakistan’s microfinance sector has grown considerably over the past decade. In 2001, there were only approximately 60,000 clients, and practically no regulation had existed in this sector. Microfinance operations were conducted informally at that time. However, the sector has grown at a rapid pace after the introduction of ”Microfinance Ordinance, 2001” and the formulation of a “Strategic Framework” by the State Bank of Pakistan (SBP) in years 2001 and 2007, respectively. The introduction of the Ordinance and the Framework have allowed commercial-oriented players to enter the microfinance market as Microfinance Banks (MFBs), and this effectively provided a message that the microfinance sector would be led by private sector. Following this, two types of MFP have come into existence in Pakistan. The former is private sector-oriented Microfinance Banks (MFBs) and the latter is NGO-oriented Microfinance Institutions (MFIs). The Rural Support

22 Bringing Finance to Pakistan’s Poor, Access to Finance for Small Enterprises and the Underserved (2009), The World Bank 23 Ibid, (According to this report, share of the population with formal financial access in India, Sri Lanka and Bangladesh is approximately 40%, 50%, and 30% respectively.)


Programs (RSPs),a particular type of non-profit rural development organizations which have a large presence in the sector, are also operating as MFIs. While the MFBs are regulated by SBP and are allowed to take deposit, MFIs remain largely unregulated. Although both the number and the loan portfolio of MFBs are increasing, MFIs have still maintained significant proportion in the market in terms of the number of borrowers and loans portfolio.

Table 7: Current Portfolio of the entire microfinance sector in Pakistan (Sep 2011)

Microcredit Micro-Savings Microinsurance Active Borrowers Value

(PKR Millions) Active Savers Value

(PKR Millions) Policy Holders Sum Insured

(PKR Millions) 2,090,617 28,959 3,692,909 12,924 2,439,890 28,203

(Source: Pakistan Microfinance Network) As of September 2011, the sector serves for approximately 2 million active borrowers with an outstanding loan portfolio of PKR 28.96 billion, and over 3.6 million active savers with collective savings of PKR 12.9 billion. In terms of micro-insurance, the number of policy holders is approximately 2.4 million during the same period. 2.7.4 Branchless Banking One of the unique characteristic of microfinance industry in Pakistan is that the industry is visibly eager to adopt new technology for the effective management of their operations. Reflecting this tendency, Pakistan is one of the fastest developing markets for branchless banking in the world against a backdrop of approximately 110 million mobile phone customers all over Pakistan. Among them, EasyPaisa, a mobile banking service which Tameer Microfinance Bank and its parent company Telenor Pakistan has launched in 2009, has been rapidly spreading throughout the country. Tameer has over 12,000 EasyPaisa agents across the country, and 23 million transactions have reported to be processed with a total throughput of PKR43 billion by the end July 201124. Currently, two branchless banking services, namely the EasyPaisa and UBL Omni are available in the Pakistani market, while more players are anticipated to be entering the market. 2.8 Summary Since its independence, Pakistan has struggled with achieving economic growth and improving the living standard of its people throughout the country. Despite varied government efforts on poverty alleviation, approximately 20 percent of the population still lives below the poverty line, and almost 45 percent of the population lives in vulnerable conditions. A large proportion of population (approximately 70 percent) lives in the rural areas, while 80 percent of them live in the vulnerable conditions. At the same time, a number of people have migrated to urban areas, which has led to the expansion of population in urban areas (such as Karachi and Lahore). This process of rapid urbanization has started to threaten the sustainability of large cities in Pakistan, in general. Although the government of Pakistan has been providing various social safety net programs for the vulnerable households, such as the recently started Benazir Income Support Program (BISP) being a central vehicle, it is yet to be established to what extent remains such programs are sufficient and fully effective. The agriculture sector plays a vital role in the Pakistani economy by contributing to a significant proportion of work force (44 percent) but a lesser proportion of GDP (21 percent). This sector was heavily affected by a spate of devastating floods in Punjab and Sindh in years 2010 and

24 Branchless banking in Pakistan, Consultative Group to Assist the Poor (CGAP): October 2011


2011. Nearly 70 percent of Pakistani people live in the rural areas, and the situation surrounding agricultural sector has a significant influence on their livelihood. The informal sector has a dominant representation of the labour market (at approx 70 percent). These labour forces in the informal sector are usually less educated and unskilled, and have a limited access to financial capital. Their productivity and income level is generally less than that of formal sector labour with lower job security, and as a result these workers in the informal sector are more susceptible to change in economic and environmental situations surrounding them. One of the difficulties among Pakistani low-income people in getting out of poverty is their lower level of literacy and education. The overall literacy rate is 57.7 percent in Pakistan and there has been observed a large discrepancy of the literacy rate between urban (73.2 percent) and rural (49.2 percent) areas. It has been reported that only less than 10 percent of Pakistani populations enrol at intermediate school or college (university) level institute. Given the low literacy levels and even lower understanding of insurance it is important that any microinsurance regulatory framework take this into consideration. This is a key reason for the recommendations related to consumer protection and client communication in Section 7.2.3.


CHAPTER 3

Microinsurance Demand 3.1 Background The demand for microinsurance arises out of the risks that low income people face and how well able they are to cope with them. What major risk events do they face? What is the impact of these events? How do they manage and finance them? How can insurance play a role in addressing the cost/ impact of these events? There are many lifecycle events that are relatively predictable but can have a major financial impact; such as marriage or education. It is important to differentiate between events that can be handled or financed through loans or savings, and those where insurance is more appropriate. It is worth clarifying, at the outset, the difference between demand and need. Often it has been seen that with nascent microinsurance markets there is low demand but significant need for insurance. Demand could be simplified as being equal to need and awareness. It has been observed that there is significant need for insurance for low income people in Pakistan, for varying risks, but the awareness and/or understanding of insurance is very low (or often non-existent). As key part of any microinsurance strategy would be to increase awareness of the potential use of insurance, at the same time trying to carefully identify the needs, only then one can build potential demand for microinsurance. In this section the current microinsurance projects operating in Pakistan are considered and what this indicates about potential demand for microinsurance. The results of direct qualitative demand testing in Pakistan, through focus group discussions, are then considered. Secondary demand research that has been completed for Pakistan is reviewed and finally conclusions are drawn on the potential demand (or need) for microinsurance in Pakistan. 3.2 Direct demand testing 3.2.1 Process and Methodology The information for demand assessment was collected through Focus Group Discussions (FGDs) using participatory rapid appraisal tools. The sample consisted of male and female clients of microfinance institutions and insurance companies providing microinsurance services in the provinces of Punjab and Sindh. The theme of the focus group discussions revolved around:


– identifying life cycle events in the lives of poor households; – prioritizing events that cause significant financial pressures on them; – identifying coping mechanism used by low-income people to deal with each type of event; – understanding the level of awareness, importance, needs and perceptions of insurance

services among the low-income people; and – Identifying the preference of events that low-income people would like to have insurance

for. Full details of the FGD methodology are provided in the Appendices. 3.2.2 Location of FGD’s and brief description of those areas Provide below is a snapshot of the important economic and demographic characteristics of each location included in the study.

Table 8: Location of FGD’s

Geo Area type City (Province)

Description

Urban Karachi (Sindh)

Karachi is the country’s largest city, main seaport and the main financial centre of Pakistan, as well as the capital of the province of Sindh. The city has an estimated population of 20 million, while the total metropolitan area has a population of over 25 million. Karachi’s GDP is around 20% of the total GDP of Pakistan

Urban Lahore (Punjab)

Lahore, a city with a population of 6.3 million, remains a vibrant economic, political, transportation, entertainment, and educational hub. Lahore's economic strength relies on the fact that it is the biggest city of Pakistan within the most populous province, Punjab, and it is also one of the most advanced cities of Pakistan in terms of infrastructure, extensive and relatively well developed road links to all major cities in the country

Semi-Urban Rawalpindi (Punjab)

Rawalpindi is the second largest urbanized district in Punjab. The total population is of this city is reported to be 4.3 million, while approximately about 47 percent of the population is considered as rural (according as of 2009 estimates).

Semi-Urban Hyderabad (Sindh)

Hyderabad city is an important commercial centre with a total population of around 3.5 million (approx 50 percent rural). It is a major commercial centre for the agricultural produce of the surrounding areas, including millet, rice, wheat, cotton, and fruits. Average income levels are much lower in Hyderabad compared to Rawalpindi.

Rural Mianwali (Punjab)

The total population of Mianwali is approximately 1.3 million; about 79 percent of the total population is reported to be rural. Mianwali city, which is the district capital, is the economic and commercial hub of the Mianwali district. The city is mostly known as an agricultural hub, where the district was severely affected by floods in 2010 when approximately 18,00025 houses were damaged and 48 percent of the population was affected, being displaced or due to loss/ destruction of house, crops and businesses.

Rural Hyderabad (rural) and Nawabshah (Sindh)

Hyderabad (rural) and Nawabshah in comparison to Mianwali are very underdeveloped, yet all of these are considered as rural. Most of the farmers in Mianwali owned their land whereas in Hyderabad (rural) and Nawabshah, they have been found to be working off of leased land or as labour. This is quite typical of rural areas in Sindh province.

25 Source UN-OCHA Pakistan flood profile


3.2.3 Summary profile of participants Profile of participants from urban areas was markedly different from rural participants. While semi-urban participants had characteristics of both with a greater degree tilt towards urban, urban participants were literate and astute about cost and benefits of the services being offered. The urban participants were dressed contemporarily, whereas rural participants were easy-going, largely illiterate people, dressed in traditional dhoti, kurta (shirt) and turbans. A Urban Urban males were involved in micro and small businesses such as garment shops, grocery stores, shoe manufacturing, etc. or private or government jobs. Urban females on the other hand were involved in the jobs such as sewing (domestic and on commercial basis), parlours, jewelry selling, cloth selling, while most of them are housewives. B Semi-urban Semi-urban males were running micro and small businesses such as barber shop, welding shop, naan (bread) shop, while some of them are working for private businesses. Most of the semi-urban females were also involved in jobs such as sewing (mostly domestic), bangle making, quilt making, small in-house shops and others. C Rural There was a lot of diversity in rural male and female groups which could be easily classified in two categories i.e. those involved in farm related activities (i.e. cultivation and livestock) and in non-farm activites such as grocery shops, chakki (mill), other shops, sewing, hand-made fan-making, etc. In terms of longitudinal diversity there is a marked difference between the income levels of households related to farm activites which is considerably lower compared to households dependent on non-farm activites. Farmers in Punjab usually had their own land whereas farmers in Sindh were mostly working on rented land as farm labours. 3.2.4 Mobile Phones and Banking Access to mobile phones is relatively high, such that 51 percent of females and 80 percent of male participants had their own mobile phones, and of those who do not own a mobile, 56 percent had access through a family member. Access to bank accounts was significantly lower as only 26 percent of females and 43 percent males were found to have a bank account. 3.2.5 Specific results of the FGD’s This study aims to identify the key life cycle events in a person’s life and then to underline those events that put a major financial pressure on the household income, also referred as risk events. In addition to identifying the risk events and then understanding the coping mechanism, this study also captured the average estimated cost of each such event and how, if ever, in lower-income people’s perception insurance services can become part of their suite of coping mechanisms for dealing with risk events. Life cycle events were identified separately for urban, semi-urban and rural populations.


3.2.6 Risk Events

Chart 2: Key life cycle events

The key lifecycle events that participants stated are largely consistent across the three geographic areas, with some notable differences. As expected in the rural areas, floods and natural disasters were identified whereas urban participants did not raise them. For urban areas rental/utilities costs and robberies were identified whereas this is less of an issue in rural areas. The table below summarises the most pressuring events identified by the participants of the study:

Table 9: Risk Event Ranking

Event Predictable Non-predictable

Top 5 ranked

Health/Illness Y

Marriage of children Y

Death Y

Childbirth Y

Business setup/losses Y Y

Bottom 5 ranked

Children Education Y

Natural disasters Y

Accidents Y

Rent/House purchase Y

Pilgrimage Y


3.2.7 Average Cost26 A Heath/ Illness Prolonged illness or health issues pose a significant financial burden on poor household. A chronic disease to a household member can shatter the economic balance and it has a multiplicity effect if the member suffering is the bread earner. In rural and remote areas another associated issue that adds to the cost of treatment is availability/ existence of hospitals. There is also a factor of transportation/ travel cost that adds to the overall higher cost in general for rural areas.

B Marriage of children After health issues, marriage of children is considered as a major economic stressor. Although in financial terms it is the most expensive but in terms of stress it is ranked lower as it is a predictable and a planned event. Expenses of marriages ranges between PKR30,000 to PKR400,000 (USD350 to USD4,600), depending on whether it is the marriage of a son or a daughter, with the latter being more expensive. In some rural communities, marriages are far less expensive compared to others, merely because they have agreed as a community to make it a less expensive event but this is a rare phenomenon. In general, it is the most expensive event in a low-income household life.

26 In Pakistan Rupees (PKR)


C Death The participants of the study stated that death in a family is the most unique stressor primarily because the household is dealing with a loss of a loved one plus they have a financial burden of arranging the burial and funeral expenses. Although death is a certain event but it is seldom planned, in almost 95 percent of the cases people are not prepared for it. It is also an expensive event as in some communities, mostly rural, the mourning period can go up to 40 days and family and relatives stay at the house of the deceased for the entire period. Expenses in the event of death range between PKR5,000 to PKR100,000 (USD58 to USD1,165). In the graph above, the minimum represent bare minimum burial or funeral expenses whereas the maximum represent the average total cost, including the food and other expenses of entire event.

D Child Birth The fourth most common financial stressor identified by the participants is the child birth. Although the cost in case of a normal birth in a public hospital is significantly low, participants stated that in most cases child birth often happen through a caesarean. The facilities, including the doctors/ staff is rare in the public hospitals so they have to go to private hospitals which are relatively more expensive, for which the low-income households are usually not prepared. This was also referred as a significant stressor particularly in rural areas, as because of non-availability of hospitals nearby rural women often lose their lives during child birth process or on their way to the hospitals. The costs, higher in rural areas, appear to be due to the non-availability of hospitals and hence people have to go to nearby cities/ town, which are the additional expenses.


3.2.8 Coping Mechanisms Coping mechanism identified by the participants of this study can be classified into three broader categories i.e. coping mechanisms for: predictable and planned events, predictable but unplanned events & unpredictable events.

– For predictable and planned events such as child birth, marriages, education, business setup, pilgrimage, etc. people generally use traditional coping mechanisms such as their regular income, savings, ROSCA (Rotating Savings and Credit Association) or a committee system and in some circumstances borrowing from friend and family.

– For predictable but unplanned events such as deaths, complications in child birth, excess

expenditure on marriages, and unpredictable events such as accidents, health issues, business losses, natural disasters etc. people generally use any and every source they can rely on; borrowings from friends and family, borrowings from MFP’s, sale of valuable assets (property, livestock, business assets), borrowings from money lenders at high interest rates.

Differences between urban, semi-urban and rural areas are related to the assets/income available to people and the level of microcredit easily accessible. Typically in rural areas people relied more on informal coping mechanisms such that the rural participants indicated their coping mechanism with financial pressures through the sale of their livestock or other assets, lending land on rent, selling wheat kept for consumption or taking credit against a pledge of gold or property. 3.2.9 Insurance Preferences The graph below sets out the summary details of the insurance preferences of the FGD participants. The participants were asked to specify a preference for insurance and to provide a ranking of the importance of this insurance to their needs.

Chart 3: Insurance preferences

Key insurance needs (in decreasing order of importance) are reported to be health, life insurance, agricultural risks, and business risks. Simultaneously, the key saving needs are found to be for marriage, education and childbirth.

Table 10: FGD Insurance preferences & understanding


Geo area Insurance preference and understanding Urban Most participants in urban areas understood the term insurance in basic terms. In terms of value,

most participants believed that insurance would prove beneficial for them as it serves as a protection against future events. However, most participants were unaware of the details and procedures regarding insurance claims or insurance premium charges they were paying

Semi-urban Most participants had a general idea about insurance services but only a few out of them knew about the products and its features/ benefits and the exclusions. Participants were ill informed about the value insurance provided, and typically admitted to taking up insurance only because it was a mandatory feature by the MFP. Participants acknowledged that having insurance is a positive but only if the services promised are provided

Rural In rural areas participants groups were highly diversified. In one set of groups most participants in the rural area failed to understand what the term insurance meant as they had never dealt with any insurance product. In the other set of groups, participants understood the term insurance very well, and explained it in terms of received a loan waiver in the case of a death and also receiving funeral expenses.

3.3 Key lessons Detailed below are some of the key observations and learning that emerged from the FGDs. 3.3.1 Profile of potential MI clientele in Pakistan As per the findings of our study, profile of microinsurance clientele in Pakistan would mostly coincide with the profile of microfinance clients however it would be broader than the typical microfinance target clientele. Microfinance is extended to people involved in microeconomic activities, as the loan is usually given for the business purposes only. It excludes people who generally hold similar economic characteristics but are involved in salaried employment. Microinsurance in contrast would include that segment as well.

Table 11: Indicative profile of microinsurance clientele

Profile of microinsurance clientele Age 25-55 years

Education Illiterate to secondary Income PKR5,000 to PKR25,000 per month Gender Male, Female Marital Status Married, Unmarried, Widowed Geographical Area Urban slum, Semi urban areas, Rural areas Poverty Band Vulnerable and Quasi Non-Poor

3.3.2 Risk events The risks events are typically either predictable or unpredictable. They also have varying financial impact and varying coping mechanisms. The risks faced, costs and coping mechanisms differ between rural and urban areas though most are common across the whole country. The life events where people had a preference for insurance (in decreasing order of importance) are health/illness, natural disaster, marriage, education, death, business loss, childbirth and accidents. Natural disaster was particularly important for rural people especially given the recent floods of years 2010 and 2011. Marriage, education and childbirth are considered as costly events; however, these are found to be an instance where savings would be more appropriate. Typically these three events had the highest cost impact, especially marriage which can cost, on


an average 18 months income. Cultural preferences though have a bigger impact on peoples spending on events of this nature. In rural areas, people often face higher costs for some events especially health where there is limited services and they need to travel to the nearest health centre. They also have lower and less secure income, and now see natural disasters as a major risk for them, worth insuring against, to protect their land, house and livestock. 3.3.3 Risk coping The low-income people are mostly found to be unprepared to handle the financial pressures posed by any unpredictable event, and often in case of predictable events. A moderate to large variation in the expected level of expenditure can have a long term detrimental impact on household living standards. Young individuals are seen to have fewer informal and formal mechanisms through which they can cope with financial pressures. 3.3.4 Insurance preference and awareness Some of the key insurable events are natural disasters, health/illness, and death and business losses. However affordability is a major issue, especially in rural areas where people tend to be with lower and sometimes insecure/irregular income. Another common issue found is lack of insurance awareness. Typically there is very low insurance awareness, especially in rural areas. In developing the market for microinsurance one needs to estimate the need and then create the demand through various enabling mechanisms such as consumer education, financial subsidies, mandatory covers, etc. There should be an explicit communication strategy at the MFP level or agent’s end to explain the insurance product features, benefits, inclusions, exclusions, claim processes, etc. to the insured client. Because of the lower literacy levels and lack of understanding, the product, processes and procedures are also advised to be kept very simple. 3.4 Client research A key learning from other jurisdictions with ongoing microinsurance programs is to research and understand the low-income clients. When developing and launching a microinsurance program, it is critically important to build the product around the clients’ risk management needs. Often the key reason why a microinsurance program sometime fails is due to weaker client research and scanty product to fit to clients needs. It is not in the insurer or clients’ interest to offer a defectively designed product. Conversely, successful microinsurance programs are usually where there has been client research and there is a reasonable level of client value in the product. International Best Practice Guidelines for Market & Demand Research A very useful tool to aid in conducting microinsurance demand research is the “Guidelines for market research on the demand for microinsurance” published by the USAID AMAP project. These guidelines clearly outline the process of qualitative research for microinsurance. They also identify and explain the different qualitative tools that can be effective in addressing a number of questions relating to demand research for microinsurance. Market research on demand can inform decisions about whether to enter the market, what type of product to introduce, and what market segments to target. Once a general product concept


has been identified, market research can help to identify specific product attributes that match the needs, preferences, cash flow patterns, and other capacities of the target market. Market research is important in several areas throughout the product development process: concept development, prototype testing, marketing design, market education, and understanding customer satisfaction. If we accept the premise that a demand driven product will lead to greater success for all parties involved, than we must recognize that frequent, formal information gathering from clients is critical. At the market research stage of the product development process, we need to understand fundamentally what it is that people need. Identifying needs requires a focus not on “insurance” – especially since low-income people generally have limited (or no) understanding of insurance and/or a negative attitude towards it – but on risks. A number of key issues surrounding risks must be understood from the target market.

- What risks do you face? - How do you manage the risks now? - How sufficient are those risk management efforts? (and conversely, where do those risk

management efforts leave gaps in your ability to cope?) - And finally how can insurance play a role to enhance or fit into the clients risk

management efforts? There is also a very useful guide to Microinsurance product development produced by the Microinsurance Centre which describes how Demand research fits into the whole product development cycle i.e. “Microinsurance Product development for Microfinance Providers”. Source: Microinsurance Product Development for Microfinance providers, Microinsurance Centre 2011

It is recommended that insurers conduct demand research of the target population, for their microinsurance portfolio, considering the following;

1. Given unique nature of risks and insurance required in rural areas; need to specifically tailor rural microinsurance products to these needs and risks.

2. Because of the lower literacy levels and lack of understanding; microinsurance product, processes and procedures have to be very simple.

3. Formal sector insurance will not be appropriate for informal market. Microinsurance product development should fully research and incorporate the characteristics of the informal sector.

4. Develop specific MI products for specific agriculture risks – with possibly some variation in coverage terms and benefit levels by province

5. Design MI product to factor in current and typical risk coping mechanisms of the target population

6. Consider development of MI products for target population split by age groupings One has to be rational and one would not expect all insurers to conduct detailed client research for every microinsurance product. This is why it is suggested that there be ongoing industry studies to develop an ongoing knowledgebase on low-income clients. In order to guide the sector, it is recommended that there be client research guidelines plus a requirement for some basic client research when developing the product. Insurers will be required to report on the level of client research they conduct, about their microinsurance client base, as part of the microinsurance product regulatory filing. This is a key reason for the recommendations related to product regulation and client research in Section 7.2.1, part 5.


