pakistan credit rating agency(pacra) - insurance sector 2011 · 2012-09-14 · 1.3 insurance...

November 2011 www.pacra.com

SECTOR STUDY

INSURANCE SECTOR – 2011

The Pakistan Credit Rating Agency Limited

SECTOR STUDY

November 2011 www.pacra.com

SECTOR REPORT CONTENTS PAGE

Summary Page 1

Brief Profile 2

Governance 7

Ownership 9

Management 12

Risk Management 13

Business Risk 14

Financial Risk 18

INSURANCE SECTOR - 2011

The Pakistan Credit Rating Agency Limited SECTOR STUDY

PACRA has used due care in preparation of this document. Our information has been obtained from sources we consider to be reliable but its accuracy or completeness is not guaranteed. PACRA shall owe no liability whatsoever to any loss or damage caused by or resulting from any error in such information. None of the information in this document may be copied or otherwise reproduced, stored or disseminated in whole or in part in any form or by any means whatsoever by any person without PACRA’s written consent. Our reports and ratings constitute opinions, not recommendations to buy or to sell. Tel: 92 (42) 35869504 Fax: 92 (042) 35830425 www.pacra.com

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SECTOR TRENDS

INSURANCE SECTOR - 2011 The insurance penetration level in Pakistan (as a percentage

of GDP) is one of the lowest, less than 1% as compared to world average of 6.9% (as at Dec10). The industry is dominated by a few large firms (top 5 firms having around 70% market share). Insurance industry faces challenges on many fronts, including lack of awareness from general public, religious beliefs and slowdown in economic activities. On a positive note, Islamic banking has taken quiet deep roots in Pakistan within a short span and offers a blue print to Islamic insurance (Takaful) for growth. There are 49 active insurers in Pakistan at present comprising 39 General Insurance, 9 Life Insurers and one state owned Reinsurer. Additionally, the number of Takaful operators currently stand at 5. In the recent years, the insurance has witnessed change from individuals/family owned businesses to group owned structures.

KEY RISKS The insurance industry in Pakistan, though very small in

volumetric terms, is a very competitive market. The premiums are determined by market forces rather than the actual risks involved. This practice poses major risk to the industry in terms of unaccounted and potentially high losses. The industry is also facing increased risk from moral hazards.

Reinsurers around the world have adjusted their business strategies in response to the financial crises of 2007. This has resulted in international reinsurers limiting their exposure or withdrawal from Pakistan. Consequently, the proportion of middle-tier reinsurers increased, especially for smaller companies. This can increase the risk profile of the industry.

The insurance industry is directly exposed to the deteriorated security environment in Pakistan. The largest losses suffered by the industry have been due to terrorism and riots. The impacts of such events are remarkable and pose very high risk to the industry. The growth in the industry is very volatile in recent years, inline with the country’s economic environment.

REGULATORY REGIME The regulator, SECP, has been active recently in providing

direction to the industry. SECP has introduced measures to safeguard policy holders, by setting minimum solvency capital requirements.

The conventional insurers may soon be able to have Takaful window permission. This would help the conventional insurers to enter into Islamic Insurance and improve penetration levels in the country. However, the rules and regulations in this regard are yet to be laid by SECP, Insurance Division.


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INSURANCE Page 2 of 20November 2011 www.pacra.com

1. BRIEF PROFILE • Insurance dates

back as far as 6000 B.C.

• Marine Insurance: As a first form of insurance

• Global Insurance penetration: 6.9%

• 49 active insurance companies in Pakistan

1.1 The concept: Insurance is an arrangement by which a company or the state undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium1. While the Insurance Association of Pakistan (IAP) defines it as a method of shifting the responsibility for losses to specialists (insurance companies) who handle the risk by spreading it over a large number of people or firms. It is a system of protection against loss in which a number of individuals agree to pay certain sums of money, called premiums, to create a pool of money which will use the contribution of these individual to pay the losses of the few caused by events such as fire, accident, illness, or death.2

1.2 History & Development: The concept of insurance goes back in time as far as around 6000 B.C as practiced by Hindus and merchants of Babylon. However, most of the development came from Europe, mainly London in the formal developmental stages. Its beginning was simple and development gradual. As the trade and industry developed, the need of insurance was also felt and the institution of insurance was invented.