CHAPTER 4

Insurance Supply This section provides an overview of the Pakistan’s insurance industry and its recent performance. The discussion commences with a review of insurers and trends in performance, followed by discussion of the products offered, followed by consideration of the distribution environment and finally a review of capacity in the market. Specific reference to microinsurance providers is highlighted but detailed discussion is provided in the next section. There are currently 48 insurance providers and 1 reinsurer operating in Pakistan27, as follows;

– 36 Non-Life insurance companies (including 1 state owned company) – 7 Life insurance companies (including 1 state owned company) – 5 Takaful operators, most of which have recently entered the market in the past 3-5 years – 1 government owned reinsurer

All above mentioned insurers are regulated by SECP. The two government-owned, one in life and non-life sector each, insurers are entirely owned by the Government of Pakistan, through the administrative control of the Ministry of Commerce, but are fully regulated by SECP. The agent network is the dominant distribution channel, while there are also a small number of insurance brokers operating in the market. The insurance industry in Pakistan is relatively small compared to its peers in the region. The insurance penetration and density is modest as compared to other jurisdictions, while the industry is underdeveloped relative to its potential.

Table 12: Insurance Penetration (% Premium to GDP)28

Country Total (percent)

Life (percent)

Non-Life (percent)

India 5.10 4.40 0.70

Sri Lanka 1.40 0.60 0.90

Bangladesh 0.90 0.70 0.20

Pakistan 0.70 0.30 0.30

27 SECP annual report 2010 28 Swiss Re Sigma No2/2011 World Insurance in 2010


Insurance penetration as a proportion of GDP is quite low at 0.7 percent of GDP, which is one of the lowest in the South Asia, and well below the overall average for emerging markets. As of December 2011 the industry’s total annual gross premium revenue stands at over PKR 124 billion.

Chart 4: Gross written premium29

The premium written for non-life business has had modest growth in the past 5 years, while life business has had much more significant growth. As a consequence life business has grown from being 41 percent of the market in CY2006 to over 56.5 percent of the business in 2011. There have been two new life insurers enter the market but most of the growth has come from the existing major players, which is said to be occurred mainly due to product innovation and new distribution channels. 4.1 Insurance providers 4.1.1 Private insurers A Life Insurers There are 7 life insurers operating in Pakistan, and in the last 5 years there have been 2 new entrants. Key observations are as follows:

– The government owned life insurer, SLIC is the dominant player with approximately 64 percent of the market share in year 2011. The market share for SLIC has been quite stable the past 5 years even with new entrants and a growing market

– In year 2011, private insurers occupy 36 percent of the market with 2 large insurers (EFU Life and Jubilee Life) having a market share of approximately 26 percent combined and the 4 remaining having total of 10 percent market share

– SLIC continues to occupy a significant place in the market although with more traditional products and some less innovative approaches to acquiring business. Some of the other life insurers exhibit greater innovation and targeting of niche sectors in the market such as more advanced products and alternative distribution channels.

29 SECP Annual report 2011


– SLIC is effectively a direct competitor with the private life insurers and this ongoing competitive dynamic will be quite important for the overall development of the life insurance market in Pakistan.

– In general the life insurance sector is seen as more stable and technically advanced compared to the non-life sector.

B Non-Life Insurers There are 39 licensed non-life insurers, including the state-owned National Insurance Company Limited (NICL). In the last 5 years there has been 1 new entrant, while 1 of the older insurer has surrendered the insurance license. Key observations for year 2011 are as follows:

– The state-owned insurer NICL has 12.4 percent market share which has been relatively stable for the past five years. Its core business is to insure non-life risks of Government and semi government organisations for which it has a monopoly. It is not considered a direct competitor with the private non-life insurers, unlike the SLIC.

– Private insurers occupy 87.6 percent of the market with three large insurers having a total market share of 53 percent combined. This share for the top three has been over 50 percent in the past 5 years with some gradual erosion in share in that time, from 57 percent in 2006.

– The remaining market share of 34.6 percent is spread among the other 35 active insurers, which is an average of 1 percent per insurer

– In general the non-life sector is considered quite competitive with some aggressive pricing techniques and pressures on profitability, especially for the smaller players.

C Takaful Insurers In recent years a number of Takaful operators have commenced operations in Pakistan. There are presently five Takaful operators, being three in general (non-life) and two in family (life) takaful business. Key observations are as follows:

– For the general takaful sector, the three operators have grown from total market share of 0.4 percent in FY 2006 to 2.1 percent in FY 2011with gross contributions of just over PKR1 billion.

– They have achieved reasonable growth since commencement of operations but have faced some difficulties establishing a critical mass or significant scale.

– It is unclear if Takaful will have a significant large scale appeal to customers though this will also be impacted by the relative immaturity of the insurance market and the high proportion of corporate business at present in nonlife sector.

4.1.2 Government-owned insurers and reinsurer As stated above there are three government-owned entities in the insurance industry in Pakistan, with one life insurer as SLIC, one non-life insurer as NLIC and one reinsurer as PRCL. A State Life Insurance Corporation The State Life Insurance Corporation (SLIC) has been in operation since 1972 and as noted earlier it is the considered as largest player in the life insurance market, in terms of approximately 64 percent market share. The dominance of SLIC is partly a legacy of the past structure of the insurance market. In year 1972, the life insurance market was nationalised and all life insurers were effectively merged, or their business was, into one national life insurer. There was then just


one life insurer with a monopoly until 1992 when the market was then liberalised, competition opened and private insurers were allowed to operate in the market. SLIC continues to occupy a significant place in the market with, traditional distribution channels and product types. The operations of SLIC are stable and appear to be well managed, though it will experience increasing competition in the future. Given its governance structure and legacy, the SLIC has a unique role to play, particularly with the government-sponsored insurance programs. It is currently the primary insurer for BISP’s insurance program, further details of which are provided in the next section. B National Insurance Company Limited The National Insurance Company Limited (NICL) commenced operations in 1976 through the National Insurance Corporation Act, 1969. However, it was incorporated as an unquoted public company in March 2000, after the promulgation of National Insurance Corporation (Reorganization) Ordinance, 2000. The s.166 of the Insurance Ordinance, 2000 defines the exclusive role of NICL vis-à-vis insurance whereby all insurance business relating to any public property, or to any risk or liability appertaining to any public property, shall be placed with NICL only and shall not be placed with any other insurer. The NICL’s core business is to insure non-life risks of government and semi-government organisations. it has been found that as of now, NICL has not initiated any microinsurance program; however, it is said to be underwriting a significant portion of crop loan insurance scheme. C Pakistan Reinsurance Company Limited The Pakistan Reinsurance Company Limited (PRCL) is the state-owned and only reinsurance company in Pakistan. The Part VI of the Insurance Ordinance, 2000 sets out the insurance law regarding reinsurance arrangements, whereby the s.42 of the Ordinance mandates a compulsory cession of thirty-five percent of every non-life insurers reinsurance business to be ceded on a treaty basis with the PRCL. This mandated proportion effectively guarantees PRCL a certain revenue and business stream. PRCL has approx 11.5 percent of the total non-life premium written in year 2011 and thus represents a significant component of the non-life market. It is understood that the domestic insurers also reinsure with international reinsurers directly or through reinsurance brokers; however, it was not possible to obtain exact details on the volume of premium or business that is ceded outside of Pakistan. 4.2 Insurance products 4.2.1 Life business The table below summarises the mix of business written by net premium according to the key classes of business.


Table 13: Life insurance premium by product type

Life Insurers - Composition of Business (percent)

2008 2009 2010 2011

Conventional Business 76 76 74 70

Unit Linked Business 23 22 24 28

Pension Business Negligible Negligible Negligible Negligible

Universal Life Negligible Negligible Negligible 1

Accident & Health 1 2 2 2

100% 100% 100% 100%

Life Insurers – Classwise Gross Written Premium (PKR in `000)

2008 2009 2010 2011

Conventional Business 26,455,174 32,063,495 38,413,302 48,955,429

Unit Linked Business 7,862,080 9,037,356 12,195,700 19,302,159

Pension Business - 10,031 20,021 44,605

Universal Life 32,929 57,350 115,609 417,541

Accident & Health 476,513 750,176 819,345 1,217,103

34,826,696 41,918,408 51,563,977 69,936,837 Summary comments are as follows:

– Key product types: The major classes of business are conventional (with profit) business and unit linked business. The minor classes are universal life and accident & health business.

– Premium volume: the total premium written has been increasing steadily in recent years, from PKR 34.8 billion in 2007 to PKR 69.93 billion in 2011.

– Mix of business: For the older insurers, such as SLIC, the vast majority of business is conventional, in particular business that has been written in the past 10 to 20 years, whereas for some of the newer insurers, the majority of business written is unit-linked.

– Client profile: Unfortunately there is no client data easily available; however, it is understood that the bulk of clients are corporate or belong to higher-end of the retail market. However, as SLIC has a major market share with an extensive network of sales staff who transact direct sales business mostly in rural to semi-urban parts of the country, a certain range of medium to low-income clients in the SLIC portfolio can be expected.

– Product Features: As is typical with life insurance the vast majority of business is long-term savings. However, there is a smaller amount of accident and health insurance business which will is usually short-term in terms of coverage period.

– Profitability: There is no readily available information on the profitability of specific product lines but the life sector is profitable at an industry level as are all the insurers at an insurer level.

– Recent trends: It has been observed that the overall share of premium written for conventional business is gradually reducing, while that of unit-linked is steadily increasing. This indicates a trend in the market away from conventional business and a particular focus of newer insurers to write non-conventional business, in particular unit linked business.

4.2.2 Non-Life business The table below summarises the mix of business written by net premium according to the key classes of business.


Table 14: Non-Life Insurance Premium by product type30

2007 2008 2009 2010 2011

Fire & Property (percent) 34 34 34 35 34

Marine & Transport (percent) 18 18 18 13 15

Motor (percent) 27 27 27 26 26

Liability (percent) 1 1 1 1 1

Worker's Compensation (percent) 0 0 0 0 0

Credit & Surety ship (percent) 0 0 0 0 0

Accident & Health (percent) 5 5 5 5 5

Miscellaneous (percent) 15 15 15 19 19

Gross Written Premium (in PKR Billion) 39 41 43 47 54

Summary comments are as follows:

- Key product types: The major classes of business are Fire & Property, Marine & Transport and Motor. These three classes make up over 70 percent of the total premium written for non-life business.

- Premium volume: the total premium written has actually reduced in recent years indicating a stagnant market.

- Mix of business: Fire and Property business is the largest single class of business. A number of non-life insurers are writing health business but this is not a significant class by itself at present.

- Client profile: As for the life market the client profile is generally at the higher socio-economic scale with a large number of corporate clients.

- Product Features: Typically non-life business is short term with 12 month contracts in place.

- Profitability: General comments from industry are that the non-life market has limited growth prospects with a large number of insurers chasing the same business. This leads to aggressive competition and possible unsound pricing, usually by smaller players.

- Recent trends: Typically one would expect the motor market to increase each year with new vehicles, people insured, increasing value of vehicles. However, in Pakistan the motor insurance market is not showing any significant growth, rather a declining trend. Some anecdotal industry estimates are that the vast majority of vehicles are uninsured; if this could be reversed then the non-life insurance market size could significantly increase.

4.2.3 Health business In Pakistan, health insurance business is allowed to be written by both by life and non-life insurers. It is understood that this business is largely corporate accounts, with very little retail or individual health share. This is a highly competitive market and is often part of a broader package of business for larger clients; and often leads to under pricing, meaning product offering below sound rates, for the health insurance business as it is part of a total package of business underwritten. At present statistics are not available to indicate the total health premium written or the split between life and non-life insurers. However from industry discussions it is understood that it is a minority or low proportion, approximately below 15 percent of business written, for most insurers. There is one dedicated health insurer, having a license of non-life insurer, namely Allianz-EFU

30 Based on classwise data available at SECP


Health Insurance Limited. The company wrote a gross premium of PKR1.060 billion rupees in 2011. If the Company has a 10-15 percent market share, this would indicate a current market size of health insurance in Pakistan to be PKR5.3 billion to PKR8 billion, which is less than 10 percent of total premium written in 2011 by the industry. Current market constraints on health business are the client base which is largely corporate clients, with very few retail clients, and the aggressive pricing tactics by the insurers to obtain the business. A further issue is the lack of strong technical pricing or underwriting capacity within some of the medium to small non-life insurers. 4.3 Distribution and premium collection 4.3.1 Current distribution approaches; The main distribution approaches are the typical ones being;

– Direct sales force; – Agents; – Brokers; – Bancassurance; and – MFPs.

It is reported that the SLIC has a significant direct sales force of almost 100,000 agents, and is the key distribution channel. Although, the newer insurers rely less on this direct approach and often explore more innovative and cost-effective distribution channels. While, the agent network is the dominant distribution channel, typically an agent works exclusively for one insurer, though a minority operate on an independent basis, working with a number of insurance companies. Agents are registered and managed by the insurers directly; and SECP nor registers or supervise the agents. There are currently six insurance brokers operating in the market, of which, three have foreign affiliations. Unfortunately it was not possible to obtain data which details the various numbers of distributors, premium volumes (or insured’s) or expenses by distribution type current or past. Therefore it is not possible to conduct any detailed quantitative analysis on the distribution channels. Information was collected from the industry, on an anecdotal basis, with the following observations;

– Many of the newer insurers do not use a sales force as they see this as being too costly. – Typically newer insurers are more willing to try alternative distribution channels due to

cost efficiencies. – Bancassurance is a growing and significant distribution channel, although there exists

certain pressure due to exorbitant commission costs. – MFP’s are seen as the sole or key approach to reaching microinsurance or low-income

clients. Insurers see the role of an MFP as critical in distributing microinsurance products. 4.3.2 Premium collection It is understood that for individual policyholders, the insurers collect premium upfront on annual basis in case of non-life insurance, and in case of life insurance, usually it is monthly or half yearly or annual, depending on the product type. However, with large corporate clients the arrangement of collection of premium is often quite flexible. The premium in some cases is


received even after the end of the insurance period and sometimes the premium is adjusted with the claim payment if a loss occurs. Usually the premium payment is through cheque and less often with cash. With the advent of bancassurance, use of electronic funds transfer is becoming a commonplace. Some of the insurers, mainly from life sector, are now starting to offer insurance products through telecom companies, which as corporate agents of the insurer, to collect premium on daily/weekly basis and subsequently transfer the same to insurers. In case of microinsurance, the premium is usually paid upfront to the insurance company and also collected upfront from the client. 4.4 Capacity in the insurance market 4.4.1 Technical capacity In general the level of technical actuarial capacity in the insurance industry is quite mixed and an area where there is need for significant capacity building. For the life insurers there is a regulatory requirement to have an appointed actuary. The actuary signs off on product design and reserves, among other things, and completes an annual Financial Condition Report (FCR) for the Board of Directors of the insurer. Each life insurer is required to submit any new product to the SECP for review and approval under Section 13 of the Insurance Ordinance, 2000. For the non-life sector there is a clear difference as regards actuarial capacity; there is no requirement for an appointed actuary, often there is no actuary and no requirement for submission of non-life products to SECP for approval. However there are limits to the possible actuarial input into the insurance sector given the relatively small size of the profession. Naturally there are a number of other important professionals working in insurers including accountants, underwriters, chartered insurance experts, risk management experts and senior management. Recently SECP has notified the Insurance Companies (Sound and Prudent Management) Regulations, 2012. These regulations set out fit and proper criteria for senior and key positions within an insurer. They also specify the requirement for pre-approval by SECP for the appointment of directors, chief executive officer or principal officers of an insurer. 4.4.2 Capital capacity A Life industry For the life industry the average claims ratio is in the order of 50 percent, the expense ratio in the order of 45 percent and profit margin is in the order of 3 percent. The average net return on equity is in the order of 6 percent and net return on assets is in the order of 0.4 percent. This indicates heavy expenses and quite modest profitability. The ratio of total assets to liabilities has been steady for the past 5 years at 108 percent. This does vary significantly by insurer but the ratio on year-on-year is relatively stable. This indicates that each insurer has a target buffer but which varies significantly by insurer. This may reflect different business mix and different solvency/capital strategies. The industry ratio of 108 percent indicates a modest level of capital capacity in the sector.


B Reinsurance capacity There are no local offices of international reinsurers in Pakistan, though many local insurers places reinsurance with reputable international reinsurers. As noted earlier the non-life insurers are also required to cede a certain amount of their risk to PRCL; this effectively creates a local non-life reinsurance market and creates a certain amount of reinsurance capacity. It is understood that one of the life insurers who is writing health microinsurance business has a reinsurance stop-loss program on the microinsurance business. This indicates a possible appetite of reinsurers to accept risks in microinsurance category. Also if a local insurer has a good working relationship with a reinsurer, this could be used to obtain reinsurance for microinsurance; and this could help enable the growth of the microinsurance market, while encouraging the insurer to commence microinsurance business. It therefore appears that local insurers have reasonable access to reinsurance, though it is unclear how competitive that market is and the possible level of under-reinsurance at present. 4.5 Summary In Pakistan, the insurance penetration is quiet low as compared to the regional and comparable peers. This clearly indicates a market that is underdeveloped. The types of classes of insurance are relatively conventional and there appears to be room for significant product development and innovation, both in life and non-life insurance. The life insurance market is heavily concentrated with one large government insurer but other insurers are also competitive, profitable and growing. The non-life market is relatively stagnant with little growth in recent years and consists of three key product types i.e. Property, Marine and Motor (ok). This non-life insurance market is relatively more competitive, especially for the smaller players. It is also understood that there is significant underinsurance in standard classes in particular for motor insurance. The actual penetration of compulsory motor insurance is understood to be very low with some opinions that it is under 20 percent (N/A). This is a typical and straightforward class of business which has significant potential for growth. Health insurance business can be written both by life and non-life insurers. It is understood that this business is largely corporate accounts with very little retail or individual health business. This is quiet a competitive market and is often part of a broader package of business for a larger client. This often leads to underpricing for the health business, as it is deemed to be part of a total package of business written. The government plays a key role in the insurance market through a number of ways, including; demand for insurance of government risks, ownership of insurers, involvement in national insurance programs such as crop insurance. Government, therefore, continues to play a key role in the future development of the insurance market in Pakistan.


International Best Practice Guidelines for analysing insurance markets Drivers of financial inclusion Financial inclusion in insurance or any other financial service is achieved when all consumers, particularly low-income consumers, can access and on a sustainable basis use financial services that are appropriate to their needs. The aim of financial inclusion is not only to ensure that users are not excluded from the formal sector, but that they actively use financial services. In order to assess this one has to understand the factors driving financial inclusion on both the demand-side and the supply-side. This is illustrated by the following diagram:

Figure 2: Financial inclusion framework

Source: Bester, Chamberlain (2006)

On the demand-side, there can either be:

– barriers to access (that is: factors outside of clients’ control, such as affordability or accessibility, that make it impossible for the target market to use the service), or

– usage barriers (factors internal to the target market, for example their preferences or level of understanding, that makes them choose not to use a service to which they technically have access).

On the supply-side, there can either be factors hindering entry by a variety of players into the market, or factors preventing the expansion of current players into the low income market. Source: A2ii Toolkit No1 Microinsurance Country Diagnostics Studies: Analytical Framework and Methodology

Entry Factors: the key question here is; “Are there forces or factors that prevent particular players from operating in the low income market?” The Insurance Ordinance, 2000 requires that only insurers can write insurance business so this restricts the risk taker to be a registered insurance company. This prevents non-insurers from entering this market and writing a microinsurance risk. However this is not unusual and not considered a major factor restricting the development of the microinsurance market. There are sufficient insurers in Pakistan, with adequate capital capacity, to commence writing microinsurance business. A more common factor limiting entry of insurers into the microinsurance market is an unclear business case and lack of specific microinsurance regulations in Pakistan. The latter will be addressed following this study; however, the former factor is more difficult to address. There have been various studies in other countries on the business case of Microinsurance, such that when and how it can be successful vis-à-vis profitable. There would also be a strong demonstration effect of local programs that are currently running, if their experience can be shared among insurers considering to enter this market segment.


A major challenge for insurers is to move away from managing corporate accounts to retail clients. There is then a further learning and stretch to manage microinsurance clients. This movement will require learning and process reengineering with the insurer. It will also require a commitment of time and resources to the microinsurance market which is challenging given the uncertain business case of microinsurance for an insurer. Expansion Factors: this is the question of “Factors that limit the expansion of the current Microinsurance market”. The microinsurance market is quite small and nascent at present. Microinsurance for non-credit life is quiet limited, although clearly an area of significant potential. It is understood that approximately 82 percent31 of microfinance loans have credit life insurance; the remainder are uninsured or informally insured by the MFP). This is an area and market that could significantly grow if all loans require a credit life insurance with a formal insurer. Presently there are no insurance programs operating on a national scale. However there are currently three programs with the potential to reach a national scale, namely the National Rural Support Program, the crop loan insurance scheme and the Benazir Income Support Program. These three programs have the potential to be considered microinsurance programs. The crop loan insurance scheme has been running on a limited basis since year 2008 and it is now under review with plans to launch another pilot, potentially on a national scale. The BISP was initiated by government of Pakistan in 2008 to establish a comprehensive social protection system as part of the National Social Protection Strategy. Currently, BISP has been testing a pilot to introduce life insurance program for poor households. The life insurance program started in early 2011 and provides life insurance cover of PKR100,000 to the head of the household. It is understood that currently there are two million persons covered in this life insurance program. Also, there are plans to launch a health program in year 2012, along the lines of RSBY in India. For those existing insurers writing microinsurance business it represents less than 5 percent of total premium written. However, the insurers with experience of microinsurance can see long term potential and state that they are willing to continue in this business and generally believe that it can be profitable.

31 Microwatch Issue 21 (3rd Quarter 2011) 1.7m Credit Life policyholders and 2.1m Active credit borrowers


CHAPTER 5

Microinsurance Supply In recent years a small number of microinsurance initiatives have surfaced. These are largely related to credit life insurance or microfinance programs, but there are also a number of health microinsurance initiatives, crop insurance, including some government-led programs which are under progress. Currently the major Microinsurance streams are generally the credit life insurance being provided by MFPs, the recent government-sponsored BISP and the NRSP health microinsurance program. The crop and other health microinsurance programs have not found to have reached significant scale, and encountered many operational challenges. The supply of credit life insurance is largely related to the demand from MFPs which is at best indirectly related to the client demand. The supply of government-sponsored programs is not in direct response to consumer demand, but is responding to the needs of low-income people who have no or little access to insurance. 5.1 Microinsurance providers and distributors There is no commonly agreed definition of microinsurance at present in Pakistan. This makes exact quantification of numbers of microinsurance policyholders quite difficult. However, it is generally accepted that if the program is with a microfinance operator then this is considered microinsurance. There are also a number of other programs that are specifically targeting low-income people which can be considered in the category of microinsurance. Given the need of specific definition of microinsurance, it is possible that there are some insurance programs which cover low-income households and might be considered in the category of microinsurance, but are not explicitly identified as such. These are most likely with SLIC given its outreach and sales & distribution approach. However exact numbers for these policyholders are not easily available. For the insurers currently conducting microinsurance business, it represents a very small portion of their gross written premium and they do not specifically separate out the reporting and monitoring of this line of business. This can lead to difficulties in the management and review of microinsurance business and in conducting industry wide analysis and surveys. 5.2 Risk takers 5.2.1 Formal Risk takers The risk takers are domestic insurers who are either life or non-life insurers. The insurer’s role is to price and accept the insurance risk. Different insurers take a differing approach to the creation


of the microinsurance market. Some insurers work with a large MFPs and respond to their needs. Others directly seek out partners to develop and sell their microinsurance offering. Broadly speaking the insurers take a more reactive and passive role to the creation of the microinsurance market and responding to the needs of their distributors or project sponsors. 5.2.2 Informal Risk takers No informal risk takers or insurance schemes have been found, though there may be some self-run by an MFP, and that too without insurer involvement. Given the nature of informal risk, it is not straightforward to estimate the level and quantum of this business. However, due to the relatively limited state of development of microinsurance in Pakistan it would appear that the level of informal risk acceptance is not overly significant. A number of the larger MFP’s have indicated their interest in setting up a specialised microinsurance company that would be run by the MFP32. This desire to “self-run” often arises from a difficult partnership or a limited understanding by each party of the others business model. 5.3 Distributors/ Intermediaries A typical distributor for microinsurance is a microfinance provider or to a lesser extent an NGO working with low-income households. This is fairly typical for microinsurance especially in a market that is at early stages of development. The tables below summarise the numbers of MFP’s providing microinsurance33.

Table 15: Types of MFP’s providing Microinsurance

Type of MFP Number of institutions

offering Microinsurance

Total MFP’s Proportion offering (percent)

Number of policyholders

Proportion split

(percent)

MFB 4 6 67 742,145 30 MFI 5 9 56 592,879 24 RSP 4 5 80 959,398 39 Other 4 8 50 145,468 6 Total 17 28 61 2,439,890 100

Comments as follows:

- Just over 60 percent of MFP’s are offering microinsurance, though this is primarily credit life insurance.

- Eight MFPs are reported to be offering health microinsurance, though this is generally on a small scale, except for one major provider which has the bulk of the health microinsurance market.

All insurers spoken to have indicated their comfort of working with a microfinance organisation as the distributor. They see this as being more cost-effective than the insurer directly trying to access this business. The selection of a good partner is thus critical with some examples of success, or otherwise.

32 Some MFP’s are in favour of having the insurance risk handled solely by an insurer and/or are ambivalent about the possibility of setting up a specialised microinsurer, as they thought that handling insurance risk was not their core business. On the other hand, PMN, the microfinance providers’ network, which is an association of 28 MFPs has requested SECP formally to allow setting up specialized microinsurance providers. Hence the Industry’s (Microfinance and Insurers) appetite could be tested further with a release of draft Microinsurance rules for specialised microinsurers. 33 Pakistan Microfinance Network - Microwatch Issue 21


There are also a number of instances of MFP’s that switch insurer quite regularly, for example on a yearly basis, often solely based on the price. This type of churncan be quite risky and disruptive to a program, and it is often more effective to invest in careful selection of a partner at the outset and building an effective partnership over a number of years. Many insurers express limited understanding of MFPs or their business model and the clientele that they work with. This is not surprising given that most insurers have worked with large corporate accounts and very limited retail/individual accounts. There are significant differences between such clients and low-income households. 5.4 Third party operators There has been found a small number of third party operators that are operating in the business of microinsurance, including the ex-First Microinsurance Agency (FMiA). The FMiA was part of the Aga Khan Foundation which launched a health microinsurance program about four years ago. This involved FMiA selecting partnering distributors/implementers such as NGOs or MFPs, many which operated in remote and rural areas. The model being followed by FMiA was to take the primary role in product design and development, and then selected insurers who would work via FMIA with the distributors, though it worked only with its sister concern, Jubilee Life Insurance, by far. The program did not have healthy claims experience in the early years, though it is reported that there were some product design and pricing changes which did help to reduce the claims ratio, which was well above 100 percent even in the conclusion, but the program even then faced significant adverse selection issues or poor claims experience. The FMiA ceased its operations in year 2011 generally, but is said to be continuing with some of the distributors in northern parts of the country and Jubilee Life Insurance acting as the insurer. The Jubilee Life Insurance has expressed a commitment to continue the program and state that it is generally ‘not unprofitable’. It is understood that the Jubilee Life Insurance is accessing a limited stop loss reinsurance arrangement to limit losses in this scheme. There are no third party administrators (TPA) in microinsurance, though the BISP administration has been found to have some elements of TPA model. These elements are there through the handling of enrolments and claims by SLIC but the selection of clients, product design and financing is handled by BISP itself. In a certain sense BISP, has reportedly outsourced the insurance function to SLIC, which has the insurance expertise vis-à-vis the insurance licence to handle this risk. 5.5 Microinsurance products 5.5.1 Current products The table below summarises the numbers of microinsurance policyholders accessed through MFP’s in Pakistan.

Table 16: Microinsurance product type by MFP

Insurance Type Number of MFP’s

No of Policyholders

Sum Insured (PKR million)

Health 8 735,053 Life 13 1,704,837 Total 17 2,439,890 28.203


A Credit life Insurance As stated earlier, the most common microinsurance product in Pakistan is credit life insurance. This is a good starting point for an insurer and distributor to commence microinsurance and there can emerge some good learning experiences from such a program. There is limited information available on the nature of current credit life insurance programs but it is understood these are typically designed to cover risk of the loan default on death of the borrower, with little or no additional benefits to the client’s family. This is of limited client value to the client themselves and such programs could be enhanced at little or no extra cost, but with potentially significant positive impact. Often the insured is part of a portfolio of risk that is notified by the MFP to the insurer each month and not on an individual basis. This makes for ease of administration but ultimately of limited impact on an individual level, especially with regards to the demonstrative effect of the benefits of insurance.

Table 17: Credit life insurance take up

Item Number Credit Life Microinsurance policyholders 1,704,837 Microcredit borrowers 2,090,617 Take up Rate (percent) 82

It is reported that currently there are 2.1 million micro credit borrowers, out of which 1.7 million are reported to be also the credit life insurance policyholders. This indicates a take up rate of 82 percent and thus potential additional market of another 300,000 insured. B Health Insurance Programs The table below summarises some of the known health microinsurance programs in operation presently or in the past, in order of starting from the earliest;


Table 18: Summary details of Health MI programs

MI Provider(s) Insurer/Distributor

Start Date

Current Status

Number Insured

Comments

Adamjee/NRSP 2005 Continues 1,750,04634 Both partners acknowledge difficulties in the early years with extremely low claims ratio. It is reported that in recent years there has been some increase in the claims ratio, indicating at an aggregate level improved client value, whereby total payout ratio was reported at 47 percent as at September 2011. There was also an expansion in product coverage to include family members.

Jubilee Life Insurance/ FMIA/ FMFB

2007 Continues with changes

25,03135 FMIA ceased its operations in Pakistan in year 2011; though parts of the program are being continued by Jubilee Life Insurance with FMFB.

Jubilee Life /Kashf 2007 Ceased in 2008

1,20036 Claims experience was relatively poor and there were reported to be some issues with the partnership and product suitability. It is understood that this was on a relatively small scale; however, Kashf has expressed its interest in re-launching a Health microinsurance program in the near future.

Asia Care/Tameer Late 2010

Plans to scale up

5,00037 Health microinsurance pilot program running since October 2010. This is a relatively small scale program.

Allianz-EFU Health/Naya Jeevan

Early 2011

Pilot, small scale

2,60138 This is a small scale program which uses innovative distribution channels and combines insurance with other health services for a wider health insurance offering

Pak-Qatar Takaful/Direct Sales

Mid 2011

Pilot, small scale

198 Health microinsurance program, running on a small scale since mid year 2011

As noted above there have initiated a number of health insurance programs in recent years. There is a limited information to assess the programs but it appears that Adamjee/NRSP has the largest scale with over 1.75 million policyholders currently insured and over 3.6 million39 since the program commenced. Both partners acknowledge difficulties in the early years with low claims ratio. It appears that in recent years there has been increase in the claims ratio indicating, at a high level, improved client perceived value. There are significant learning experiences from such a program which can have a positive demonstrative effect for the industry to show how and when health microinsurance can work. As noted earlier the FMiA program faced many challenges, though it continues in a different form. This is not unusual in microinsurance for a program to change and readjust over time. Such evolution also has a demonstrative effect. However, many insurers quoted the FMiA experience, particularly the claim ratio to be above 200 percent, as a concern and something that would cause them to hesitate to enter this market segment. Often the insurers have expressed some scepticism at the results of Admajee/NRSP. All this makes it a a prime opportunity for sharing of learning experiences in an open manner that will ultimately help the industry to learn and grow in this line of business.

34 NRSP Program Update of September 2011 - number INCLUDES dependants. 35 Numbers enrolled from Jan 2011 to October 2011 (latest data point) 36 Anecdotal numbers advised by Kashf during interview November 2011 37 Anecdotal numbers advised during interview with Asiacare in November 2011 38 Insurer reply to data request from SECP January 2012 39 NRSP Programme update at September 2011


C Agriculture and other As noted earlier, there has been a crop loan insurance scheme which ran on a limited basis since year 2008. Further details are provided in Section 5.3. Credit life, health and crop insurance are considered as key microinsurance product types. Internationally there are other product types such as property, accident and livestock insurance. It is understood that some ground work has also commenced recently regarding exploration of potential for livestock insurance in Pakistan. 5.5.2 Product evolution Currently, microinsurance products being offered in Pakistan are seen to be at a nascent stage of development; however, a transition from first phase to next is not too far in this market. The figure below illustrates the typical stages of evolution of microinsurance products and process40.

Typically microinsurance starts with basic products, particularly credit life insurance, which helps to demonstrate the viability of microinsurance; this is where Pakistan’s microinsurance market is seen to be at. The next stage is greater product sophistication, including voluntary products and new distribution channels, while the third phase is with increasing innovation, more complex products and multiple partners. For more details, one must review the Microinsurance Compendium Volume 2 release in early 2012. 5.6 Demand and Supply Interaction 5.6.1 Current microinsurance supply In Pakistan the microinsurance risk takers are primarily insurers, though no informal risk takers are visibly found. Distributors are primarily MFPs and some NGOs, though Pakistan Post is also seen as a significant distributor, for BISP and Postal Life Insurance. Credit life insurance is seen as the most dominant microinsurance product, while there is one large scale health microinsurance program (NRSP/Adamjee) currently in operation. Also BISP’s life insurance has significant current and potential scale, along with its health insurance scheme.

40 Source: ILO’s Microinsurance Innovation Facility, 2011. Microinsurance Compendium Vol II Chapter 1


5.6.2 Business Case for microinsurance International Study on Business Case for Microinsurance A recent study in 2011 assessed the profitability of five microinsurance programs and the lessons for identifying the drivers of profitability of Microinsurance. The study identified three main drivers of profitability; namely (i) enerating sufficient income by reaching scale; (ii) managing claims costs; and (iii) managing acquisition and administration costs.

SCALE Microinsurance initiatives need to achieve scale to cover the costs of building the business and other fixed costs. Low margins in microinsurance often means that these initiatives need to generate larger policy volume to generate reasonable profit levels relative to other business. Scale is also needed to maintain a stable pool of risks; this in turn enables insurers to manage claims costs. It is important not only to focus on selling large volumes of business, but also to retain customers. Monitoring new business relative to renewed business can be an important indicator in this regard. Levels of retention can also be an indication of customer satisfaction and the appropriateness of the product. CLAIMS COSTS Claims costs are managed mainly through the design of the initiative, pricing for the risks, and managing the risks. Pricing the risks is a challenge because microinsurance involves new markets and products for commercial insurers. Insurers often rely on existing experience when pricing microinsurance products, and make adjustments over time based on the experience of the initiative. Risk management measures need to be built into the design of the initiative and the products. The insurer should also implement processes to mitigate underwriting and claim stage risks such as anti-selection and claims fraud as well as monitor these risks on a regular basis. Reinsurance can also protect the insurer against poor claims experience. ACQUISITION AND ADMINISTRATION COSTS Many insurers work with groups and leverage existing infrastructure, within the insurer or of strategic partners, to control distribution and administration expenses. Insurers are also experimenting with alternative distribution channels such as retail stores and telecom companies that provide access to an existing client base. Simplicity of products and efficiency in the processes and the design of the microinsurance initiative are important. Two additional aspects of initiatives cut across the drivers of profitability are organisational structure of the insurer and experience monitoring. Adapted from: Microinsurance Innovation Facility Paper No11 ‘Business Case for Microinsurance: an analysis of the profitability of Microinsurance for five insurance companies (2011)

5.6.3 Demand and supply interaction A Non-Government driven demand Demand for life microinsurance cover is primarily coming from microfinance organisations, mainly in the area of credit life insurance. However, the results are quite mixed with many clients not being aware that they are insured or how to claim the benefit or eventually a low benefit level. This is often the case for mandatory cover at a portfolio level when there is no premium paid directly by the individual client.


Demand for health microinsurance is being partly met by certain schemes, some of which are spending a great deal of resources building the program around the client’s needs, though these are just few exception. Demand for crop insurance has not been fully tested due to the limited scope of the current crop loan insurance scheme. However direct demand research indicates a reasonable amount of demand for this type of cover, especially in rural areas that have been affected by the recent heavy floods of year 2010 and rains of 2011. B Government driven demand The BISP’s life insurance scheme is creating a significant new microinsurance market from scratch with significant potential demonstrative effect. BISP’s health insurance scheme is also expected to create a significant microinsurance market with major potential demonstrative effect. Postal life insurance, through Pakistan Post, is being sold on a voluntary basis which in a sense is responding to demand. As regards Crop insurance, the need is clearly there with demand largely from banks and lesser from clients. This is an area of key focus at present for many policymakers. 5.7 Market Size and Current Trends 5.7.1 Market Size The table below summarises estimates41 of the Life microinsurance market

Table 19: Market size of Life Microinsurance

Life Microinsurance Actual

Current Potential Policies

Ultimate Potential Policies

Credit Life of MFIs 1,704,837 2,090,617 27,500,000

BISP Life 2,030,000 4,000,000 4,000,000

Total 3,734,837 6,090,617 31,500,000

The current market size for life microinsurance is estimated at 3.7 million (though this is probably higher including Postal life and informal credit life insurance). The potential number of microinsurance policies is estimated in the order of 31.5 million42. This potential market is based on estimates of the potential microfinance market and the potential for BISP life insurance scheme outside of microfinance. For Health microinsurance the potential market is considered to be similar to the life microinsurance market of 31.5 million policies. However, if one include dependents of the policyholder also, then the potential health microinsurance market would be approximately two to three times higher than this, in the order of approximately 80 million people insured. Looking at it from another perspective while considering the potential microinsurance population to be vulnerable (20 percent) and the Quasi Non-Poor (36 percent), one can arrive at an estimate of 80 million people potentially insured for health microinsurance, which is 46 percent of overall population of Pakistan.

41 Credit Life; Actual numbers from PMN Microwatch 3rd Quarter 2011. Estimated numbers from SBP Strategic framework for sustainable microfinance (January 2011 Exec Summ P1,Para2). BISP actual and estimated from WB briefing papers (November 2011) 42 This is based on potential microcredit clients and there will be some potential that include both spouses from the household. Therefore when adjusting for Family size one needs to factor this in


5.7.2 Current International Trends Current International Trends in Microinsurance The recently published Microinsurance Compendium (Vol II, 2012) describes five trends that reflect the dramatically changing state of affairs for microinsurance on a global level. The Chapter is summarised below. Microinsurance definition The definition is moving from conceptual and becoming operational by typically considering one or more of the following; target group, product definition, provider definition, distribution channel. Regardless of how one defines microinsurance, product design and access are key differentiators. The focus on simplicity and accessibility, and the efficiency of processes, separates microinsurance from traditional insurance. For example, insurance with long application form, numerous exclusions and other requirements may not qualify as microinsurance, even if the premiums are low and the product is intended for the low-income market. Microinsurance should be defined in a manner that responds to the national or corporate objectives or regulators and insurers respectively and thus the definitions will vary. Indeed, the trend is important not simply because the definition is becoming operational but because insurers and policymakers are actually interested in putting it into practice in their operations. This indicates that they are taking this target group more seriously, and possibly creating incentives or special structures to protect the poor. Both market-led approaches and social protection initiatives are critical and complementary, and therefore from a public policy perspective, they need to be considered holistically. More low-income households covered Today, back of the envelope estimates suggest that the sector is approaching 500 million risks covered, including the lives and health of low income people, as well as protection for their crops, animals and other assets. It is estimated that 60 percent of the persons covered by microinsurance around the world live in India. With roughly 350 to 400 million risks insured, Asia is spearheading microinsurance development, in part because of large and dense populations, interest from public and private insurers, willing aggregators or distribution channels and active government involvement, for example through subsidies. There are four factors that have contributed to recent expansion in numbers covered. The first and most significant is government support, through; subsidies; public-private partnerships; mandates for private sector insurers and involvement of public-sector insurers. The second driver is automatic enrolment or mandatory cover. The third driver is development of effective payment systems; emerging payment systems such as mobile money, bill payment systems, point of sale networks, utility companies and mobile operators. The fourth driver is the capacity of multinational insurers and brokers to replicate their success across jurisdictions. Stakeholders becoming more diverse There is now a greater involvement of a diversity of stakeholders, including; insurers and reinsurers, delivery channels, governments and enablers. The three primary risk takers are; community-based and mutual insurers managing risk of their members; commercial insurers adjusting products and process to cover the low-income market; and governments with national social protection schemes. Insurers motivation for entering this market are a combination of social and commercial objectives, bottom of pyramid (BoP) profits and corporate social responsibility (CSR). Insurers now use a broad range of channels, beyond microfinance providers, including; Agents, NGO’s, retailers, funeral parlours, brokers, CBO’s, government


agencies, employers, religious institutions and cooperatives. Governments play an important role as; providers of social protection; stimulator through premium subsidies, mandating insurance, consumer education and awareness raising; and as a regulator and consumer protection advocate. Expanding and varied range of products Microinsurance started with basic products, particularly credit life, which helped to demonstrate the viability of microinsurance. These basic products have evolved to provide greater client value. Instead of just covering the loan, or paying only for the funeral service, additional benefits are being added to enable these products to help low-income families cope better with the loss of a breadwinner. These products are also being used as entry points to cover other persons and/or provide protection against additional risks. The products themselves have been transformed. Group covers were the most common type of microinsurance, and probably still are. However there is more experimentation with voluntary group insurance where members of the group opt in or out and even voluntary covers. Product evolution has embraced reengineering to respond better to the market. Some market segmentation is occurring, considering the requirements of specific segments, including women, migrants, smallholders and livestock keepers and designing products relevant for them. Concern about value More attention is being paid to assessing whether the insured are actually benefiting from insurance. Donors and policymakers are keen to understand impact. Various frameworks have been developed for assessing client value. Regulators and insurance associations are keen to ensure that sufficient consumer protection is in place so that the industry can forge and maintain the trust of the market. Source: Adapted from Microinsurance Compendium Vol II Chapter 1 Current Trends in Microinsurance


CHAPTER 6

Policy, regulation and supervision This section provides an overview on the policy, regulatory and supervisory environment for insurance and microinsurance in Pakistan. There are typically three main pillars for the enabling environment for insurance, and microinsurance, being Government Policy, Regulation and Supervision. These three pillars and their implications for microinsurance development are assessed.

– Section 6.1 provides background on the political and legal environment. – Section 6.2 identifies the primary stakeholders in the financial sector, including regulatory

authorities and their roles. – Section 6.3 outlines the government policy impacting on (micro)insurance development – Section 6.4 considers the laws, regulations and guidelines applicable to the insurance

industry, and their relevance to the field of microinsurance. – Section 6.5 sets out the key results and conclusions from the IAIS/ICP assessment. – Section 6.6 sets out examples of Microinsurance regulation in different jurisdictions – Section 6.7 considers specialised microinsurers – Section 6.8 sets out summary points

6.1 Political and Legal environment Pakistan is a federal republic with five provinces (Sindh, Punjab, Balochistan, Khyber Pakhtunkhwa, and Gilgit Baltistan), one territory (Federally Administered Tribal Areas), one capital territory (Islamabad Capital Territory) and the Pakistani-administered portion of the disputed Jammu and Kashmir region consisting of an administrative entity, Azad Kashmir. The Chief of State in Pakistan is the President, who shares power with the Prime Minister. The Prime Minister is the head of government, elected through a majority of the Assembly. The president appoints the Cabinet on the advice of the Prime Minister. The legislative branch is a bicameral parliament or “Majlis-e-Shoora” consists of the Senate and the National Assembly. The elections for the Senate were last held in March 2012 and are next to be held in March 2015. The elections for the National Assembly were last held on 18 February 2008 with by-elections on 26 June 2008, main to held again early 2013. The legal system in Pakistan is based on the common law, influenced by the previous British Law, under British India and Islamic principles. In addition to the Constitution, originally adopted in 1973, the primary laws that affect the insurance sector include the the SECP Act of 1997, the Insurance Ordinance of 2000, the Companies Ordinance of 1984 and the Income Tax Ordinance


of 2001. The legislation in general provides that regulations and additional guidance are adopted by the relevant regulatory authority as necessary, rather than at the legislative level. The process of creating and passing new legislation in Pakistan, like many countries, is complex and lengthy. Given the complexity of the process for adopting new legislation, if changes to the regulatory environment are desirable to facilitate the growth of microinsurance, it would be more effective to first consider changes within the regulations or guidelines that would accomplish the desired effect, rather than looking to amend primary legislation. However, in the long run, there may be cases where it would be preferable to amend the primary legislation, whether the process is cumbersome or not. Within the analysis and technical recommendations, it has been highlighted where quick wins are more possible, but also where legislative changes would be desirable in the long term. 6.2 Financial sector authorities This section looks at the powers and responsibilities of the Pakistan authorities concerned with developing the financial sector and its players, as well as their interrelationships and the co-ordination of their actions. In the Pakistan context, the following authorities are relevant for insurance & microinsurance market development. 6.2.1 Securities and Exchange Commission of Pakistan The role of Securities and Exchange Commission of Pakistan (SECP) is to ensure stability of financial markets, regulate financial services (excluding Banking), monitor implementation of relevant legislation, and protect the rights of investors and clients of the financial markets. SECP was set up under the Securities and Exchange Commission of Pakistan Act, 1997. This Act institutionalized certain policy decisions relating to the constitution and structure, powers, and functions of the SECP, thereby giving it administrative authority and financial independence in carrying out its regulatory and statutory responsibilities. SECP became operational in January 1999. It was initially concerned with the regulation of corporate sector and capital market. Over time, its mandate has expanded to include supervision and regulation of insurance companies, non-banking finance companies and private pensions. The SECP has also been entrusted with oversight of various external service providers to the corporate and financial sectors, including chartered accountants, credit rating agencies, corporate secretaries, brokers, surveyors etc. SECP has four sector-specific divisions: Insurance Division, Securities Market Division, Specialised Companies Division and the Companies Law Division. Each Division usually has a Commissioner and these Commissioners, including the Chairman, sit on the SECP’s Commission to address issues at the Commission level. The Insurance Division is responsible for licensing insurers, brokers and surveyors/ loss adjusters. 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 SECP regulates and monitors the insurance industry of Pakistan primarily through powers vested in the Insurance Ordinance, 2000 and the Companies Ordinance, 1984 6.2.2 Other authorities Ministry of Commerce (MoC) has a key responsibility for looking after trade and related matters, economic affairs, and some of the insurance affairs so far. The Ministry has a direct link with hree major state insurers, such as National Insurance Company Limited (NICL), State Life insurance Corporation (SLIC) and Pakistan Reinsurance Company limited (PRCL). The MoC has


an ownership role in each of these three insurers and can affect significant insurance-related government policy through this link. State Bank of Pakistan (SBP) is the central bank of Pakistan, and is also the regulator of the microfinance banks and microfinance institutions. SBP is quite active in developing and implementing strategy, policy, regulations and supervision of the microfinance sector. It recently released a three-year strategic plan for the microfinance sector for 2012 to 2015. Given the key role of microfinance in delivery of microinsurance, and common clients, the SBP can also play an important role in the development of microinsurance. 6.3 Social & Insurance Policy The following policies, programs and strategy have a bearing on the development of microinsurance in Pakistan.