1.2.1 In the earliest days, contracts known as bottomry were used by money lenders to shift the burden of risk from owners of ships or cargoes to themselves. The loan was cancelled, if the ship or cargo was lost during a voyage. The charge for the bottomry loan, if the voyage was successful, was very high because it included the amount of interest and cost of risk. The contract of bottomry loan in fact sowed the seed of the modern insurance idea.

1.2.2 Marine insurance was the first category of insurance business that was developed. Although marine insurance originated in Italy, its practice gradually spread to other trade centers of Europe, including London. Until 1720 A.D., marine insurance was entirely in the hands of individual underwriters, whose main business was trade and commerce and insurance was a side-line. These individuals were either available in the Royal Exchange or in one of the nearby coffee houses. Lloyd’s Coffee House, owned by Edward Lloyd, became the centre for sales of ships and their cargoes. In this coffee house, businessmen would come for coffee and sit down to talk about their business and would exchange information about the movements of ships. Gradually, this coffee house was a formalized hub for the individual insurers, or underwriters, concerned with marine insurance, who would congregate to do insurance business. A policy holder having a Lloyd’s policy would have words “at Lloyd’s’ on them. Lloyd’s was like a vast market-place of insurance where individual underwriters would sit to accept risks of insurance. The liability to meet claims under the policy rests solely with those underwriters who are committed by any one policy, each for his own share of the risk. In 1871, Lloyd’s Act was passed to incorporate the Society of Lloyd’s or the Corporation of Lloyd’s as it is now called. The first insurance company in the United States underwrote fire insurance and was formed in Charles Town (modern-day Charleston), South Carolina, in 1732.3

1.2.3 After the discovery of marine insurance other classes of insurance such as fire, life, motor, accident etc. appeared in the market. When the Great Fire of London occurred in 1666 A.D., no fire insurance existed. In the same way, life insurance made its debut in 1583, when the life of William Gibbons, a sea captain, was insured by sixteen individual underwriters in London against a premium amount of GBP 383.

1.3 Insurance categories: Insurance today is broadly categorized in two categories 1) Life Insurance and 2) General Insurance or Non-Life Insurance as the terms are used interchangeably. 1.3.1 Life Insurance: Under this policy, the insurance company pays in case of demise of the policy holder or at the time of maturity of the policy. Hence the products available are

1 Oxford Dictionary definition 2 Definition from “The Insurance Association of Pakistan (IAP)” 3 From the works of M.A.Chishti (Late) – professional who wrote several books and articles on the insurance industry of Pakistan


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either whole life insurance or term insurance.

1.3.2 General Insurance (Non-Life): Most commonly divided into Fire, Marine, Motor (Auto), & Health insurance. However, there are several general, specific and sub-classifications available in non-life insurance category having variations owing to geographical regions, cultures, customs and economic environment. The miscellaneous segment has also received significant growth in recent years with new innovative products being added to the category inline with the growing consumer needs.

1.4 Reinsurance & Coinsurance: In order to reduce risks involved in writing more risky and large policies, insurance companies also transfer portion of their losses through getting their potential losses insured from global reinsurers. Another way of reducing risks for insurance companies is by arranging coinsurance. In a coinsurance arrangement, the insurance company does not write the risk alone, instead it is distributed among 2 or more insurers.

1.5 Global Insurance Industry: Insurance companies today find themselves juggling a variety of challenges as they work to improve profitability, grow, and compete. Life insurance companies, for example, must find ways to contend with the demographic changes that are altering their customer base – learning to serve more effectively the soon to be retiring baby boomers, as well as the more technically sophisticated younger individuals now beginning wealth accumulation. For their part, property and casualty companies face complex and increased exposure to significant risks due to factors such as terrorism and natural disasters. Asia-Pacific market has received remarkable growth rate, the worlds fastest (~19% in life & ~12% in non-life segment). This alone helps explain why many multinational insurers are either preparing plans for further investment in the region, or are in the thick of implementing them. By 2015, approximately 39% of the world’s economy is predicted to be in Asia-Pacific. 4 Globally, insurance penetration stands at 6.9% with UK topping the list with 12.4%.

4 “Windows of Opportunity” 2011 global insurance outlook by Ernst & Young


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Top 25 insurance companies in the world (by Market value 2010): Rank Company Market Value (USD bln) 1 China Life Insurance 118.7 2 Ping An Insurance Group 52.8 3 Allianz 52.7 4 AXA Group 46.0 5 ING Group 35.4 6 Generali Group 35.1 7 Zurich Financial Services 34.7 8 Manulife Financial 32.5 9 China Pacific Insurance 32.2 10 Munich Re 30.1 11 MetLife 29.9 12 The Travelers Companies 27.2 13 Prudential Financial 24.8 14 Aflac 23.4 15 Tokio Marine Holdings 22.2 16 Prudential 20.0 17 QBE Insurance Group 19.7 18 ACE 16.9 19 Allstate 16.9 20 Chubb 16.7 21 Swiss Re 16.4 22 Sun Life Financial 16.2 23 Cathay Financial 15.8 24 CNA Financial 15.6 25 Aviva 15.5

Source: Forbes

1.6 Global Future Outlook: Expectations are pointing to insurers entering new domains, as well as expand their presence in current markets. While there are signs of stabilization, consumers and businesses remain cost conscious. For much of the European and US insurance markets, these conditions continue, with only slight improvement. In Europe, 2011 is expected to be another year of low GDP growth, low interest rates and fluctuating equity market performance. On the life insurance side in Europe, low interest rates reduce the probability of people saving or putting capital into investment products like life insurance and annuities. Insurers that seek greater flexibility in their distribution relationships may be able to counter the stagnant sales environment.

Despite lingering uncertainty, the economic recovery should continue and bolster premium growth in the life and non-life sectors globally. However, investment income in both life and non-life sectors will remain low given that interest rates will only rise slowly, at best.

In terms of the mature markets, growth in life insurance is expected to turn positive in the


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US, while in Western Europe, premium growth could slow down slightly, as rising interest rates will make life policies with interest rate guarantees less attractive. Over the longer term, the fact that the ageing societies increasingly need provisions for old age continues to be positive for life insurers. In non-life, the trend is towards higher premium growth. This trend will strengthen as premium rates begin to get adjusted upwards. The global market share of emerging countries is expected to continue to increase strongly from today’s 14% over the next ten years. China is likely to become the second largest insurance market within a decade (in 2010 it is the sixth largest). The main risks to the outlook are an escalation of the euro sovereign debt crisis or a major oil shortage caused by turmoil in major oil producing countries.5

1.7 Domestic Insurance Industry: At the time of partition, there were 77 foreign insurance companies dominating Pakistani insurance market whereas the strength of local insurers was only 56. In 1952 Government established Pakistan Insurance Corporation (PIC) to promote the local insurance industry. Consequently, the number of local insurance companies increased to 47 while number of foreign companies reduced to 25 by 1972. In 1976, National Insurance Corporation (NIC) was formed with the purpose of undertaking General Insurance business relating to public property. In 2000, PIC was converted to Pakistan Reinsurance Company Limited (PRCL). PRCL has a mandate to provide reinsurance support to the local insurance industry in respect of treaty & facultative business as well as managing specialized insurance schemes assigned by the Federal Government of Pakistan. The following table summarizes active general, life and takaful companies in Pakistan:

5 The study is the first public assessment of the performance of global insurance markets in 2010. The 78 markets, where data or estimates for 2010 are available, account for 98% of global premium volume. Overall, the report is based on 147 insurance markets. Source: Swiss Reinsurance Company Ltd 6 Financial Sector Assessment 2003; SBP


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1.8 History & Developments: In December 1971, East Pakistan became an independent sovereign state, Bangladesh, depriving the Non-Life premium of PKR 290mln of that region. Out of this total of PKR 290mln, the share of foreign insurers was PKR60mln, West Pakistani companies of PKR 180mln and East Pakistani companies of PKR 50mln. Later on in 1979, private sector insurers experienced imposition of tax on exceptional loss reserves, which used to be tax free. These reserves still remain taxable. Nationalization policy of the seventies of the government further brought difficulties for the insurance industry. 31 industries, along with ghee mills, shipping, banks, petroleum marketing companies, automobile, etc. were bracketed under the umbrella of public sector and which, in turn, gave a loss of PKR 353mln to the private sector insurance industry.

The Life Insurance Business in Pakistan was nationalized during March 1972. Before that 32 Life Insurance Companies are working in Pakistan. On November 1, 1972 all these companies were merged and all Life Insurance Business was consolidated and entrusted to the State Life Insurance Corporation of Pakistan. Until the GoP allowed life insurance companies to operate by private sector in 1992, State Life Corporation remained the only Life Insurance company in Pakistan.