– SECP Plan – Social Protection Strategy (2007) – Medium Term Development Framework (2005-10) – Social Safety Net Programs – Framework for Economic Growth (2011) – Strategic Framework for Sustainable Microfinance (2011) – National and government supported insurance programs

6.3.1 SECP Plan SECP has issued a plan for the whole of the corporate sector under its purview summarised in the document “The Way Forward-Strategic Objectives”. This sets out strategic objectives for the whole of SECP for years 2011 to 2014, under five categories, namely; People, Sectors/Markets, Capabilities/Processes, Regulatees and Financials. It is important to note that development of Microinsurance, including sustainable crop insurance scheme, is also part of this plan. 6.3.2 Government Strategies for social inclusion and poverty reduction Recently a comprehensive government social protection strategy was introduced in Pakistan. After going through a consultative process with assistance of the World Bank and other donors, “A Social Protection Strategy to Reach the Poor and the Vulnerable” was approved by Cabinet in 2007. The Social Protection Strategy is conceived within the overall framework of “Just and Balanced Development” envisaged in the Medium Term Development Framework (2005-10) and Vision 203043. The main focus of this strategy is to develop an integrated and comprehensive social protection system, covering all of the population, but especially the poorest and most vulnerable groups44. 6.3.3 Social Safety Net Programs Some of the social programs have a bearing on the low income households and potential microinsurance clientele. One of these is the Zakat and Food Support Program. Until the initiation of BISP in 2008, two cash transfer programs, Zakat and Food Support Program have played an important role in promoting a social safety net. Both the programs have targeted the poor, widows, orphan and other needy people. Although disbursement of cash through these programs has continued to date, these programs have faced various issues. A significant share of social spending from these programs has benefited the non-poor due to misallocation, and

43 World Bank (2009) Pakistan Social Safety Net Technical Assistance Project 44 World Bank (2009), Ibid


groups of most vulnerable people have been placed outside of the social protection system45. Another program is the Benazir Income Support Program (BISP) which was initiated by government of Pakistan in 2008 to establish a comprehensive social protection system as per the focus of the strategy. Cash transfer and skills development for the vulnerable group and poor households were regarded as a crucial tool to turn the strategy into effective implementation. Currently, BISP has been testing a pilot to introduce life insurance program for poor households. The life insurance programs started in early 2011 and provides life insurance cover of PKR100,000 to the head of the household. It is understood that there are over 2 million households covered in this life insurance program and there are plans to launch a health insurance program in 2012. 6.3.4 National Framework for Economic Growth The National Economic Council approved the framework in May 2011. One of the relevant aspects related to insurance which it states is the Healthcare Financing Reforms, which is a multifaceted and comprehensive healthcare financing strategy, prepared so as to move towards a National Health Services (NHS) program. In this regard, social health insurance is to be introduced for extremely poor at the platform of BISP. Moreover, this insurance is to cover both formal and informal segments and the Private health insurance schemes to be encouraged to ensure maximum coverage. 6.3.5 Strategic Framework for Sustainable Microfinance The State Bank of Pakistan developed a revised strategy for microfinance in 2011, replacing the previous one of 2007. This is focused on microfinance but does have some relevance for microinsurance given microfinance is a key distribution approach for microinsurance. It also makes some comment regarding (micro) insurance such that the industry needs to shift away from the credit-only approach and offer comprehensive financial services such as micro-savings, remittances, and microinsurance. Also, all-inclusive services can address the diverse needs of customers and provide additional revenues streams to MFBs. One of the important aspect is the need to investigate the feasibility for Deposit Insurance Scheme for depositors of MFBs. 6.3.6 National Microinsurance Strategy As described above, there are a number of programs that work with or impact on low-income households in urban and rural settings. Some of these are offering certain forms of microinsurance. However there is not yet a co-ordinated microinsurance strategy in place. There is a need to build a robust strategy on microinsurance, with stakeholder input, ideally aiming for an agreed national strategy on microinsurance. This will help in improvising the microinsurance regulation and supervision.

45 World Bank (2007) Social Protection in Pakistan: Managing Household Risks and Vulnerability


International Guidelines for developing and implementing a Microinsurance Strategy The Access to Insurance Initiative issued guidelines for Microinsurance Market Development (A2ii Toolkit No2). Given below is a summary of the guidance on developing a microinsurance strategy. With the groundwork in place, namely the strategic objectives and the definition, the strategy can kick off in earnest. What will be the steps in the process? The country context and strategic objectives determine what the process in each country will look like, as will the political economy and domestic policy priorities. The Figure below gives an example of what such a process could look like.

Figure 5. Steps to develop a microinsurance market

(Source: Bester, Chamberlain, 2006)

Stage 1: “Ready” Catalyse the debate. If coordinated action is required to move the microinsurance market forward, someone must take the lead. There is no specific recipe for who should take the lead. Different entities may lead different aspects or at different points in time. However, if substantial changes in the policy or regulatory environment are essential for market development, it will be very difficult to move forward without the active participation, if not leadership, of the relevant public entities and office bearers, particularly the insurance supervisor. Stage 2: “Steady” Devising the strategy: A strategic action plan should be drawn up to articulate the barriers, opportunities and strategic objectives to achieve and the interventions or actions needed to achieve those objectives. The action plan will serve as a consensus document to ensure that all stakeholders are on the same page and strive towards a common goal. Stage 3: “Go” Implementing the strategy: The final step in the process is to implement the strategy. It is important to include clear, realistic milestones to measure progress so as to ensure that momentum is not lost. While it is laudable to be ambitious, an over-ambitious agenda will not be fully implementable and will undermine the credibility of the strategy. The strategy should identify a few key actions that can be effectively implemented. Source: A2ii Toolkit No2 Country Process Guidelines for Microinsurance Market Development


6.4 Laws and regulations This section gives an overview of the laws and regulations that have bearing on the insurance industry in Pakistan. The following section then considers some of the implications of this regulatory structure for the development of microinsurance. 6.4.1 General Legislation

– Securities and Exchange Commission of Pakistan Act, 1997 which is the founding Act for the SECP and sets out the functions of the SECP, its scope, its ability to set rules and regulations for all bodies regulated by SECP. This is a key founding reference for setting of rules and regulations, in addition to the Insurance Ordinance, 2000.

– Companies Ordinance, 1984 which sets out the procedures for the establishment, registration and reorganization of a company, its management and organizational supervisory structure, the rights and obligations of its shareholders, and its liquidation. This legislation applies to all companies that are incorporated in Pakistan, including commercial banks, non-banking financial institutions, insurance companies, institutional agents and brokers.

– Income Tax Ordinance, 2001 sets out the taxation law for individuals and corporations. There is also a set of Income tax rules with the specific taxation rules (Income Tax Rules 2002).

6.4.2 Insurance Sector Legislation The Insurance Ordinance, 2000 is the key piece of insurance law in Pakistan. This regulates all insurance activities, except those regulated specifically by other laws, such as the Companies Ordinance, as mentioned elsewhere. This legislation includes provisions for definition of insurers, statutory funds, roles and responsibilities of actuaries, capital and statutory deposits, solvency requirements, reinsurance arrangements, accounts and audit, investigations & directives powers, amalgamation and transfer of insurance business, assignment or transfer of policies, market conduct, surrender lapse and forfeiture of life insurance, intermediaries, special provisions, insurance tribunal, insurance ombudsman, administrators & winding up, offences & penalties, rules & regulations. 6.4.3 Insurance Rules, Regulations and Guidelines Supplementary to the primary legislation, the Insurance Ordinance, 2000, SECP promulgates rules, regulations and guidance for the insurance industry. Rules and regulations have a greater force of law, in that they are required to be essentially followed, whereas guidance is generally more informative than prescriptive. The rules and regulations serve to clarify the provisions in the Ordinance on insurance, and are more frequently and easily amended than primary legislation. The SECP can also issue orders and directives; however these are usually not specific to the overall insurance industry. The process for the development and approval of new rules and regulations is quite lengthy. All new rules and regulations require final approval at the SEC Policy Board. During its brief existence, the SECP has made significant strides in issuing regulations relating to major aspects of insurance industry. There are currently four prominent pieces of insurance rules and regulations, which govern a significant aspect of insurance-related activities, namely;

– Insurance Rules, 2002; – SEC (Insurance) Rules, 2002; – Takaful Rules, 2005; and – Insurance Companies (Sound and Prudent Management) Regulations 2012.


There is currently one post draft piece of new insurance rules, namely the Takaful Rules, 2012, which has been finalized after stakeholder consultations and is awaiting the final approval from SEC Policy Board. These are expected to be promulgated before the third quarter of 2012. 6.4.4 Non-insurance specific laws There are a number of law that are not specific to insurance or microinsurance, but have a bearing and/or indirect impact on the insurance industry. The banking and microfinance ordinance is included, as microfinance providers are presently the major distributors of microinsurance. Therefore, any regulation of them possibly has an indirect impact on microinsurance. The laws are:

– Anti-Money laundering Act, 2010 and the rules made thereto; – Income Tax Ordinance, 2001; – Banking Companies Ordinance, 1962; and – Microfinance Institutions Ordinance, 2001.

6.5 Insurance Core Principles (ICP) assessment 6.5.1 ICP background As an integral part of the diagnostic, the second country mission included an assessment of SECP as Pakistan’s insurance regulator and supervisor against the IAIS Insurance Core Principles (ICPs). This was carried out by an international regulatory expert. The ICP assessment was conducted in accordance with the 26 ICPs, which are the most up to date ICPs as at October 2011. A full list of ICPs is also provided in the Appendices. They are divided into the following seven categories:

1. ICPs 1-3: Supervisor 2. ICPs 4-8: Supervised entities 3. ICPs 9-12: Supervisory process 4. ICPs 13-17: Prudential matters 5. ICPs 18-20: Distribution and Disclosure 6. ICPs 21-22: Fraud and AML 7. ICPs 23-26: Group and Macro matters

A confidential assessment report has been submitted to the SECP for review and follow-up (ICP report). 6.5.2 Key results Noted below are the key results of the ICP assessment. The table below shows the results of the review by rating in aggregate and for regulatory and supervisory components.

Table 20: ICP rating results

Weighted Rating Aggregate Regulatory Supervisory Observed 2 5 2

Largely Observed 7 11 5

Partly Observed 16 9 17

Not Observed 1 1 2

Not Applicable - - -

Total 26 26 26


The chart below shows the results in a graphical form;

Chart 5: ICP assessment by ICP group

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

1 - 3 4 - 8 9 - 12 13 - 17 1 8 - 20 2 1 - 22 23 - 26 All

Weighted Result

I C P G roup

IA IS IC P A ssessment - W e ighte d A ve ra ge : ICP G ro up

A ggregate

Re gulatio n

Sup erv ision

L in ear (O bse rved )

L in ear (L arge ly O bs)

L in ear (Part O bs)

6.5.3 ICP results & findings for Microinsurance From the perspective of Microinsurance, it is suggested that there are seven key ICPs relevant to microinsurance. However this is a suggestion as there is no international guidance or agreement on which ICP’s are most important for microinsurance. The table below shows the results of the review for these key ICP’s.

Table 21: Key microinsurance-related ICP’s ICP No. ICP Name Aggregate Rating 4 Licensing Largely Observed 8 Risk Management and Internal Controls Partly Observed 16 Enterprise Risk Management and Solvency Partly Observed 17 Capital Adequacy Partly Observed 18 Intermediaries Partly Observed 19 Conduct of Business Partly Observed 20 Public Disclosure Largely Observed

Microinsurance: The regulatory and supervisory system for insurance in Pakistan does not explicitly recognise microinsurance, and hence does not address any of the special requirements that may be needed to support the effective development of more inclusive insurance markets. There is a need to recognise the special characteristics that may be needed to make insurance markets more accessible. In Pakistan an integrated approach to these issues in concert with the microfinance initiative and supervision would be beneficial. 6.6 International Microinsurance Regulation Currently there are four countries found to have specific microinsurance regulations and a number of other countries are in the process of drafting regulations and/or legislation. The key features46 of the current regulations are summarised below (full details are in Appendix G) 46 A2ii Study ‘Microinsurance in Brazil Towards a strategy for Market Development, Appendix 3


6.6.1 India Microinsurance Regulations (2005) These regulations embody the Indian Insurance Regulatory and Development Authority (IRDA)’s commitment to extending the reach of the insurance sector. They create a specific category of microinsurance agents to distribute microinsurance products on behalf of registered insurers. Microinsurance products are defined to comprise both life and general insurance products. The definition is set according to minimum and maximum benefits, the minimum/maximum term of the insurance policy and minimum/maximum age of entry, as well as certain simplicity requirements. In order to promote the penetration of insurance products within the low-income market, India implemented a quota system for rural and social sector reach. The quotas are phased up over time and require that:

– 7 percent of all life insurers’ policies must be from rural areas in year one, phasing up to 16 percent in year five, and 20 percent in year 10.

– For non-life insurers, 2% of total gross premiums underwritten must be from rural areas in year one, phasing up to 5% in year 5, and 7% in year 10.

– In the social sectors, each insurer has to maintain at least 5,000 policies in year 1 rising to 20,000 in year 5, and 55,000 in year 10, for both life and general insurance.

The Indian insurance regulator has made no concessions in terms of capital or operational requirements for insurers (specialised or otherwise) wishing to offer micro-insurance. However, it represents one of the clearest examples of where regulatory requirements around intermediation have been relaxed for microinsurance products. 6.6.2 Philippines The Philippines opened the institutional and prudential space for the provision of insurance beyond traditional insurance companies to also include community-based entities. A key aspect of the policy is the allowance for a tiered minimum capital regime. It defines microinsurance as insurance (life and non-life) aimed at mitigating the risks of the poor and disadvantaged. It is defined in terms of a maximum premium (of about $25.5 per month) and maximum benefits (of approximately $4000) for life insurance only (no benefit caps apply to non-life microinsurance policies that are included in the microinsurance category). It also stipulates that policies must clearly set out all relevant details, must be easy to understand and must have simple documentation requirements. Premium collection must coincide with the cash flow of/not be onerous to the target market An important characteristic of prudential and institutional regulation in the Philippines is that it allows for a tiered minimum capital regime. As early as 1974 a second tier of microinsurance providers which traditionally focus on the lower-income market was introduced by regulation. So-called Mutual Benefit Associations or MBAs are allowed to offer insurance products to their members under a reduced regulatory burden and with lower capital requirements. 6.6.3 South Africa Detailed of the proposed microinsurance regulatory framework are contained in a Policy document released by National Treasury in 2011. It is planned to incorporate the policy framework into a Microinsurance Act and specific legislation. A key aspect of the policy is the allowance for specialised microinsurers. The proposed definition to limit market conduct and prudential risk is:


– Benefits capped at R50,000 (~$6,000) per policy (or per risk in the case of asset insurance)

– Contract term of less than 12 months, but with contracts being renewable without the imposition of new waiting periods.

– Cover is limited to risk only (no long-term contractual savings) – Simple terms and conditions

In contrast to the conventional insurance regime, where only registered public companies may provide insurance, the institutional space for microinsurance is opened up to friendly societies and cooperatives. All entities will be subject to a cross-cutting set of corporate governance requirements. 6.6.4 Peru In Peru, the target market for microinsurance is the 8.9m low-income people who do not live in abject poverty but are nevertheless poor. Of these, the regulator estimates the potential microinsurance client base at 1.1 million people, comprised of MFI clients, people that use money transfer agencies, cooperative members, and members of associations and social groups. It is therefore quite a narrow definition of the microinsurance market. Microinsurance regulations were first passed in March 2007. It covers life and asset insurance, but not medical insurance apart from telephonic medical consultations and a second medical opinion. It is focused on an insurer-agent model where retailers, MFIs, financial institutions, savings and credit cooperatives, money transfer operators, social organisations or others act as collective distribution channel (as opposed to the traditional insurer-broker channel). The agent has the official mandate to act as mediator between the insurer and the clients and can make claims payments on behalf of the insurer. In October 2009, a new microinsurance resolution was passed to improve the framework. Microinsurance is simply defined as “insurance that provides protection for the low-income population” provided as group or individual policies by authorised insurance companies. The main change introduced is the fact that the monetary limits were removed as part of the definition of microinsurance. Furthermore, the requirement that “no prior checks may be made in relation to persons or insurable property”, that is, that there may be no individual risk rating, was relaxed to say that such checks may be included “if necessary”, but must then be in accordance “with the cover afforded by microinsurance.” The same holds for the requirement that there may be no restrictions. The Peruvian insurance regulator has made no concessions in terms of capital or operational requirements for insurers (specialised or otherwise) wishing to offer micro-insurance. 6.6.5 Mexico In Mexico, 20 percent of the population live on less than USD2 per day and 45 percent if the employed population earn less than two minimum salaries per month. This, in the eyes of the insurance regulator, the CNSF, makes microinsurance particularly relevant, as this part of the population does not have access to conventional insurance. Microinsurance expansion will therefore serve both a social goal (risk mitigation for the poor) and a financial goal (increasing insurance market penetration). The definition includes life, asset, accident and health insurance – all with the objective to facilitate access to insurance for the poor. A quantitative definition is used relating premium and/or sum insured to annual minimum salary.


Microinsurance products meeting the specifications may (unlike other insurance products, who may only be sold by authorised agents or brokers), be distributed by non-traditional marketing channels with low transaction costs. The Mexican insurance regulator has made no concessions in terms of capital or operational requirements for insurers (specialised or otherwise) wishing to offer microinsurance. 6.7 Dedicated Microinsurers47 As noted in the preceding section there are two countries that make specific allowance, or intend to, for dedicated microinsurers, and these are Philippines and South Africa. These would be generally defined as insurers who are dedicated solely to the sale of microinsurance business. India, Peru and Mexico do not prevent or distinguish between insurers that are dedicated to microinsurance. However reserve, and capital requirements do not differ from those established for traditional insurance products. Microinsurance is provided by the same companies that are selling the other types of insurance products and is subject to the same prudential rules as all insurance products. 6.7.1 Philippines An important characteristic of prudential and institutional regulation in the Philippines is that it allows for a tiered minimum capital regime. As early as 1974, a second tier of microinsurance providers which traditionally focus on the lower-income market was introduced by regulation. The so-called Mutual Benefit Associations or MBAs are allowed to offer insurance products to their members under a reduced regulatory burden and with lower capital requirements. More recently, the tier-based regime was extended to include the following tiers;

– Commercial insurance: Minimum capital requirements were raised to USD24 million for new life and non-life insurers and double that for composite insurers. This is up sharply from the USD1.2 million previously required of commercial insurers.

– Cooperatives: The Insurance Commission has the discretion to reduce this requirement by up to half for cooperatives, but thus far no cooperatives have applied for registration under this condition, as specific guidelines for the implementation of this provision of the cooperative code have not yet been formulated.

– Existing MBA’s: Existing MBAs must hold capital of USD305,000, a very sharp increase from the minimum capital requirement previously in place.

– New MBAs: This increase is even more pronounced for new MBAs as they must now hold capital of about USD3 million.

– Microinsurance MBAs: Microinsurance MBAs must hold capital of USD122,000 (Php5m) that must be scaled up over time to the level of existing MBAs. It is the only category for which such graduation is allowed.

Although any registered insurer can offer microinsurance products, the regulatory concessions created apply only to microinsurance MBAs. An MBA can be recognised as microinsurance MBA if it only provides microinsurance and has more than 5,000 member-clients. A key aspect of the context for Philippines is that when these revised capital requirements were introduced, MBA’s were already quite significant in size, scale and presence in the Microinsurance market. It appears that part of the motivation for concessions was to regulate the market as it stood without unnecessarily restricting or reducing the existing microinsurance market.