Despite tough operating conditions during nationalization in seventies, the insurance continued its progress. The spectacular revival and growth of private sector insurers amply demonstrate its professional and managerial skill when it registered a constant growth from PKR 290mln of premium in 1973 to PKR 335mln in 1976, PKR 820mln in 1980, PKR 3.4bln in 1990, PKR 31.25bln in 2005 and PKR 38.5bln in 2010.

In 2000, government of Pakistan decided to repeal the Act of 1938 and promulgated the Insurance Ordinance 2000 to strengthen the insurance industry by regulating it effectively. By virtue of this new Act, the Department of Insurance, headed by the Controller of Insurance under the Ministry of Commerce was abolished and the charge of the entire insurance industry for monitoring and regulating was given to Securities and Exchange Commission of Pakistan (SECP) under the Ministry of Finance. This new regulation has

General Insurance1 ACE Insurance Limited 27 Security General. Insurance Company Limited2 Adamjee Insurance Company Limited 28 Shaheen Insurance Company Limited3 Alfalah Insurance Company Limited 29 Silver Star Insurance Company Limited4 Allianz EFU Health Insurance Limited 30 Takaful Pakistan Limited5 Alpha Insurance Company Limited 31 The Asian Mutual Insurance Company (Guarantee) Limited6 Asia Insurance Company Limited 32 The Co‐operative Insurance Society of Pakistan Limited7 Askari General Insurance 33 The Credit Insurance Company Limited8 Atlas Insurance Limited 34 The Crescent Star Insurance Company Limited9 Capital Insurance Company Limited 35 The Pakistan General Insurance Company Limited

10 Central Insurance Company Limited 36 The United Insurance Company of Pakistan Limited11 Century Insurance Company Limited 37 The Universal Insurance Company Limited12 Continental Insurance Company Ltd. 38 TPL Direct Insurance Limited13 East West Insurance Company Limited 39 UBL Insurers Limited14 EFU General Insurance Ltd. Reinsurance Companies15 Excel Insurance Company Limited 1 Pakistan Reinsurance Company Limited16 Habib Insurance Company Limited Life Insurance Companies17 IGI Insurance Limited 1 Adamjee Life Assurance Company Limited18 National Insurance Company Limited 2 American Life Insurance Company (Pakistan) Limited19 New Hampshire Insurance Company Limited 3 Asia Care Health & Life Insurance. Company Limited20 New Jubilee Insurance Company Limited 4 Dawood Family Takaful21 Pak‐Kuwait Takaful Company Limited 5 East West Life Assurance Company Ltd.22 Pak Qatar General Takaul Limited 6 EFU Life Assurance Limited23 PICIC Insurance Limited 7 New Jubilee Life Insurance Company Ltd.24 Premier Insurance Limited 8 Pak Qatar Family Takaful25 Reliance Insurance Company Limited 9 State Life Insurance Corporation of Pakistan26 Saudi Pak Insurance Company Limited

Active Insurance Companies in Pakistan (SECP) as on June 15, 2011


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brought the regulatory procedures to provide full protection to policy holders as well as to arrest the malpractices rampant in the industry before the advent of this new Act of 2000.

The penetration levels in Pakistan are one of the lowest, less than 1%, with few firms dominating large share of market. However, the recent trend has been in the form of innovative products, new distribution channels (banks) and inclusion of financial institutions as owners to the sector. In the banking sector, Islamic banking has taking quiet deep roots in Pakistan within a short span. This riba-free banking model has become very popular among the people attracting the Pakistan insurance industry towards Islamic insurance i.e. Takaful. At present five Takaful Insurers are operating. The first Takaful to function was Pak Kuwait Takaful General Ltd. sponsored by Pak Kuwait Investment Co. Ltd in December 2005. Takaful Pakistan Limited was the second Islamic insurer to arrive on the scene in 2007. Two more Takaful were established during 2007; Pak Qatar General Takaful Ltd. and Pak Qatar Family Takaful Ltd while Dawood Family Takaful began its operations in 2008.