47 A2ii Study ‘Microinsurance in Brazil Towards a strategy for Market Development, Appendix 3.Philippines Microinsurance Regulatory Framework. South African Microinsurance Regulatory Framework


6.7.2 South Africa There is a similar situation in South Africa where the informal microinsurance market is currently quite large and the regulator is introducing concession-oriented prudential requirements for specialised microinsurers. A key dynamic of the South African model is that the definition of microinsurance is limited to short contract terms, which is a maximum of 12 months cover limited to risk only, benefits are capped and products have simple terms and conditions. This is one of the key reasons for enabling lower prudential requirements for specialised microinsurers. Both life and non-life insurance underwriting is allowed by a single entity. This relaxes the strict demarcation between life and non-life insurance for microinsurance purposes, in recognition of the fact that microinsurance is written on a short-term risk basis, whether life or non-life in nature. The proposed regulatory framework for South Africa resembles that of the Philippines, in a sense that it sets out reduced capital and compliance costs for entities wishing to offer microinsurance products, thus extending the scope for microinsurance provision beyond traditional insurers. Within the microinsurance category, no differences in capital requirements are however proposed, that is, the capital requirement differentiation is based on product category offered, rather than institutional form, per se. However, dedicated microinsurers will be limited to providing only the microinsurance products as defined. A file and use product approval system is proposed and the dedicated microinsurers are subject to a minimum upfront capital requirement of USD0.4 million. This is significantly lower than the current minimum upfront capital requirements of USD1.2 million for life and USD0.6 million for non-life insurers. Reserving will be done on a simplified standard model, similar to that currently applicable to the non-life insurance industry as these figures were arrived at through actuarial modelling. One should note that in order to introduce this new microinsurance regulatory regime, in South Africa, there will be specific new insurance legislation introduced to achieve this task. 6.7.3 Conclusion The implication of regulatory concessions for a dedicated microinsurance regime is that either all the operations of a licensed insurer must relate to microinsurance, i.e. a dedicated microinsurer, or the microinsurance operations of an insurer that also offers traditional insurance must be clearly separated from its other operations and accounted for separately. This would imply that SECP needs to create a separate microinsurance license setting out the specific capital requirements and other reduced compliance requirements applicable to that license. A specific option to consider would be that dedicated microinsurers qualifying for lower capital requirements are limited to lower risk microinsurance products, similar to South Africa), while larger insurers who already meet standard capital and solvency requirements are allowed to offer products falling within the higher risk microinsurance product categories. For the long-term strength of the industry it would not necessarily be required to tailor the compliance requirements for dedicated microinsurers to the profile of existing insurers. The requirements should be designed to encourage, proactive and prudent, new entrants. If the incentives are right, one could also imagine a scenario where microfinance providers are enticed to register as microinsurers. This could help to grow the market for microinsurance. However, when considering whether to allow for specialised microinsurers it is important to consider the current market and if such regulation is required to fit in with the current level of microinsurance. A second and critical question is the business case for specialised microinsurers. In markets where there is a large informal level of microinsurance there is a stronger possibility to sustain a formal microinsurance market for a dedicated microinsurer and the business case will be stronger.


6.8 Summary Established since 1999, the Securities and Exchange Commission of Pakistan (SECP) regulates and supervises all companies and the corporate sector, except banks, including capital markets and the insurance industry. The SECP issues insurance regulations and is responsible for licensing insurers, brokers and insurance surveyors. The major piece of insurance legislation is the Insurance Ordinance, 2000 with four major sets of associated insurance rules and regulations. At a summary level the legal and regulatory environment in Pakistan, for insurance, is essentially adequate. There appears to be quite a broad range of powers, within the legislation, that the SECP’s Insurance Division can draw on to support its role in supervising the insurance industry. There also appears to be ample powers within the ordinance for the SECP to develop rules and regulations for Microinsurance. The regulatory and supervisory system for insurance in Pakistan does not explicitly recognise microinsurance, and hence does not address any of the special requirements that may be needed to support the effective development of microinsurance. Relevant areas for Microinsurance rules may include; product regulation, consumer protection, intermediaries, institutional regulation, interaction with microfinance regulation and regulatory reporting. Detailed recommendations are provided in Section 7.


CHAPTER 7

Principle recommendations The preceding analysis clearly indicates that development of microinsurance market in Pakistan is dependent on the overall development of the wider insurance market. It is difficult to grow the microinsurance market without a strong and viable insurance industry or a strong retail insurance focus. Consequently, it is recommended that the focus should be on developing the broader insurance market, with a view of ensuring that microinsurance initiatives are supported by such development rather than constrained. The following recommendations outline areas where it is believed relevant actions can be taken to support microinsurance in the near term, as well as more general insurance market recommendations that will also ultimately benefit the development of microinsurance in Pakistan. Section 7.1 sets out some guiding principles and objectives when setting microinsurance policy, regulations & supervision. Section 7.2 provides specific recommendations for microinsurance development. Section 7.3 provides specific recommendations for general insurance market development. 7.1 Microinsurance policy, regulation and supervision –

Objectives and Principles The purpose of growing microinsurance provision is to extend financial inclusion in the insurance domain. The objective with financial inclusion is that individual consumers, particularly low-income consumers currently excluded from using formal financial sector services, must be able to access and on a sustainable basis use, financial services that are appropriate to their needs and provided by registered financial service providers. Detailed below is an abstract from international guidelines48 to grow the formal microinsurance market. This can be done by (i) formalising existing informal providers of insurance; (ii) encouraging existing commercial insurers to reach out to lower market segments, as referred to in these guidelines as outreach; and (iii) encouraging new entrants, both domestic and foreign, that are particularly focused on the low-income market. To develop microinsurance markets, regulators should pursue the following general objectives:

1. Facilitate both outreach and formalisation, ensuring a level playing field for big and small players where they seek to serve the same market;

2. Promote products, providers and distribution channels that will trigger the favourable introduction of insurance to low-income clients and its benefits;

48 Emerging Guidelines for microinsurance policy, regulation and supervision (A2ii, 2009)


3. Adopt risk-based regulation, tailoring regulation to the distinctive risks posed by microinsurance products and intermediation; and

4. Minimise the regulatory burden on underwriting and intermediation. In other words, the guiding principles are:

1. Target market: Identify, define and understand the target market; 2. Broader policy: Develop microinsurance policy as part of broader goal of financial

inclusion; 3. Definitions: Define allowable microinsurance product categories; 4. Risk nature: Tailor regulation to the risk character of microinsurance, thus entities writing

the same kind of risk face a similar regulatory burden; 5. Multiple players: Allow multiple players with flexible approaches including multiple legal

forms to underwrite microinsurance, if appropriate; 6. Informal: Provide a path for formalisation of informal approaches; 7. Distribution: Allow flexibility in distribution approaches; 8. Enrolment: Build on a mandatory market and also foster a voluntary market 9. M&E: Monitor market developments and respond. Facilitate information sharing; and 10. Enhanced supervision: Use market capacity to support supervision in low-risk areas;

7.2 Microinsurance policy, regulation and supervision -

Recommendations The recommendations are set out under two categories, specific to regulation and others more broadly related to the development of the Microinsurance sector. 7.2.1 Recommendations related to Regulation A Product Regulation At a basic level, microinsurance refers to insurance that is accessible by low-income households. To turn this conceptual definition49 into a practical one, and wide enough to facilitate the development of a dynamic microinsurance market, the definition should reflect the features of insurance required by low-income households and should generate low prudential risk and be straightforward to distribute.

1. Microinsurance Definition: Derive and implement a simple definition of microinsurance products that would be allowable under life and non-life classifications.

a. Consider allowing group microinsurance policies within the definition, along with a micro-takaful definition as an alternative of microinsurance;

b. Definition to be quantitative-light, with guidance as to keep the flexibility to define a microinsurance product; and

c. This definition to be subject to annual review for appropriateness. 2. Product Submission:

a. Require that all current and new microinsurance products be submitted to SECP for approval on a File and Use basis, with preset filing requirements, including insurer pricing basis;

b. The File and Use will mean that SECP will have the information and the insurer will only have to wait for a specific period, and in case of no regulatory advise, the insurer will not be required to necessarily wait for regulatory approval before launching the product.

3. Policy Conditions: Advise insurers in pragmatic use of waiting periods, grace period, exclusions and simplified claims procedures.

49 Reference “The South African Microinsurance Regulatory Framework” (2011)


a. Waiting periods: maximum of 6 months for death/disability due to natural causes, for policyholders less than of 65 years of age. No waiting period allowed for accidental death or disability;

b. Grace period: one month grace period, if claim during period, outstanding premium to be deducted

c. Exclusions: no exclusions for pre-existing conditions unless insurer can clearly justify otherwise

d. Claims procedures: The policy document must clearly state the claims documents required, the claims process and timeframe for settlement.

4. Underwriting Guidelines: Advise insurers on underwriting guidelines in particular for; group vs individual products, allowance for discretionary underwriting and renewal process.

a. Group policies have a master policy with individuals join the master policy b. Insurers can underwrite as they see fit but for group underwriting the risk as

evaluated on a group basis based on the general characteristics of the group. c. When underwriting on a group basis no price discrimination will be allowed

between individuals within a group other than on the basis of age at entry or level of cover

d. Renewals: auto renewal for contracts 12months or less, some allowance for re-pricing & underwriting after the contract ends

e. When developing and launching a Microinsurance program it is critically important to build the product around the clients risk management needs. Often the key reason why a microinsurance program fails is due to poor client research and a poor product fit to clients needs. It is not in the insurer or clients’ interest to offer a poorly designed product. On the converse the most successful microinsurance programs are usually where there has been client research and there is a reasonable level of client value in the product.

5. Client Research Guidelines [G]: SECP recommend to insurers that they conduct client research of the target population, for their MI portfolio, considering the following;

a. Given unique nature of risks and insurance required in rural areas; need to specifically tailor rural microinsurance products to these needs and risks.

b. Because of the lower literacy levels and lack of understanding; Microinsurance product, processes and procedures have to be very simple.

c. Formal sector insurance will not be appropriate for informal market. MI product development should fully research and incorporate the characteristics of the informal sector.

d. Develop specific MI products for specific agriculture risks – with possibly some variation in coverage terms and benefit levels by province

e. Design MI product to factor in current and typical risk coping mechanisms of the target population

f. Consider development of MI products for target population split by age groupings Detailed client research is not required for every individual MI product but can be conducted on an industry wide level that can be then referenced or used by Individual insurers. SECP can take a lead role in sponsoring/facilitating microinsurance client studies on a collective basis (hosting forums, practicioner information sharing) which then can be shared with insurers as a reference and/or guide on their future MI product development. SECP to require insurers to report on the level of client research they conduct on their Microinsurance client base, as part of the Microinsurance product filing. B Insurance Intermediaries Low-cost distribution is essential to successful microinsurance development. However, cost is not the only criteria. Distribution channels should be able to actively sell policies to clients and deliver policies as close as geographically possible to the normal locations of low-income clients.


International experience50 also shows that microinsurance uptake increases with the level of trust that potential clients have in the distribution channel, be that a retailer with a trusted brand, a bank with which the person has an existing banking relationship, a public utility, or another institution such as a religious group or trade union of which the person is a member. Recommendation is to allow flexibility for insurance intermediaries to enable more effective and broad-based microinsurance initiatives and define a new category of Microinsurance Agent, subject to the provisions of the Insurance Ordinance, 2000.

1. Allow innovation in direct sales and marketing through new technology options such as mobile payment systems.

2. Create a new category of Microinsurance Agent; a. Allow any body corporate conducting microfinance to act as microinsurance

agents; b. Allow any other body corporate to act as microinsurance agents including non-

traditional intermediary channels such as retail shops, unions, etc. c. Allow any individual to act as microinsurance agent; d. Licensing of new microinsurance agent to through the insurer, with right to review

by SECP; 3. Require that Microinsurance Agents undergo an approved microinsurance training

program, run by the insurer, with a minimum number of hours training; 4. Develop and introduce reporting and disclosure requirements of microinsurance

intermediaries by insurers to SECP, including numbers, qualifications, training, remuneration, turnover, sales volumes and area of operation;

5. To cap the level of remuneration and commission at 10,15 and 20 percent, depending on premium frequency and product term. Actual amount can vary depending on level of administration handled by the agent and/or if it is a group policy;

C Client related To complement the consumer protection mechanisms built into the product definition, requirement for product submission, as well as institutional, prudential and market conduct requirements, it is proposed that provision be made for adequate disclosure, consumer recourse, code of conduct and client communication.

1. Consumer protection a. Introduce minimum disclosure requirements for microinsurance products

including marketing material, benefit illustrations and policy documents; b. Provide guidance for simplified claims procedures and claims documentation

requirements for microinsurance products; c. Right to review insurer’s policies and procedures on complaints handling; d. Liaise with Insurance Ombudsman regarding the Ombudsman role in

microinsurance consumer protection; e. Require that Microinsurance Agents follow a Code of Conduct that is managed

by the insurer, with SECP’s right to review; f. Develop and implement a Code of Consumer Protection that insurers and agents

must follow and which must be communicated to the clients; g. Provide guidance to insurers on an internal grievance handling mechanism for

clients complaints and grievances; h. Liaise with industry bodies such as IAP and PMN on consumer education and

protection. Consider developing and implementing insurance awareness campaigns for low income households, especially in rural areas;

2. Client communication: SECP to recommend to insurers and distributors that there should be an explicit communication strategy at the microinsurance agent level to explain the

50 Emerging Guidelines on Microinsurance policy, regulation and supervision (A2ii 2009)


microinsurance product features, premium, benefits, inclusions, exclusions and claim processes to the client;

a. This should be monitored by the insurer; b. SECP should have a specific right to review the related insurer processes and

documentation; c. SECP will also have the 'look through' right i.e. required legal permissions

enshrined in acceptable agreements with distributors by insurer to review microinsurance provider process and documentation.

D Prudential regulation In principle the capital requirements for microinsurance should reflect the underlying risks involved with providing the product to its users. However, in practice it may be appropriate to recognise that much microinsurance may be presented and provide as part of a larger financially related package.

1. For life insurers, require that the FCR specifically consider the implications of the microinsurance business on the financial soundness of the insurer;

2. No other specific recommendations for prudential requirements for microinsurance for existing insurers;

3. Prudential requirements for specialised microinsurance providers to be developed separately;

E Institutional and Market Conduct regulation In developing regulatory requirements for microinsurance providers, SECP to adopt a proportionate, flexible and proactive approach. For example, consideration to be given to the capacity of both the insurance product providers and the product distributors to protect the interests of those insured over all the links in the insurance value chain, the level of government interest and support for microinsurance, and the typically low level of insurance knowledge and awareness of many microinsurance recipients. Some recommendations include:

1. Ensure that microinsurance risk takers are adequately licensed as an insurer, as opposed to any other body, to provide their insurance services;

2. Allow for transition of informal risk takers to become licensed insurers or to transfer the risk to a licensed insurer;

3. Encourage information sharing to eliminate regulatory arbitrage by (micro)insurance providers;

4. Require prompt payment and settlement of claims with limited documentary requirements and a simple claims administration process;

F Interaction with microfinance regulation A key area of cooperation with SBP is regulation of insurance intermediaries such as MFBs. Some key areas include:

1. Engage with the SBP in the continuing development of microinsurance regulatory framework, regulatory and supervisory capacity and potentially seek to promulgate joint regulations and rules with the SBP where practicable;

a. This could be pursued through the high level Task Force on Microinsurance, which may include various key players, including the SBP, IAP, PMN and other stakeholders;


I Regulatory reporting

1. Data collected with regard to microinsurance should be segregated from other data. This will require the prescription of changes or addition in subclasses of insurance for both life and non-life insurances;

2. Data requirements may include: a. Current normal reporting requirements but with Microinsurance identified as a

separate class of business; b. Product filing of product details and pricing prior to launch, on a ‘file and use

basis’; c. Annual reporting on claims turnaround times and claims statistics; d. Annual reporting on expenses, both expected and actual; e. Annual reporting on sales volumes, past and projected and estimated

sustainability of the product, and level of subsidies, if applicable; 3. Insurance reporting requirements may include:

a. Obtain external Technical Assistance (TA) to review current information reporting systems within SECP for insurance reporting;

b. Review analysis and reporting on current databases; c. Collect future microinsurance reporting data in electronic form, using a template

set up for ease of input and ease of analysis; 4. Liaise with insurance industry on any changes to format and reporting requirements

specific to microinsurance; while allowing transitional time for implementation of new reporting requirements;

J Other regulatory issues

1. Microinsurance Supply key areas may include: a. Encouraging all microcredit products have credit life insurance; b. Recommend and encourage that insurers and/or MFP’s offer more advanced

credit life products to clients, including spouse cover and funeral cover; 2. Other Regulatory issues may include:

a. Identify areas where current rules and regulations will overlap with microinsurance and need referencing in new set of microinsurance regulations, to avoid arbitrage;

b. Note the recent introduction of sound and prudent management regulations, for insurers which may be reviewed for relevance and applicability to microinsurance development;

K Other recommendations

1. Relationship management: Recommended to insurers to invest in developing good relationships with MFPs and MFPs to carefully manage client relationship at the field level;

2. Microinsurance supply may include: a. Conduct and share publicly the detailed assessments of current microinsurance

market size on a regular basis, at least annually; b. Conduct and share publicly the detailed assessments of potential microinsurance

market size on a regular basis, at least every 3 years; 3. Capacity Building: Facilitate, with stakeholders consultation and expertise, training in

microinsurance product development for current and potential suppliers in Pakistan; 4. Strategic development: Develop a strategic framework on microinsurance and obtain

industry and stakeholder input to ideally aim for an agreed national strategy for microinsurance. This will help guide the Microinsurance regulations and facilitate the implementation process;


7.2.2 Conventional Insurance Market Development - Recommendations Set out below are broader recommendations for the development of the conventional insurance market below;

1. Service Management: Recommend to insurers to monitor the service level by providers, for example through the use of service level agreements from insurer with key providers.

2. Insurance Supply and Studies: a. Target market growth: Consult with industry to set a target insurance penetration

for next 3 to 5 years by life/non-life sector. Conduct a study of the key reasons for growth in similar markets and assess if this can be incorporated in strategy for broader, beyond microinsurance, insurance development in Pakistan;

b. Conduct and share publicly detailed market analysis of the non-life sector, its profitability, by product line and sustainability of current numbers of insurers;

c. Conduct and share publicly a detailed study of current levels of underinsurance across the market, and for motor insurance in particular;

d. Conduct and share publicly a detailed technical study of the profitability of the health insurance business, consider development of industry morbidity study and pricing guidelines for Health Business, perhaps in partnership with Pakistan Society of Actuaries;

e. Conduct and share publicly a market study of premium collection mechanisms for the conventional insurance market and assess their applicability to Microinsurance markets;

3. Government and National Insurance programs: a. Ensure involvement in the review and relaunch of the crop insurance program; b. Conduct a review of Postal Life Insurance program; c. Require detailed reporting of product details and experience of BISP insurance

program to SECP. Conduct detailed analysis of experience and encourage public sharing of these experiences;

4. Pricing Techniques: Review current industry pricing practices, via an external and independent party, and identify areas for improvement; this will have an impact on microinsurance product development

a. Life: Conduct a detailed technical study, with actuarial input, into current conventional insurance products including pricing basis and methodology. Share the findings with the industry and consider minimum pricing guidelines for insurers;

b. Non-Life: As for life, but more pressing, conduct a detailed technical study of current conventional products, pricing basis and methodology. Consider amending regulations to require submission of all non-life product pricing to SECP, at least on a file and use basis;


APPENDICES

A Summary of Findings The table below summarises the key findings of the diagnostic under the key headings. Contextual factors Interviews with insurance market participants and stakeholders, secondary research of industry data and available studies, World Bank and Government of Pakistan’s publications.

1. Very uncertain political and security situation; 2. Deteriorated and unstable economic situation; and 3. Moderate donor-engagement, though some notable ones such as World Bank, Asian

Development Bank, GIZ, DFID, KMZ Microinsurance Demand Twelve Focus Group Discussions (FGDs) were conducted, with 128 participants overall, in urban, semi urban and rural in two provinces, namely Punjab and Sindh, along with various occasions of secondary research.

1. High proportion of population in rural areas (60 to 70 percent) and in vulnerable conditions (80 percent), exposed to weather events and with limited availability and access to government rescue services

2. Lower literacy levels such that 49 percent in Rural and 73 percent in Urban 3. Rapid urbanisation is leading to expanding low-income households in urban parts of the

country 4. Majority of workers in informal sector, as high as 70 percent, is lesser educated, with

low skills and limited access to financial capital 5. Pressure-oriented lifecycle events are found to be similar for men and women, though

they vary on the basis of location and income groups. Significant lifecycle events in agricultural areas include bad harvests and natural disasters. Low-income households are found to be mostly unprepared to handle the financial pressure posed by any non-predictable event & even in case of most predictable events, they tend to do risk coping through income, savings, Credit Associations, MFPs, borrowing from family/friends; and in case of unpredictable events they do coping through the means as for predictable events, in addition to borrowings from moneylenders, sale of valuable assets.


6. Younger individuals are found to have fewer informal and formal mechanisms through which they can cope with financial pressures

7. The FGD participants who are insured, were not comprehensively familiar about the insurance services

8. Key insurance needs were found to be health, life and agricultural risks in rural areas; and business risks in urban areas. Savings options were also found to be in demand for marriage and education

9. Trust of prospecting policyholder in the insurance selling institution is important as this was found that the MFP clients more willing to buy insurance product from MFP, rather than directly buying it from insurer

10. There is significant room for improvement on the supply-side of the existing insurance services such as health care providers

Insurance Supply

1. Market Size: Insurance penetration is very low by international standards and to peer countries in the region (0.7 percent of GDP). This clearly indicates a market that is underdeveloped.

2. Providers: a. There are currently 46 insurance providers and 1 reinsurer operating in

Pakistan (7life, 34 non-life, 5 takaful) b. The life market is heavily concentrated with one large government insurer but

the other insurers are competitive, profitable and growing. c. The non-life market is relatively stagnant with little growth in recent years and

consists of 3 key product types (Motor, Property and Marine). This market is very competitive especially for the smaller players.

3. Products a. The types of classes of insurance are relatively conventional and there appears

to be room for significant product development and innovation for both life and non-life insurance.

b. Appears to be significant underinsurance in standard classes in particular for motor insurance (penetration estimated to be below 20%). This is a typical and straightforward class of business which has significant potential for growth.

c. Health insurance business can be written by a life insurer or a non-life insurer. It is understood that this business is largely corporate accounts with very little retail or individual health business. This is a very competitive market and is often part of a broader package of business for a large client. This often leads to under pricing (below sound rates) for the health business as it is part of a total package of business written.

4. Government role a. Government plays a key role in the insurance market through a number of

ways, including; demand for insurance of government risks, ownership of insurers, involvement in national insurance programs (e.g. crop insurance).

b. Government has a key role in the future development of the insurance market in Pakistan.

5. Distribution & Premium Collection a. Agent network is the typical distribution channel with Bancassurance a growing

channel in recent years. b. MFP’s are seen as the sole or key approach to reaching microinsurance or low

income clients. Insurers see the role of an MFP as critical in distributing microinsurance products.

c. Premium usually collected upfront for individual risks with some flexibility for large corporate clients.

d. Microinsurance premiums normally paid upfront to insurer and collected annually or monthly from client


6. Market Capacity a. Life market is profitable and has strong capacity (technical and non-technical) b. Non-life market is profitable for top 3 insurers but lesser technical capacity (and

limited actuarial input) and low or unprofitable for smaller players 7. Other comments

Microinsurance Supply

1. Non-Govt MI providers & distributors a. Risk takers are primarily Insurers. Anecdotally there a few informal (non-

insurance coy) risk takers. b. Distributors are primarily MFP’s and some NGO’s. Except BISP distributed

directly through Pakistan Post 2. Non-Govt MI Products

a. Credit Life a dominant product (typically covering loan only) b. One large scale Health program (NRSP/Adamjee), small number of smaller

health programs with limited scale. One high profile health program faced significant problems and has been scaled back significantly (FIMA)

3. Government & National Insurance programs a. Crop Insurance run on limited scale, being reviewed and to be re-launched b. Postal Life (est. PKR300m premium, 1% of total life premium) c. BISP life has significant scale at over 2 million lives (potential 4 million) d. BISP Health planned for 2012 – potential very significant scale

4. Other comments

Microinsurance Demand & Supply Interaction

1. Non-Government driven demand a. Demand for life microinsurance cover is primarily coming from microfinance

organisations (primarily credit life). However the results are quite mixed with many clients not being aware they are insured, how to claim and/or a low benefit level.

b. Demand for health microinsurance is being partly met by some schemes and some are spending (e.g. FMIA) great deal of time building the program around the client’s needs – however these are the exception.

c. Demand for crop insurance has not been fully tested due to the limited scope of the current crop insurance program.

2. Government driven demand a. BISP Life program creating a significant market from scratch with significant

potential demonstration effect. b. BISP Health will also create a significant market with also major potential

demonstration effect. c. Postal Life – support by Pakistan Post (with Government support) sold on a

voluntary basis so is in a sense responding to demand. d. Crop Insurance- need is there, demand is largely from MFP’s and lesser so

from clients. 3. Market Size:

a. Current Market size for Life MI is estimated at 3.8 million. Approx 1.8million microfinance clients with microinsurance, 2 million other clients with BISP Life and Postal Life (numbers unknown).

b. Potential Market Size estimated at least 30million – 27.5million potential microfinance plus any non-microfinance clients covered by BISP (total 4m) and Crop Insurance program (numbers unknown).


Social & Insurance Policy Lack of specific national policy for Microinsurance though there is a social policy to provide Health Insurance to low income households and SBP recommend MFP’s to offer microinsurance.

1. Social Inclusion & Poverty reduction – a. Social Protection Strategy and Medium Term Development Framework. Main

focus is to develop an integrated and comprehensive social protection system, covering all of the population, but especially the poorest and most vulnerable groups

2. Social Safety Net Programs a. Zakat and Food Support Program targeted the poor, widows, orphan and other

needed people. Although disbursement of cash through these programs has continued to date, these programs have faced various issues - a significant share of social spending from these programs has benefited the non-poor due to misallocation

b. BISP – started in 2008. Cash transfer and skills development for the vulnerable group and poor households regarded as a crucial tools. Key MI components are BISP Life and upcoming BISP Health

3. Framework for Economic Growth (2011) a. “A multifaceted and comprehensive healthcare financing strategy must be

prepared so as to move towards a National Health Services (NHS) program. In this regard, social health insurance should be introduced for extremely poor at the platform of BISP”

b. Monopolies: “Fixing minimum paid up capital requirement for banking and insurance companies fosters monopolies in this sector”

4. Strategic Framework for Sustainable Microfinance (2011). Strategy developed by SBP for microfinance sector.

a. “The industry needs to shift away from the credit‐only approach and offer comprehensive financial services such as micro‐savings, remittances, and microinsurance. All‐inclusive services can address the diverse needs of customers and provide additional revenues streams to MFBs.”

b. National and government supported insurance programs – BISP, Crop Insurance, Postal Life, NRSP, PPAF

Regulation & Supervision

1. Political & legal environment a. The process of creating and passing new legislation in Pakistan is complex and

lengthy. Given the complexity of the process for adopting new legislation, if changes to the regulatory environment are desirable to facilitate the growth of microinsurance, it would be more effective to first consider changes within the regulations or guidelines that would accomplish the desired effect, rather than looking to amend primary legislation

2. Financial Sector Authorities a. Key authority is SECP which has been regulating the Insurance industry, since

January 2001. b. Other authorities are Ministry of Commerce and State Bank of Pakistan (the

regulator of banks, microfinance banks and microfinance institutions). MoC has a major role in managing the 2 Govt Insurers and the Reinsurer.


3. Key insurance laws a. General Legislation; SECP Act, Companies Ordinance & Income Tax

Ordinance b. Insurance Legislation: SECP regulates and monitors the Insurance Sector

primarily through powers vested in the Insurance Ordinance, 2000 c. There appears to be ample powers within the insurance ordinance for the SECP

to develop rules and regulations for Microinsurance (without need to change the Ordinance).

4. Insurance regulations & guidelines a. The function of Rules & Regulations is to clarify the provisions in the Ordinance

on Insurance, and are more frequently and easily amended than primary legislation. The SECP can also issue orders and directives; however there are none that are specific to the insurance sector

b. Relevant areas for Microinsurance rules include; class of business, market conduct, intermediaries, consumer protection and reporting

c. The process for the development and approval of new rules & regulations is quite lengthy. All new rules & regulations require final approval at the Policy Board level which can take quite a long time to be approved (between 6 months and 2 years)

d. SECP developed a draft set of Microinsurance regulations in January 2011, largely based on the Indian regulations. These were subject to some public consultation but were not passed for approval to the Policy Board

e. There are currently 6 active pieces of insurance rules, regulation and guidelines, which govern a significant aspect of insurance-related activities. All 6 will possibly be impacted by new Microinsurance regulations


B Contextual information Macro Economic Situation Overview of Macro-economic Situation in Pakistan Although Pakistan has enjoyed a high growth rate during the period of early 2000s, the macro-economic situation has been poor in recent years (see table 1). Since 2008, Pakistan’s macro-economic situation has further weakened, severely hit by global financial crisis, a spate of devastating floods and an uncertain political and security situation that reduced private and foreign investment51. Growth has slowed down since 2007, and inflation remained stubbornly high. In addition, the fiscal deficit has been chronic since FY 2006, reflecting the structural problems of revenue side where Pakistan has one of the lowest tax-to-GDP ratios in the world52. The current account has strengthened since FY 2008 due to improving trade balance and a growing amount of workers’ remittances from overseas. However, it remains uncertain if this trend will continue as the textile sector, which generates approximately 60% of export earnings, has been facing stiff competition from regional peer countries such as Bangladesh and Sri Lanka. Also, this sector (along with other manufacturing sectors) has been seriously hit by the domestic energy crisis, which has had a severe impact on this industry’s competitiveness. In the next few years, recovery in growth will likely be modest at best and inflation might reduce, but remain in two-digit territory. On the supply side, driving forces will possibly be robust activities in the service sector and a floods-free quick recovery of the agriculture sector. From the demand side perspective, the growth will rely on domestic consumption and dynamic exports and remittances rather than on a mild recovery in private and public investment53.

App_Table 1: Key Macro-economic Indicators54

FY2006 FY2007 FY2008 FY2009 FY2010 Real GDP growth rate 6.2 5.7 1.6 3.6 4.1 GDP per capita(PPP adjusted) 2,310 2,468 2,516 2,606 2,688 GDP per capita (Nominal) 789 871 979 949 1,019 Inflation rate (Consumer Price) 7.9 7.6 20.3 13.6 13.9 Real Interest Rate 0.5 3.8 -2.8 -4.5 1.9 Current Account Balance (% of GDP) -5 -6 -10 -2 -1 Fiscal deficit (% of GDP) -4.3 -4.3 -7.6 -5.3 -6.3

Structure of the Labour Market in Pakistan The table below details the official unemployment rate by area and gender;

51 Pakistan Economic Update -September 2011, The World Bank 52 Tax-to-GDP ratios in FY 2010 are 14.2%, and it is expected to be 12.5% in FY 2011 53 Pakistan Economic Update -September 2011, The World Bank 54 World Development Indicator, the World Bank and Pakistan Economic Survey 2010-2011, Ministry of Finance


App_Table 2: Unemployment Rate by Area and Sex55

2009-2010 Area/ Gender

Total Male Female

Pakistan 5.6 4.4 9.5

Rural 4.8 3.9 7.2

Urban 7.2 5.3 20.8 (Source: Labour Force Survey 2009-2010, Federal Bureau of Statistics)

Pakistan’s employment situation remains relatively stable with the official unemployment rate at 5.6% in FY2009-2010 (see Table 2). The official unemployment rate is higher in urban areas compared with rural areas partly because unpaid family helpers in the rural area are classified as employed56. Also, it is notable that unemployment rate of females is significantly higher than that of male especially in urban area. It implies the realities that labour market in Pakistan could not absorb female workers effectively.

App_Chart1: Industry wise employment share

(Source: Pakistan Economic Survey 2010-2011, Ministry of Finance)

From an industry-wise employment perspective, agriculture is still the largest provider of employment with 45% of its share in the labour market. Also, wholesale / retail and manufacturing sectors are the important sources of employment with 16% and 13% of the share respectively. Although the overall picture of employment seems to be stable, a couple of issues are looming over the country’s employment situations. First of all, employment in the informal sector has still dominated as a major provider of employment with almost three quarters of share in the labour market57. These labour forces in the informal sector are usually less educated and unskilled, and have a limited access to financial capital. Owing to this, their productivity and income level is generally less than that of formal sector labour forces. In addition, their job security is not assured, and they cannot enjoy the benefit of decent working conditions, pensions and employment insurance. As a result, these workers in the informal sector are always susceptible to change in economic and environmental situations surrounding them. The second concern about employment situation in Pakistan is that many younger generations are suffering from unemployment compared with those in the older age bracket. According to Labour Force Survey 2009-10, the unemployment rate of the age groups between 15-19 and 20-24 are the highest among all the age groups with 8.9% and 7.9% respectively. Persistent

55 The official unemployment rate using standard formula. This appears low and may be disguising true or productive employment. In certain sectors (e.g. agriculture, service, government) often more people are working than is necessary, and these people are counted as employed although their labor productivity is very low 56 Pakistan Economic Survey 2010-2011, Ministry of Finance 57 Labour Force Survey 2008-09, Federal Bureau of Statistics


unemployment undermines the confidence of these unemployed young people, which might drive them into the extreme activities such as crime. Composition of Economy by Sectors Agriculture Agriculture sector continues to play a vital role in Pakistani economy by contributing to a significant proportion of work force (44%) and GDP (21%)58. Among them, cotton, sugarcane, rice, wheat and maize have been the major products in the sector, and Punjab is the breadbasket of these products. Nearly 60-70% of Pakistani people live in the rural area, and the situation surrounding agricultural sector has a significant influence on their livelihood. This sector was heavily affected by a spate of devastating floods in Punjab and Sindh in 2010 and 2011. However, extended heavy monsoon rains have improved water availability (including underground water) in reservoir, which might help the sector recover from the devastating floods quickly. The agriculture sector will continue to be the most important sector as the largest employers and the main sources of output in the short-to-mid term. From a long-term perspective, however, it is not certain if Pakistan is prepared for various issues such as looming climate change which might have a significant negative influence on the production of crops and the livelihood of rural areas. Service Sector This sector accounts for approximately 53% of domestic output and serves as the second largest provider of employment. Among them, three segments (Wholesale / retail trade sector, transportation, storage and communication sector, and Community and Social and public services sector) constitute the majority of the output59. Although the sector contributes to almost half of GDP growth, its base is narrow with two sectors – Public administration & defence, and social services – driving employment and incomes. Also, another important segment of the sector, financial and insurance services, has slightly declined after FY2008 due to the global financial crisis. Although the banking sector has remained the main driving force of financial sector, it is significantly important to nurture other financial sector players such as mutual funds and insurance to create sound and resilient financial system in this country Manufacturing Manufacturing is the third largest sector of the economy, and accounts for 19% of GDP and 13% of total employment. Among them, textile industry is the most important sector in that it has generated the country’s highest export earnings of 58% and significantly contributed to GDP (8.5%)60. Other important manufacturing sector is agro-based industries (including sugar industry and grain milling industry) which accounts for 38% of manufacturing61. Although manufacturing sector has played an important role in generating the country’s revenue and employment, growth of this sector has become lacklustre mainly due to the energy shortage and an uncertain political and security situation that has reduced private and foreign investment. As no immediate solution to energy crisis is in sight, the momentum of manufacturing sector growth will continue to remain weak.

58 Pakistan Economic Update -September 2011, The World Bank 59 Federal Bureau of Statistics 60 Year Book 2009-2010, Ministry of Textile Industry, Textile Industry Division 61 Pakistan Economic Update -September 2011, The World Bank


App_Table 3: Real GDP Sector-wise Data (2009-10)62

PKRs (in Million)

Composition by Sector (in percentage)

Agriculture 1,201,945 21.2 Crops 519,132 9.1 Livestock 646,783 11.4 Fishing and Forestry 36,030 0.6 Industry 1,500,345 26.4 Manufacturing 1,054,276 18.6 Mining and Quarrying 140,378 2.5 Construction 144,985 2.6 Electricity & Gas Distribution 160,706 2.8 Service Sector 2,979,241 52.4 Wholesale & Retail Trade 963,368 17.0 Transport Storage & Communication 574,101 10.1 Finance and Insurance 277,555 4.9 Ownership of Dwellings 155,916 2.7 Public Administration & Defence 340,508 6.0 Community, Social & Personal Services 667,793 11.8 GDP Total 5,681,531 100.0

The table below summarises the proportion of GDP and employment share for the 3 major sectors of the economy;

App_Table 4: Sector-wise GDP and employment share63

Sector Share of GDP (percent)

Employment share (percent)

Agriculture 21 45 Industry 26 20 Service sector 53 35 Total 100 100

Socio Economic Situation Demographic and Poverty Profile Since its independence, Pakistan has struggled with achieving economic growth and improving the living standard of its people throughout the country. Despite varied government efforts on poverty alleviation, approximately 20% of population still lives below the poverty line, and almost 45% of population lives in vulnerable conditions (see Table 4). A large proportion of population (approximately 60-70%) lives in the rural areas, and 80% of them live in the vulnerable conditions. At the same time, a number of people has migrated to urban areas to seek an opportunity for better jobs, which has led to the expansion of slums in urban areas (such as Karachi and Lahore). This process of rapid urbanization has started to threaten the sustainability of large cities in Pakistan. Government of Pakistan has been trying to deal with the poverty issues with limited resources and institutional capacity. Current poverty reduction strategy of the government focuses mainly on the five areas which includes i) accelerating economic growth and maintaining macroeconomic

62 Source: State Bank of Pakistan 63 Reference Table 3 and Chart 1


stability; ii) investing in human capital; iii) augmenting targeted interventions; iv) expanding social safety nets and v) improving governance64. However, a series of crises surrounding Pakistan has further undermined the government capability to address poverty reduction and income distribution. In recent years, escalating global food and fuel prices has been eroding the purchasing power of many poor households in Pakistan. In addition, a spate of devastating floods in 2010 and 2011 (in Punjab and Sindh respectively) has further deteriorated the livelihood of the poor people living in the rural areas. Besides, intensification of war on terrorism has continued to cause massive social and economic disruption in the country.

App_Table 5: Poverty Profile of Pakistan65

Poverty Band Percentage of

Population (in percent)

Estimated head Count

(in million) Extremely Poor [<50% of Poverty line] 0.5 0.81 Ultra Poor [>50% and <75% of poverty line] 5.4 8.69 Poor [>75% and <100% of Poverty Line] 16.4 26.39 Vulnerable [>100% and <125% of poverty line] 20.5 32.99 Quasi Non-Poor [>125% and <200% of poverty line] 36.3 58.41 Non-Poor [>200% of poverty line] 20.9 33.63 Total Population 100 160.9

(Source: Pakistan Economic Survey 2007-8, Ministry of Finance) Socio Economic Situation of Low Income People in Pakistan

App_Chart 2: Income Level of poor households in Pakistan

64 Pakistan Economic Survey 2010-11, Ministry of Finance 65 Poverty line is $1.25 of earnings per day


(Source: Statistical Year Book 2010, Federal Bureau of Statistics) Average monthly income in Pakistan is approximately PKR7,000 (approximately equivalent to USD80). There is found to be a large discrepancy in monthly household income between urban and rural areas in Pakistan. In most of the provinces, except for Balochistan, average household income in urban areas is about 50 percent higher than that of rural area. However, there is not much difference in monthly income between each province (See App_Chart 2). Lower monthly income in rural area suggests that a large number of poor households have difficulty in earning their living. In addition, their irregular income from agriculture or daily labour has undermined their financial stability to make their ends meet in their household economy. As a result, poor households in rural area frequently rely on informal money lenders who charge exorbitantly high interest rate on the loans, further deteriorating their household economy. One of the expected roles of microfinance providers (MFPs) is to help improve their economic situation and smoothen their household economic needs. Household Size of Low-income Populations in Pakistan

App_Table 6: Average Size of Household in Pakistan66

Pakistan Punjab Sindh NWFP Balochistan

Urban Area 6.31 6.28 6.04 7.23 8.17 Rural Area 6.72 6.35 6.97 7.71 7.59

(Source: Pakistan Household Survey 2007-08) As in other developing countries, size of low-income household in Pakistan is larger than that of middle and high-income countries because of higher fertility rate compared with more developed societies. Like in other developing countries, children are seen as economic investment goods that would bring about returns in the form of child labour and financial support for their parents67. According to one study conducted in 2007-08, average size of Pakistani household is 6.58 with 3-5 children per household68. There is a contrast between rural area and urban area in most of the provinces in Pakistan. Although these children contribute to the low-income household economy, the actual cost of rearing these children (education, hospitalization and marriage) makes it difficult for the poor family to manage the household economy, which brings their livelihood under the vulnerable condition. Literacy and Education

App_Table 7: Literacy Rate in Pakistan and Provinces (Percent)

2009-10 Province /Area Total Male Female

Pakistan 57.7 69.5 45.2 Rural 49.2 63.6 34.2 Urban 73.2 80.2 65.5 Punjab 59.6 69.1 49.8 Rural 52.5 64.0 40.7

Urban 73.5 78.9 67.8 Sindh 58.3 70.2 44.3 Rural 41.0 58.2 20.3 Urban 74.9 82.2 66.8

66 Total number of samples is 15,512 in this survey 67 Economic Development (10th edition), Michael p. Todaro and Stephen C. Smith 68 According to the population census conducted in 1998, average size of household was 6.8. It means size of household remains the same even after about 10 years


KPK 50.9 70.1 32.3 Rural 48.4 68.3 29.1 Urban 62.7 77.8 47.4 Balochistan 51.5 69.2 29.3 Rural 45.7 64.2 22.5 Urban 69.6 85.0 50.6

(Source: Pakistan Labour Force Survey 2009-2010) One of the difficulties among Pakistani low-income people in getting out of poverty is their low level of literacy rate and education. According to Table 7, the overall literacy rate is 57.7% in Pakistan. At the same time, the data shows the large discrepancy of the literacy rate between urban areas (73.2%) and rural areas (49.2%). The low literacy rate in rural areas makes it difficult for the people living there to seek an opportunity for better jobs which requires reading/writing skills and higher education. The other characteristic about literacy rate in Pakistan is that literacy rate of women is significantly lower than men in both urban and rural areas. Low literacy rate among women has hindered Pakistani women from entering the formal labour market. A large number of women serve for household economy as home-based workers or informal micro entrepreneurs.

App_Table 8: Level of Education in Pakistan and Provinces (Percent)

2009-10 Province /Area Total Male Female

A. literate 57.7 69.5 45.2 No formal education 0.5 0.6 0.5 Below Matric 37.5 44.9 29.5 Matric but less than Intermediate 10.7 13.1 8.0 Intermediate but less than Degree 4.7 5.6 3.8 Degree and above 4.3 5.3 3.4 B. Illiterate 42.3 30.5 54.8 Total (A+B) 100.0 100.0 100.0

(Source: Pakistan Labour Force Survey 2009-2010) As for the level of education in Pakistan, approximately 60% of populations have an opportunity to receive some sort of formal education. However most of the populations stop at basic level of education (primary and middle school education), and do not enrol at higher educational institutes (intermediate, college and university). Only less than 10 % of Pakistani populations enrol at intermediate school or college (university) level institute. As is the case in literacy rate, data shows lower rate of women’s education when compared with men. Women in Pakistan face more difficulty in having formal education (see Table 8). Most of the poor people in urban and rural areas stop having education at primary or middle school level, and have a limited opportunity for well-paid jobs which requires higher educations. In rural area, they work as peasant, servant, day labourer or informal micro entrepreneur whereas, in urban area, they work as driver, servant, low-level office worker or informal micro entrepreneur. War on Terrorism and Security Situation Cost of War on Terrorism and Pakistani Economy Since Pakistan assumed the role of a frontline state in the war against terrorism in 2001, the Pakistani economy has been heavily affected by the damage it has suffered and an aggravated security situation. Since 2006, more than 35,000 citizens and 3,500 security personnel have lost their lives69. Also, infrastructure has been heavily damaged especially in Balochistan, Khyber

69 Pakistan Economic Survey 2010-11, Ministry of Finance


Pakhtunkhwa (KP) and Federally Administered Tribal Areas (FATA), which has increased the cost of trading significantly. Internal and external (from Afghanistan) migration of millions of people has caused unemployment issues and social and economic disruption in the country. Due to the growing anxiety about security situation in Pakistan, inflows of foreign investment have been stagnant for several years. As the table below indicates, inflows of Foreign Direct Investment (FDI) have been stagnant in Pakistan since 2001. In contrast, India has continued to attract FDI, and the net flows of FDI have grown into five times the amount compared with 2001 levels. Although it is difficult to attribute the stagnant FDI in Pakistan solely to erosion of investment climate caused by security threat, it could safely be inferred that deteriorating reputation on the investment climate has, to some extent, caused anxiety among investors all over the world, leading to the stagnant inflows of FDI. In the IT sector, substantial number of IT companies from abroad has forced their companies to close down their facilities due to the growing image of Pakistan as a “Geopolitical Hotspot”70. Government of Pakistan (Ministry of Finance and Ministry of Foreign Affairs) has continued to assess the direct and indirect cost of War on Terrorism and its impact on Pakistan’s economy. According to the assessment, the direct and indirect cost of War on Terror has accumulated to 5,037 billion PKRs during the last decades. The majority of the cost is incurred from decrease in exports, destruction of physical infrastructure, drop in FDI and industrial output, decline in tax collection and increasing cost of uncertainty71.

App_Chart 3: Foreign Direct Investment to Pakistan

(Source: World Development Indicator, the World Bank)

App_Table 9: Cost of War in Pakistan (2001-2011)

Years Billion (USD) Billion (PKR) % Change 2001-2002 2.669 163.9 / 2002-2003 2.749 160.8 3 2003-2004 2.932 168.8 6.7 2004-2005 3.41 202.4 16.3 2005-2006 3.986 238.6 16.9 2006-2007 4.67 283.2 17.2 2007-2008 6.94 434.1 48.6 2008-2009 9.18 720.6 32.3 2009-2010 13.56 1136.4 47.7 2010-2011 17.83 1528 31.5 Total 67.926 5036.8 /

Source: Ministry of Finance, Ministry of Foreign Affairs Joint Ministerial Group 70 PESB Pakistan IT Market Assessment 2010, Pakistan Software Export Board (PSEB) 71 Pakistan Economic Survey 2010-11, Ministry of Finance


Possible Impact of Security Situation on Development of Financial Sector Although it is not certain how much impact the War on Terrorism and aggravating security situation has had on financial sector in Pakistan, it could safely be said that increasing uncertainty about the security situation has had substantial impact on the sector, in particular in the field of access to finance. From a geographical perspective, Balochistan, KP and FATA are the provinces which have been suffering most from security and law and order issues. In these provinces, outreach of major commercial banks is limited to major large cities such as Quetta and Peshawar, and microfinance providers (MFPs) are the major players who could serve for the people living in the remote areas. In Balochistan, KP and FATA, there are only 26, 72 and 2 branches of MFPs respectively. The total number of MFP branches in three provinces is almost equivalent to the number of branch in one city in Punjab, Faisalabad, which is regarded as relatively safer place to live72. It is true that geographical difficulty and underdevelopment of infrastructure have made it difficult for MFPs to expand their outreach in these provinces. However, a number of staff in major MFPs mentioned that they have avoided the risk of operating in these provinces because of the anxiety over security issues mainly caused by the War on Terrorism73. The disproportionate distribution of MFP branches is partly created by MFPs’ security concerns about their operations in these affected areas. Financial Sector in Pakistan Overall Situations about Access to Finance Access to finance is widely recognized as a tool to achieve meaningful economic inclusion, poverty alleviation and sound development of the private sector, especially among SMEs and micro enterprises. In addition, if a number of poor households and small businesses are able to enjoy basic financial services, it could compliment the social policy and help them cope with difficult economic situations (including natural disasters) more resiliently.

App_Chart 3: Access to Finance in Pakistan

(Source: Bringing Finance to Pakistan’s Poor, Access to Finance for Small Enterprises and the Underserved (2009), and the World Bank)

72 The data is from “Microwatch: issue 18 Annual”, Pakistan Microfinance Network 73 The World Bank team confirmed this when they had a stakeholder discussions with MFPs such as Tameer Microfinance Bank and NRSP


Although, various financial services (such as bank loans, deposit and insurance) are available in Pakistan, the average Pakistani household remains outside the formal financial system. Only 14 percent of Pakistanis are using financial products or services offered by formal financial institutions. If informally served products are taken into account, 50.5% of Pakistani is counted as the users of financial products or services74. The rest of the populations are excluded from the entire financial system. Compared with regional peer countries such as India, Sri Lanka and Bangladesh, the share of the population with formal financial access in Pakistan is significantly lower75. From a product-wise perspective, the outreach of most of the products (including savings) is limited to few people (see Chart 4). Banking Sector The main driving force of Pakistan’s financial sector has been the banking sector, especially private commercial banks. The banking sector has overwhelmingly dominated the sector with approximately 90% of total assets in the entire financial sector. After going through the reform period in the 1990s, many state-owned banks have been privatized and shifted into commercial banks. In this process, banking sector has enhanced competitiveness by improving management capabilities and increasing its capital. Although the sector remains relatively robust even after the financial crisis, non-performing loans (NPLs) continued to accumulate, raising the perception of credit risk in the sector. The gross NPL ratio to total loans reached 14.7 % at end-December 2010, which is significantly higher than NPL levels in comparators such as India and Bangladesh (see figure 5). NPL ratios for Small and Medium Enterprises (SMEs) are the highest at 32% followed by agriculture (20%) and the consumer sector (17.5%)76.

App_Chart 4: Country wise NPL to loans ratio

(Source: Pakistan Economic Update: September 2011, the World Bank)

In addition, continued public sector (government and state-owned Enterprises) borrowing from banks for fiscal support makes it more difficult for private sector (especially SMEs) to secure funding from the banking sector. Coupled with the National Savings Schemes (NSS), the public sector has mobilized funding from the banking sector. The public sector’s excessive reliance on these funding schemes has undermined the sound growth of private sector as well as domestic market-based funding structure in Pakistan.

74 Bringing Finance to Pakistan’s Poor, Access to Finance for Small Enterprises and the Underserved (2009), The World Bank 75 Ibid, (According to this report, share of the population with formal financial access in India, Sri Lanka and Bangladesh is approximately 40%, 50%, and 30% respectively.) 76 Quarterly Performance Review of the Banking System, State Bank of Pakistan


Non-Bank Financial Companies77 (NBFCs) NBFCs have remained relatively smaller compared with the banking sector. Mutual Funds lead the sector with approximately 50% of the share in NBFCs total assets while Development Financial Institutions (DFIs) are in the second place with about 20% of share in total assets (see Figure 6). Although the NBFC sector has been growing gradually, they have been struggling to remain commercially viable even in normal circumstances. Asset managers and mutual funds were severely impacted by the capital markets crisis of late 2008, and investor confidence has still remained low.

App_Chart 5: Assets of NBFC’s in Pakistan

Insurance Sector

App_Table 10: Insurance Penetration (% Premium to GDP)

Countries Total (in percent)

Life (in percent)

Non-Life (in percent)

India 5.1 4.4 0.7 Sri Lanka 1.4 0.6 0.9 Bangladesh 0.9 0.7 0.2 Pakistan 0.7 0.4 0.3

(Source: Swiss Re Sigma No2/2011 World Insurance in 2010) The insurance industry in Pakistan is relatively small compared to other regional peer countries with only 0.7% of GDP in the insurance penetration (see Table 10). However, the sector has a huge potential to grow with an effort for liberalization led by the Securities and Exchange Commission of Pakistan (SECP). Currently, there are 35 non-life insurance companies and 7 life-insurance companies in the market including state-owned National Insurance Company Limited and State Life Insurance Corporation. In non-life insurance sector, 3 large private companies account for approximately 60% of the market share while State Life Insurance Corporation enjoys almost 70% of the market share in life-insurance sector. The development of Takaful sector is at an embryonic stage. Currently, there are only 5 Takaful operators in the market. However, this sector is expected to grow robustly as the Takaful operators expand its outreach to the people who prefer Islamic Finance type of product. As for reinsurance, there is only one domestic reinsurance company in Pakistan. A government-owned Pakistan Reinsurance Company Limited continues to benefit from a mandatory minimum of 35 %

77 Non-Bank Financial Companies (NBFCs) include Mutual Funds, Development Financial Institutions (DFIs), Leasing, Investment Finance, Modarabas, Housing Finance and Venture Capital


share in the treaties of non-life companies78. There is a strong need for other competitors in the reinsurance market. Microfinance Sector Pakistan’s microfinance sector has grown considerably over the past decade. In 2001, there were only approximately 60,000 clients, and practically no regulation had existed in this sector. Microfinance operations were conducted informally at that time. However, the sector has grown at a rapid pace after the introduction of ”Microfinance Ordinance” (Microfinance Institutions Ordinance 2001) and the formulation of a “Strategic Framework” (Strategic Framework for Sustainable Microfinance) by the State Bank of Pakistan (SBP) in 2001 and 2007 respectively. The introduction of “Microfinance Ordinance” and the “Strategic Framework” have allowed commercially oriented players to enter the microfinance market as Microfinance Banks (MFBs), and this effectively provided a message that the microfinance sector would be led by private sector. Following this, two types of MFP have come into existence in Pakistan. The former is private sector-oriented MFBs and the latter is NGO-oriented microfinance Institutions (MFPs). RSPs (Rural Support Programs), a particular type of non-profit rural development organizations which have a large presence in the sector, are also operating as MFIs. MFBs are regulated by SBP and are allowed to take deposit while MFIs remains unregulated. Although both the number and the loan portfolio of MFBs are increasing, MFIs have still maintained significant proportion in the market in terms of the number of borrowers and loans portfolio. As of end 2010, the sector serves for approximately 2 million active borrowers with an outstanding loan portfolio of PKR 25.5 billion and nearly 3.3 million active savers with collective savings of PKR 11.9 billion. In terms of micro-insurance, the number of policy holders is approximately 3 million during the same period (see Table 11). Most of the loans in Pakistan follow group lending methodology. As of end 2010, 88% of active borrowers are using group loans while only 12% of active borrowers use individual loans. In terms of gross loan portfolio by methodology, group loans consist of 82% of the entire portfolio whereas individual loans account for 18% (see Table 12 & 13).

App_Table 11: Current Portfolio of the entire microfinance sector in Pakistan (Dec 2010)

Microcredit Micro-Savings Micro-Insurance

Active Borrowers Value

(PKR Millions) Active Savers

Value (PKR Millions) Policy Holders

Sum Insured (PKR Millions)

2,059,536 25,494 3,295,701 11,863 3,030,583 38,265 (Source: Pakistan Microfinance Network)

App_Table 12: Active Borrowers by Lending Methodology(Dec 2010)

Total Borrowers 2,059,536 Group 1,818,020 (88%) Individual 241,516 (12%)

(Source: Pakistan Microfinance Network)

App_Table 13: Gross Loans Portfolio by Lending Methodology (Dec 2010)

Total values (PKR Millions) 25,494 Group 20,839 (82%) Individual 4,655 (18%)

(Source: Pakistan Microfinance Network)

78 Pakistan Economic Survey 2010-11, Ministry of Finance


Branchless Banking One of the unique characteristic of microfinance industry in Pakistan is that the industry is eager to adopt new technology in their daily operations and management. Reflecting this tendency, Pakistan is one of the fastest developing markets for branchless banking in the world against a backdrop of approximately 110 million mobile phone customers all over Pakistan. Among them, Easypaisa, a mobile banking service which Tameer Microfinance Bank and its parent company Telenor Pakistan has launched in 2009, has been rapidly spreading throughout the country. Tameer has over 12,000 easypaisa agents across the country, and 23 million transactions had been processed with a total throughput of 43 billion PKRs by the end July 201179. Currently, two branchless banking services (including easypaisa) are available in the market, and more players are anticipating to entering the market. The government of Pakistan, and the regulator SBP, has played an important role in promoting branchless banking as part of financial inclusion policy. In 2008, SBP introduced branchless banking regulations to promote access to finance and improve efficiency in the financial sector. In 2011, SBP revised the regulation to make this service more user-friendly as well as to keep prudent supervisory oversight. One of the key revisions is an introduction of a “level 0” account, which allows branchless banking clients to open the account with no physical paper work. It is expected that Pakistan would develop sound branchless banking market with the revised regulation.

App_Table 14: Emerging and Established Branchless Banking Services in Pakistan

License Application Bank Alfalah, HBL and Kashf Bank

In Principle Approval MCB, Waseela Bank (Mobilink), TCS Bank and Askari Bank

Pilots /Small Scale Launch Dubai Islamic Bank Ltd (3 agents) and First Microfinance Bank (53 agents)

Large-Scale Deployments Tameer Easypaisa (12,000 agents) and UBL Omni (5,000 agents) (Source: CGAP)

Remittances

App_Table 15: Overview of Remittances in Pakistan

USD (millions) 2005 2006 2007 2008 2009 2010e

Inward remittance flows 4,280 5,121 5,998 7,039 8,720 9,407

of which

Workers’ remittances 4,277 5,113 5,992 7,025 8,701 _

Compensation of Employees 3 8 6 14 16 _

Migrants' transfers _ _ _ _ _ _

Outward remittance flows 3 3 2 2 8 _

of which

Workers’ remittances 2 1 2 _ _ _

Compensation of Employees 1 1 2 _ _ _

Migrants' transfers _ _ _ _ _ _ (Source: Migration and Remittances Factbook 2011, the World Bank)

Remittances to Pakistan have been increasing year by year at an impressive rate as more and more Pakistani people work overseas. The amount of workers’ remittances is more than double in 2009 compared with the amount in 2005 (see Chart 13). The largest amount remitted is from the United States (27.3%), followed by Saudi Arabia (19.4%). 70% of inward international flows

79 Branchless banking in Pakistan, Consultative Group to Assist the Poor (CGAP): October 2011


comes through the formal channels with Habib Bank Limited (HBL) and United Bank Limited (UBL) being the two main players80. Remittances to Pakistan play a vital role not only in improving the household economy of low-income people but also in sustaining the macro-economic situation of Pakistan itself81. As mentioned in the earlier, inward remittance flow from overseas has made a sizable contribution to the improvement of current account balance which had been significantly negative until FY2008. Due to the growing amount of remittances, Pakistan could address various macro-economic issues such as inflation and foreign reserve losses more resiliently. The SBP has an active role in formalizing remittance transactions by setting up exchange companies (ECs) in an attempt to formalize the remittance market. Owing to its effort on formalization, more than 70 percent of international flows come through formal channels such as banks and ECs. To move forward with remittance policy, it is significantly important for SBP to pay attention to domestic remittance market as well as to form partnerships with banks and ECs abroad so that Pakistani workers could take more advantage of remittance services abroad.

80 Bringing Finance to Pakistan’s Poor, Access to Finance for Small Enterprises and the Underserved (2009), The World Bank 81 For comparison : Net FDI inflows were $5.4 bn, net ODA received was $1.5 bn, total international reserves were $9.0 bn, and exports of goods and services were $21.1 bn in 2008 (Migration and Remittances Factbook 2011, The World Bank)


C Demand research Background The demand for microinsurance arises out of the risks that low income people face and how well able they are to cope with them. What major risk events do they face? What is the impact of these events? How do they manage and finance them? How can insurance play a role in addressing the cost/impact of these events? There are many life cycle events that are relatively predictable but can have a major financial impact; such as marriage or education. It is important to differentiate between events that can be handled or financed through loans or savings, and those where insurance is more appropriate. It is worth clarifying at the outset the difference between demand and need. Often with nascent microinsurance markets there is low demand but significant need for insurance. Demand could be simplified as being equal to need and awareness. It has been observed that there is significant need for insurance for low income people in Pakistan, for varying risks, but the awareness and/or understanding of insurance is very low (or often non-existent). As key part of any microinsurance strategy would be to increase awareness of the potential use of insurance while at the same time trying to carefully identify the needs. Then one can build potential demand for microinsurance. Direct demand testing Process and Methodology The information for demand assessment was collected through Focus Group Discussions (FGDs) using participatory rapid appraisal tools. The sample consisted of male and female clients of microfinance institutions and insurance companies providing microinsurance services in the provinces of Punjab and Sindh. Composition of FGDs was single gender, one exclusively female and one exclusively male group was conducted in Lahore, Karachi and Rawalpindi where as in Mianwali and Hyderabad two exclusively female and one exclusively male group was conducted. Out of the total of twelve (12) groups four were conducted in urban, three in semi-urban and five rural areas of the country, with a total of 77 female and 51 male participants. Participants were moderate to very poor based on the average monthly income range of Rs 3,500 to Rs. 23,000 (US $ 40 to $267). The theme of the focus group discussions revolved around:

– identifying life cycle events in the lives of poor households, – prioritizing events that cause significant financial pressures on them, – identifying coping mechanism used by poor people to deal with each type of event, – understanding their level of awareness, importance, needs and perceptions of insurance

services and lastly, – Identifying their preference of events that they would like to have insurance for.

In order to sensitize the study to the varying insurance needs of people in different age groups the sample was distributed so that there would be 2 groups of people i.e. less than 40 years and people between 41-60 years. In order to assign equal weight to the risk preferences of people who have had some experience of insurance services and those who do not have any such experience the sample aimed to include an equal mix of both types. However in actuality 89% of the participants had credit life insurance by virtue of being members/ clients of microfinance institution and about 54% had health insurance coverage as a value added service offered with their loan. This was factored in when analysing the results of the FGD’s.


The table below provides an overview of the geographic areas, districts, location of FGDs along with the gender bifurcation of overall sample and organizing partners.

App_Table 16: Overview of FGD profile

Geo Area District Area FGD Number of participants

Organizing Partner

Lahore city Female 9 Kashf Foundation Lahore

Lahore city Male 8 Kashf Foundation

Karachi city Female 11 Tameer Microfinance Bank

Urban

Karachi

Karachi city Male 9 Tameer Microfinance Bank

Kalar Syedan, Rawalpindi Suburbs

Female 11 First Microfinance Bank Rawalpindi

Rawalpindi city Male 8 First Microfinance Bank

Semi Urban

Hyderabad Hyderabad city & suburbs Female 8 Asia Care Insurance Company

Mianwali, Female 14 National Rural Support Program

Kalabagh, Isakhel Male 14 National Rural Support Program

Mianwali

Kalabagh, Isakhel, Bhakkar Female 12 National Rural Support Program

Tando Jaam, Matiari, Musa Khutain, Khyber

Female 12 Jubilee Insurance Company

Rural

Hyderabad/ Nawabshah

Nawabshah, Matiari Male 12 Jubilee Insurance Company

Total 128 Location of FGD’s and brief description of those areas Detailed below is a snapshot of the important economic and demographic characteristics of each location included in the study. Urban FGD’s The urban FGD’s were conducted in Lahore and Karachi, two of the most populous cities of Pakistan, with one entirely male and one entirely female FGD conducted in Karachi and one entirely male and two entirely female FGD’s conducted in Lahore. Lahore, with a population of 6.3 million, remains a vibrant economic, political, transportation, entertainment, and educational hub. As of 2008, the city's gross domestic product (GDP) was estimated to have a projected average growth rate of 5.6 percent. Lahore's economic strength relies on the fact that it is the biggest city of Pakistan's most populous province, Punjab, and it is also the most advanced in terms of infrastructure, having extensive and relatively well developed road links to all major cities in the country. Karachi is the country’s largest city, main seaport and the main financial centre of Pakistan, as well as the capital of the province of Sindh. The city has an estimated population of 20 million, while the total metropolitan area has a population of over 25 million. Karachi’s GDP is around 20% of the total GDP of Pakistan. Karachi and Lahore are amongst the largest cities in Pakistan. Both of them are provincial capitals for Sindh and Punjab respectively and a significant proportion of the population is urbanized. Karachi is the home of Pakistan's largest corporations that are involved in textiles, shipping, automotive industry, entertainment, arts, fashion, advertising, publishing, software development and medical research. Lahore on the other hand is a historical city and is often called the cultural heart of Pakistan, as it is the centre of Pakistani arts, films and intelligentsia. It is located near the Ravi River, close to the Pakistan-India border.


Semi-Urban FGD’s The semi-urban geographical areas included for the purpose of this study were suburbs of Rawalpindi district and Hyderabad districts from Punjab and Sindh provinces respectively. One male and one female FGD were conducted in Rawalpindi. Rawalpindi is the second largest urbanized district in Punjab. The total population is 4.3 million and approximately about 47% of the population is rural (according as of 2009 estimates). In Sindh, only one female semi-urban FGD was held in Hyderabad, the male FGD had to be cancelled due to some administrative issues. Hyderabad is an important commercial centre with a total population of around 3.5 million. Urban: Rural split is 51: 49. Hyderabad produces almost all of the ornamental glass bangles in Pakistan. Hyderabad city is a major commercial centre for the agricultural produce of the surrounding areas, including millet, rice, wheat, cotton, and fruits. Rawalpindi and Hyderabad are comparable as semi-urban districts because nearly 50% of the population in both districts is rural. However, average income levels are much lower in Hyderabad compared to Rawalpindi. Rawalpindi city, being a twin city to the Federal Capital, is more advanced. It is also the military headquarter and Islamabad's international airport, Benazir Bhutto International Airport, is actually located in Rawalpindi, and serves both cities. Hyderabad, in comparison, is the second largest city in the Sindh province of Pakistan. Rural FGD’s In order to assess rural demand, the district of Mianwali in Punjab was included and one entirely male and two entirely female FGD’s were conducted in the region. The total population of Mianwali is approximately 1.3 million; about 79% of the total population is rural. Mianwali city, which is the district capital, is the economic and commercial hub of the Mianwali district. The city is mostly known as an agricultural hub. The district of Mianwali was severely affected by floods in 2010 when approximately 1800082 houses were damaged and 48% of population was affected, being displaced or loss/ destruction of house, crops and businesses. However the district was not affected by the floods of 2011. In Sindh, the districts of Hyderabad and Nawabshah83 were included in the research with one male and one female FGD. Demographical features of district Nawabshah is that 74% of the population is rural and characteristics of Hyderabad district are explained in the earlier paragraph, however for the purpose of rural demand assessment participants selected were distinctively from rural areas of the district. In 2010 floods, both of these districts were moderately affected whereas in 2011 floods, they were severely affected. Hyderabad (rural) and Nawabshah in comparison to Mianwali are very underdeveloped, yet all of them are rural. Most of the farmers in Mianwali owned their land whereas in Hyderabad (rural) and Nawabshah and they were working off of leased land or as labour. This is quite typical of rural areas in Sindh province. Summary statistics of profile of participants The table below sets out summary statistics of the FGD participants;

82 Source UN-OCHA Pakistan flood profile 83 Now called Shaheed Benaizabad


App_Table 17: Summary statistics of FGD participants

FGD 1 2 3 4 5 6 7 8 9 10 11 12

Gender Female Male

Geo-Area' Urban Semi-urban Rural Urban Semi-urban Rural

Participants 9 11 8 11 14 12 12 9 8 8 12 14

Average Age of the FGD

38 40 37 44 43 31 35 44 38 38 31 46

Average HH monthly income

11,667

19,864 9,563 19,909 3,464 10,667 7,750 22,778 16,675 18,250 13,375 5,042

Average no. of children

4 5 5 6 5 3 4 3 3 3 2 5

Average HH members

10 7 6 8 7 6 7 9 7 10 7 8

Gender Females Males

Respondents 77 51

Average Age of the FGD 38 39

Average HH monthly income 11,840 15,224

Average no. of children 5 3

Average HH members 7 8

Geo-Area Urban Semi-urban Rural

Respondents 37 27 64

Average Age of the FGD 40 40 37

Average HH monthly income 17,746 15,907 8,060

Average no. of children 4 5 5

Average HH members 8 8 7

Profile of participants from urban areas was explicitly different from rural participants, semi-urban participants had characteristics of both with a greater degree tilt towards urban. Urban participants were literate and astute about cost and benefits of the services being offered. They were dressed contemporarily, whereas rural participants were easy-going, illiterate people dressed in traditional dhoti, kurta(shirt) and turbans. Most of the characteristics among participants from same geo-area were homogenous yet certain distrinctive attributes could be drawn from different provinces. In general female participants were more expressive and forthcoming about sharing their experiences and identifying there problems and requirements. Male participants generally introvert and tend to associate solution of all problems with the success of their business. Urban Urban males were involved in micro/ small businesses (e.g. Garment shops, grocery stores, shoe manufacturing, other shops), private and government jobs. Urban females on the other hand were involved in sewing (domestic and on commercial basis), parlours, jewelry selling, cloth selling and some were housewives.


Semi-urban Semi-Urban males were running micro businesses (e.g. barber shop, welding shop, naan shop) and some of them are working for private companies. Most of the semi-urban females were also involved in sewing (mostly domestic), bangle making, quilt making, small in house shops and others. Rural There was a lot of latitudinal and longitudinal diversity in rural male and female groups and could be easily classified in two categories i.e. those involved in farm related activities (i.e. cultivation and livestock) and in non-farm activites (i.e. grocery shops, chakki, other shops, sewing, hand made fan making). In terms of longitudinal diversity there is a marked difference between the income levels of households related to farm activites which is considerable lower compared to households dependent on non-farm activites. For latitudinal diversity, farmers in Punjab in most cases had their own land whereas farmers in Sindh were mostly working on either rented land or as farm labours. Mobiles & Banking Access to mobile was fairly high as 51% of females and 80% of male participants had their own mobile phones and of those who do not own a mobile, 56% had access through a family member. Access to bank accounts was significantly lower as only 26% of females and 43% males had a bank account. It is worth factoring in that many MFB’s require clients to open an account (as opposed to MFI’s or NGO’s) – this is due to the fact that they are banks (but for microfinance). Some of the key statistics of the sample are graphically presented in the next section.


Specific results of the FGD’s There have been a number of studies in the past to investigate and illustrate that poor people are vulnerable against most unpredictable events and in some case even the predictable or planned events. This is primarily because most of their lives they are striving to maintain equilibrium between their irregular income and significant and often unexpected expenses. For this reason this study aims to identify all life cycle events in a person’s life and then to underline those events that put a major financial pressure on the household income (also referred as risk events). In addition to identifying the risk events and then understanding the coping mechanism, this study also captured the average estimated cost of each such event and how, if ever, in poor people’s perception insurance services can become part of their suite of coping mechanisms for dealing with risk events. Life cycle events were identified separately for urban, semi-urban and rural population in order to come at holistic list that is inclusive of all geographies. RISK EVENTS Urban Life cycle events identified by urban females and males from Lahore and Karachi include child birth, education, marriage, illness, rent, utility bills , accidents, death, business set up, business losses, pilgrimage, robberies (and events such as snatching or mugging) also played a vital role in their household’s financial stability, as the participants felt such events were fairly common in the city. For urban females, the ranking of life cycle events which proved to place the greatest financial pressure or the risk events important for them were children’s marriage, illnesses, purchase of property, rent/utilities and death. For urban men, life cycle events causing financial pressure were broadly consistent as those for women, with purchase of a house and business set ups rating higher than they did for women. Furthermore, for men monthly utility bills and business expenses also played a vital role. Semi-urban


In the semi urban areas of Rawalpindi and Hyderabad, the life cycle events identified were illness, death, education, marriage, utilities, business set-ups and the Islamic pilgrimage. The most highly ranked events on the basis of financial pressure for females were illnesses, children’s marriage, death, child birth and education. For men death, children’s marriage, health and illness, education and then rent/utilities were identified as the most financially pressurizing events for the group. Rural In the rural area of Hyderabad, Nawabshah and Mianwali, the primary life cycle events identified included natural disasters such as floods, illness, death, education, marriage, accidents, crop failure, business set up and child birth. In rural areas almost all of participants owned their own houses so rental was not an issue with this group. Ranking of risk events by females were marriage of children, health/ illness, death, child birth, natural disasters (floods). For rural men health/ illness, natural disaster, marriage, child birth and death were ranked are the most financially stressful events. Participants claimed that a bad crop harvest was an especially pressurizing situation as their income is lost, their food supply is lost and they have to undertake debt burden as well. Most of the issues identified by different groups were homogenous, with only a few geographical differences. Chart 7 depicts the life cycle events identified, classified into two categories i.e. predictable and non-predictable events. The outer layer of red circles represents non-predictable events joined by a dotted line that implies that they may or may not even in everyone’s life, whereas the inner layer of blue rectangles represent predictable events, which hypothetically speaking happen in everyone’s life.

App_Chart 6: Key life cycle events

Our study corroborates past findings that poor people are financially pressurized by a combination of predictable and non-predictable events.


The table below summarises the most pressuring events identified by the participants of the study:

App_Table 18: Ranking of life cycle events

Events Predictable Non-predictable

Top 5 ranked

Heath/ Illness √

Marriage of children √

Death √

Child birth √

Business setup/ losses √ √

Bottom 6 ranked

Education of children √

Natural disasters √

Accidents √

Rent/ Utilities √

Purchase of house √

Pilgrimage √

Key observations and learning Detailed below are some of the key observations and learning’s from the focus group research.

a. Individuals are often more willing to receive insurance through their current Bank or MFP, as it would take a lot of time to develop trust in an insurance company.

b. Life cycle events which caused financial pressure for men and women are largely similar, although they vary on the basis of location and income groups. Significant life cycle events in agricultural areas were different as they took into account bad harvests and natural disasters to a greater degree.

c. Poor people are mostly unprepared to handle the financial pressure posed by any non-predictable event and even in case of predictable event. Often a moderate to large variation in the expected level of expenditure can have a long term detrimental impact on household living standards.

d. Younger individuals have fewer informal and formal mechanisms through which they can cope with financial pressures.

e. None of the participants were comprehensively familiar about the insurance services. However many had some experience of going through the entire process cycle from the payment of premium to receipt of the claim settlement. This substantiates that there is a significant need to educate people regarding insurance services.

f. A lot of females would be more willing to take up insurance if it included a maternity cover and also covered parent’s illnesses.

g. Because of the lower literacy levels and lack of understanding, the product, processes and procedures have to be very simple.

h. There should be an explicit communication strategy at the MFP or agent’s end to explain the product features, benefits, inclusions, exclusions, claim processes, etc and the relationship of MFP or agent with the insurance company to avoid/limit reputational risks due to non performance of any party which may result in loss for the other party.

i. There is significant room for improvement on the supply side of the existing services which also provides leads for future entrants into the market e.g. list of hospitals needs to include those hospital that are normally used by poor people as they might feel intimidated walking into big hospital. Policy inclusions and exclusions need to be clearly


communicated to the policy holders, hospitals on the panel should be aware of the product benefits and be able to guide policy holders.

Broader demand estimation Demand study There has limited public demand or supply side research work completed on the subject of microinsurance in Pakistan except for study by Elizabeth McGuiness and Volodymyr Tounytsky titled “The Demand for Microinsurance in Pakistan” completed in 2006. In that study a number of key questions are considered regarding the most frequent and financially stressful situations faced by poor microfinance clients as well as the coping mechanisms currently used by microfinance clients. The study also tested the effectiveness of these formal and informal coping mechanisms and explores opportunities for microinsurance products to fill the gaps in microfinance clients’ risk management strategies. The study explored stress-producing events, which were categorized as either risks or economic stressors, in an effort to better understand their financial implications on low-income households. According to the study, the risks that placed the greatest amount of economic pressure on households are similar to those which were identified through our own research as well:

– Death of a family member – Prolonged illness – Business loss or failure

The economic stressors cited in terms of the amount of financial pressure they place are also similarly matched with the results of our own research:

– Construction of a house – Marriage of a son/daughter – Education of a child – Birth of a child

Coping mechanisms in response to these risks or economic stressors identified by the study fell into two categories. The first consisted of strategies that people do ahead of time (ex-ante) in order to reduce their vulnerability to shocks and economic stress, such as risk avoidance, risk reduction and efforts to protect against risk. The second consisted of loss management strategies that take place after a shock has occurred (ex-post) Typically, borrowing from family members and friends was identified as a low stress coping strategy. In most communities, individuals can access an instant loan in case of need. Similarly, savings were also identified as a low stress coping mechanism. While there are special occasions for which people will save (notably, marriages), all respondents (apart from the poorest) reported keeping a relatively small amount of money at home in a “mattress account” for emergencies. Respondents also reported participating in more than one committee depending on their needs. Though common, the study identified that committees have limited use in crisis management, since only a few committees will allow a member to jump the line and access cash immediately in an emergency. Further, loans from MFPs were also noted to be widely used for managing emergencies. Yet the study discovered that borrowers do not always use loans for the originally stated purpose. In group discussions of the study, respondents reported intermittent use of general (or “productive”) loans for emergencies, and that of emergency loans for business investments. The finding is not surprising, as other studies have also highlighted the fungibility of microfinance loans. In cases of major emergencies requiring larger amounts of money, however, the study noted that these low stress strategies are usually supplemented by other, higher-stress solutions. All high-


stress responses result in the loss of productive capacity and lower future living standards for the household. For example, respondents termed liquidation of assets or the selling of valuable household items like jewellery, and business assets (in rural areas, these include livestock and land) as a high stress coping mechanism. Borrowing from moneylenders was also ranked in the same category as moneylenders generally charge a very high price for the loan (10% interest per month) and allow for no partial payments. As a result, the amount paid on interest can be several times the principal amount. In cases of extreme poverty, families will ignore health problems or stop spending on children’s education. This study revealed that, in many cases, the coping mechanisms of the microfinance clients are only partially or minimally effective in emergencies or economically stressful situations. As a result, families can lose assets, fall into debt traps, and remain indebted for long periods of time. These gaps suggest opportunities to introduce new risk management instruments, such as microinsurance, to help low-income households reduce their vulnerability and better cope with particularly stressful risks. Rural finance product study Another research that was conducted by Shore Bank international in the rural areas of Sindh and Punjab revealed that insurance is the most desired value added service along with a loan by the microfinance clients. The research was conducted as a quantitative survey with more than 600 respondents within nine rural districts of both provinces. The primary objected of the research was to unearth needs for specialized rural finance products in the rural areas. It was only discovered as secondary finding that people prefer to have an insurance service as a value added service to their micro loan as against opening a savings account, remittance services and financial education services. Within the ambit of insurance health insurance was ranked highest followed by life and crop insurance. Risk events The risks events are typically either predictable or unpredictable. They also have varying financial impact and varying coping mechanisms. The risks faced, costs and coping mechanisms differ between rural and urban areas though most are common across the whole country. The life events where people had a preference for insurance (in decreasing order of importance) are health/illness, natural disaster, marriage, education, death, business loss, childbirth and accidents. Natural disaster was particularly important for rural people especially given the recent floods of 2010 and 2011. Marriage, education and childbirth are costly events but this is more where savings would be more appropriate, as it is not a typical insurable event. Typically these 3 events had the highest cost especially marriage which can cost on average 18months income. Cultural preferences naturally have a big impact on peoples spending on events of this nature. In the rural areas people often face higher costs for some events especially health where there is limited services and they need to travel to the nearest health centre. They also have lower and less secure income. They now see natural disasters as a major risk for them and worth insuring against, to protect their land, house and livestock. Insurable events The key insurable events are natural disasters, health/illness, and death and business losses. However affordability will be a major issue especially in rural areas with people with low and insecure income. Another common issue is lack of insurance awareness. Typically there is very low insurance awareness especially in rural areas. In developing the market for microinsurance one needs to estimate the need and then create the demand through various enabling mechanisms such as consumer education, financial subsidies, mandatory cover etc. Summary comments


In assessing demand the current microinsurance projects operating in Pakistan were assessed and what this indicates about potential demand for microinsurance. The results of direct qualitative demand testing in Pakistan (through focus group discussions) were then considered. Focus groups were conducted (12 focus groups in the 2 main provinces) across urban/semi-urban/rural areas. Secondary demand research was then assessed and finally conclusions were drawn about the potential demand (or need) for microinsurance in Pakistan. The profile of microinsurance clientele in Pakistan would mostly coincide with the profile of microfinance clients. However it could be broader than the typical microfinance target clientele and include people who don’t need a loan but are low-income and face insurable risks. The life events where people had a preference for insurance (in decreasing order of importance) are health/illness, natural disaster, marriage, education, death, business loss, childbirth and accidents. Natural disaster was particularly important for rural people especially given the recent floods of 2010 and 2011. Marriage, education and childbirth are costly events but this is more where savings would be more appropriate. Typically these 3 events had the highest cost especially marriage which can cost on average 18months income. Cultural preferences naturally have a big impact on peoples spending on events of this nature. In the rural areas people often face higher costs for some events especially health where there is limited services and they need to travel to the nearest health centre. They also have lower and les secure income. They now see natural disasters as a major risk for them and worth insuring against, to protect their land, house and livestock. Premium affordability will be a major issue especially in rural areas with people with low and insecure income. Another common issue is lack of insurance awareness. Typically there is very low insurance awareness especially in rural areas. In developing the market for microinsurance one needs to estimate the need and then create the demand through various enabling mechanisms such as consumer education, financial subsidies, mandatory cover etc.


D Stakeholder feedback All the major stakeholders were met, as part of the industry consultation process to understand the market in Pakistan and the stakeholder’s views on Microinsurance. This direct consultation process consisted of over 25 direct meetings, stakeholder workshop and a microinsurance seminar. An online survey of the major insurers and microinsurance operators was also completed. It should be noted though that there were no meetings with government representatives, NICL, PRCL or Postal Life. This was effectively outside scope of the assignment. One can however make some observations on the role of government from other discussions. Summarised below is the feedback according to the sources. Insurer view This is from discussions with those insurers’ currently doing or considering starting Microinsurance

1. The insurers were generally unclear on the business case due to; a. Heavy distribution costs b. Lack of data c. Lack of knowledge of the clientele d. Lack of regulation e. Balancing low premium with relatively high expenses

2. Their primary focus is on corporate clients (except SLIC) and they have limited or no focus on retail clients, and almost none on microinsurance clients.

3. Typically there is limited or no in-house expertise on microinsurance 4. In favour of the Partner Agent model, they consider the distribution costs too heavy to do

with their current approach and/or in setting up a new distribution approach. 5. Usually in favour of using technology and other innovation approaches. 6. Regarding technical points:

a. Looking for lower capital requirements for MI business b. Generally not in favour of mandated proportions of business in Microinsurance c. Mixed view on caps on 3rd party commissions d. Generally in favour of providing freedom to the market to develop and grow with

limited regulatory intervention Microfinance Industry From discussions with major players in the microfinance sector

1. Some major players are strongly in favour of allowing specialised microinsurance companies to be set up by large MFP’s) with lower capital requirements

2. There are often mixed views on the partner agent (PA) model; some MFP’s are in favour of the PA model and transferring the risk to a technical party and keeping their focus on the core business of credit and savings. This is often for differing reasons. Some MFP’s are growing rapidly on their core Lending and deposit business and just recently starting MI. Other MFP’s are doing minimal MI with life insurance on the credit portfolio their only ‘MI program’. An alternative view comes from a MFP that is unhappy with the current insurer partnership

3. Many microfinance organisations often see themselves as a key access point to the clients and don’t see that insurers can go directly to the clients

4. Key product needs suggested are health, crop, livestock and/or flood insurance 5. Generally they seem optimistic on the business case of microinsurance.


Other players From discussions with other players such as third party operators

1. Many players have or are running microinsurance pilots with mixed success. All mention customer education and awareness as critical part of MI.

2. They generally don’t have a strong view on MI regulations but request that there is flexibility to allow multiple approaches and players in the sector

3. They have good understanding of clients and work much closer with them than insurers. They will be important in the testing of various MI approaches and product types given their proximity to clients and understanding of them

4. Many are generally in favour of the PA model and often see insurance risk as non-core for them and not where their expertise is.


E Insurance Core Principles of the IAIS

ICP ICP Title

1 Objectives, Powers and Responsibil ities of the Supervisor2 Supervisor3 Information Exchange and Confidentiality Requirements4 Licensing5 Suitabil ity of Persons6 Changes in Control and Portfolio Transfers7 Corporate Governance8 Risk Management and Internal Controls9 Supervisory Review and Reporting

10 Preventive and Corrective Measures11 Enforcement12 Winding-up and Exit from the Market13 Reinsurance and Other Forms of Risk Transfer14 Valuation15 Investment16 Enterprise Risk Management for Solvency Purposes17 Capital Adequacy18 Intermediaries19 Conduct of Business20 Publ ic Disclosure21 Countering Fraud in Insurance22 Anti-Money Laundering and Combating the Financing of Terrorism23 Group-wide Supervision24 Macroprudential Survei llance and Insurance Supervision25 Supervisory Cooperation and Coordination26 Cross-border Cooperation and Coordination on Crisis Management


F Emerging Guidelines for Microinsurance policy, regulation and supervision The purpose of growing microinsurance provision is to extend financial inclusion in the insurance domain. The objective with financial inclusion is that individual consumers, particularly low-income consumers currently excluded from using formal financial sector services, must be able to access and on a sustainable basis use financial services that are appropriate to their needs and provided by registered financial service providers. Insurance provides clients with a market-based means to mitigate material risks that they face. Microinsurance must do the same for low-income consumers. Although informal community-based risk pooling mechanisms (those not registered with the insurance supervisor to provide insurance to the public) provide low-income clients with a risk mitigation option and need not necessarily be formalised if they present low risk, the approach of these guidelines is to grow the formal microinsurance market. This can be done by: (i) formalising existing informal providers of insurance (referred to in these guidelines as formalisation); (ii) encouraging existing commercial insurers to reach out to lower market segments (referred to in these guidelines as outreach); or (iii) encouraging new entrants, both domestic and foreign, that are particularly focused on the low-income market. To develop microinsurance markets, one should pursue the following general objectives:

1. Facilitate both outreach and formalisation, ensuring a level playing field for big and small players where they seek to serve the same market;

2. Promote products, providers and distribution channels that will trigger the favourable introduction of low-income clients to insurance and its benefits;

3. Adopt risk-based regulation, tailoring regulation to the distinctive risks posed by microinsurance products and intermediation;

4. Minimise the regulatory burden on underwriting and intermediation. Summary notes on guiding principles

1. Target market: Identify, define and understand the target market; 2. Broader policy: Develop microinsurance policy as part of broader goal of financial

inclusion; 3. Definitions: Define allowable microinsurance product categories; 4. Risk nature: Tailor regulation to the risk character of microinsurance; 5. Multiple players: Allow multiple players with flexible approaches; 6. Informal: Provide a path for formalisation of informal approaches; 7. Distribution: Allow flexibility in distribution approaches; 8. Enrolment: Build on a mandatory market and also foster a voluntary market; 9. Monitoring and Evaluation: Monitor market developments and respond. Facilitate

information sharing; 10. Incentives: Balance incentives with strong direction and commercial market pressures.


G Examples of International approaches to Microinsurance regulation The following table summarises international precedents in the definition of microinsurance, as well as key aspects of the applicable regulatory regimes:

India Philippines South Africa (proposed) Peru Mexico

Max. premium n/a $25.5 per month (set as max. % of daily minimum wage)

n/a

2007 Resolution: A monthly premium of up to US$3,3 Monetary definition was removed by Oct 2009 resolution.

For asset insurance a monthly premium of up to 1.5 times the daily minimum salary (US$ 7)

Non-life: max. $740; min. $123 (exception family health & accident: $247)

Current: US$2,400 funeral US $ 900 friendly societies

Benefit limits Life: max. $1230 (exception endowment & health: $740) ; $123 min. (family health & accident: $247)

$4256 (set as max. % of daily minimum wage) - limit defined for life only

Recommended: US$6,226 all MI

2007 Resolution: Up to US$3,300 Monetary def. removed by Oct 2009 resolution.

For personal insurance an amount up to four times (groups insurance three times per member) the annual min. salary which amount to US$ 6,840 (Groups US$5,130);

Life: >18, <60 Age of entry Non-life: n/a

(exception personal accident: >5, <17)

n/a n/a n/a n/a

Non-life: 1 year

Term limits Life: >5, <15 years (exception health insurance: >1, <7)

n/a maximum 1 year n/a One year

renewable, except where linked to credit

Product features

Simplicity, available in vernacular language

Product must clearly set out details, be easy to understand, with simple documentation requirements. Premium collection must coincide with cash flow/not be onerous to target market

Simplicity & disclosure requirements, including need for a recourse channel

For individual policies: a simplified policy For group coverage: certificates or summary policies No deductibles & exclusions 30 day grace period Claims to be paid within 10 days

Contracts must be clear, precise and simple Certain mandatory, simplified consumer protection clauses to be included in the contract Simple premium payment mechanisms Limited exclusions 30 days grace period

Demarcation

Composite life & non-life MI products allowed, but separate insurers must underwrite the risk.

Life and non-life MI policies possible; only life has max. benefit limits

Life/non-life demarcation removed for MI

Applies to any type insurance

Applies to life, personal accident, asset and health.

Market conduct aspects

Commission cap of 10-20% of premium, depending on premium payment method. This is higher than the 60% (over 5 years) for full insurers. Reduced training requirements for MI agents.

No concessions

Uncapped commissions for microinsurance, paid on an “as & when” basis. Reduced training/qualification for those selling only MI.

Insurer-agent model for MI, with MFIs, cooperatives and other groups as agents, versus broker model.

Range of intermediaries expanded beyond brokers and agents. Reduced training requirements

Institutional/ prudential aspects

No prudential tier for MI; distribution through qualifying non-profit MI agents

MI concessions only apply to registered Mutual Benefit Associations with more than 5,000 members and that provide exclusively microinsurance

Public companies, cooperatives and friendly societies may become micro-insurers

No concessions No concessions


H Bibliography

– Access to Insurance Initiative. “Insurance Core Principles Standards Guidance and Assessment Methodology October 2011”

– Access to Insurance Initiative. “2007 Issues Paper in regulation and supervsion of microinsurance”

– Access to Insurance Initiative. “2010 IAIS MCCO Issues Paper” – Access to Insurance Initiative. “A2ii Country Diagnostic Scoping Note.” 2011. – Access to Insurance Initiative. “Emerging Guidelines for microinsurance policy, regulation

and supervision” 2011 – Access to Insurance Initiative. “India country diagnostic 2008” – Access to Insurance Initiative. “Toolkit 1: Country Diagnostic Studies Analytical

Framework.” 2011. Access to Insurance Initiative. “Toolkit 2: Country Process Guidelines for Microinsurance Market Development.” 2011.

– CIA. “The World Factbook. CIA - The World Factbook: Pakistan” – Dr.V.Rengarajan. “An anatomy on demand side perspectives of Microinsurance” – Financial Services Assessment. “Assessment of Health Microinsurance Outcomes in the

Northern Areas, Pakistan- Baseline Report” – Finmark Trust. “Example focus group Terms of Reference” – Microfinance Opportunities. “The Demand for Microinsurance in Pakistan” – Pakistan Ministry of Finance.“Economic Survey 2011” – Pakistan Planning Commission.“Final Version - Pakistan Framework for Economic

Growth 2011” – State Bank of Pakistan.“Strategic Framework for Sustainable Microfinance - 24 Jan 2011” – USAID. “MI Demand Study Guide USAID” – World Bank.“Bringing Finance to Pakistans Poor”

microinsurance in pakistan - mefinmefin.org/files/catalogue/pakistan/05pa_status of inclusive... ·...

Documents