2. GOVERNANCE

• GOVERNED BY MINISTRY OF COMMERCE

• IAP – INSURANCE ASSOCIATION OF PAKISTAN

• REGUALTOR-SECP

2.1 Insurance is an effective tool for mobilization of savings in developed countries, which helps both in the control of inflation and in capital formation for the development of a country. Although, insurance penetration is low in Pakistan, it contributes to the economic progress of a country and plays an integral role towards economic, social and technological progress. Without insurance cover major industrial, economic and social activities could be jeopardized due to high level of risk involved and no fall back avenue. Hence, it is important to examine the nature of governance system prevailing in the industry in order to assess its feasibility and efficacy towards achieving sustainable development. GoP governs the Insurance sector of Pakistan through Ministry of Commerce. The Federal Minister, appointed by the Prime Minister, is the functional head and is assisted by the Parliamentary secretary. The position remains subject to political shifts. The sitting minister for Commerce is Makhdoom Amin Faheem (graduate in political science) while Mr. Zafar Mahmood is the Secretary.

2.2 Ministry of Commerce aims to contribute to the national economy through trade liberalization and facilitation, improving export competiveness and reducing cost of doing business. It aims to achieve higher market access for Pakistani products in existing markets as well as new markets with ultimate aim of improving quality of life of the people of Pakistan. The ministry announces periodic trade policies for the country.

2.3 Insurance Association of Pakistan (IAP): Before 1947, there were three Insurance Associations in the subcontinent at Calcutta, Bombay and Madras; Bombay Association had

Ministry Functions

Ministry of Commerce

Under the Rules of Business 1973, Commerce Division is assigned the following functions:

1. Imports and exports across custom frontiers 2. Export promotion 3. Commercial intelligence and statistics 4. Tariff policy and its implementation 5. Anti-dumping duties, countervailing duties and safeguard laws 6. Inter-Provincial trade 7. Domestic Commerce 8. Organization and control of Chambers and trade associations 9. Law of Insurance and regulation and control of Insurance companies 10. Administrative Control of Attached Departments/Organizations 11. Selection of Trade Officers for posting in Pakistan’s Missions

abroad


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a branch in Karachi. After the establishment of Pakistan, the Insurance Association of Pakistan was formed and inaugurated in 1948. The Insurance Association of Pakistan is a forum for the exchange of information, knowledge, experience and statistics among its members. IAP, unlike other trade bodies provides a professional platform to guide the members in technical matters related to industry.

The IAP is managed by 6 committees; 2 Executive and 4 Technical. These include 1) Executive Committee (Executive), 2) Regional Committee North (Executive), 3) Accident Committee (Technical), 3) Property Committee (Technical), 4) Marine Committee (Technical), and 5) Life Committee (Technical). Elections are held yearly to induct members in these committees. The committees provide statistics to the members, conduct workshops, and also address members in the developmental areas. IAP presented its three year goal and plan in 2010, which is part of its five year plan being set earlier and presented below.

2.4 Securities and Exchange Commission of Pakistan (SECP): SECP has been regulating the Insurance industry, since January 2001 after it took over from the Controller of Insurance operating under Ministry of Commerce, Government of Pakistan. The SECP regulates and monitors the Insurance Sector in the country through powers vested in the Insurance Ordinance, 2000 and the Companies Ordinance, 1984.

SECP is the apex regulator of the insurance industry and has a strategic priority and commitment to strengthen and maintain an effective regulatory environment in which insurance and takaful business can flourish and prosper in Pakistan. SECP has established an Insurance Division headed by a Commissioner. The current Insurance Commissioner is Mr. Mohammed Asif Arif Insurance Division is been divided into two main departments:

• Policy, Regulation and Development Department • Supervision Department

Association Functions

Insurance Association of Pakistan

(IAP)

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

1. To have in place a practicable and effective Code of Conduct and to evolve a process for its strict adherence/compliance by its Members

2. To ensure that IAP Members fully understand and adhere to the regulatory requirements, thus managing their business based on sound financial footings with a keen emphasis on the best practices of corporate governance.

3. To initiate and develop a comprehensively planned campaign of insurance to create awareness amongst the public to impart its advantages focusing on specific products and quality customer service.

4. To ensure that current and future Human Resource needs of the Insurance Industry are adequately met.

5. To stop the Motor Third Party Insurance extended by fraudulent or unrecognized insurance representatives.


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2.5 Insurance Ordinance 2001: The insurance ordinance 2001 brought in more comprehensive approach in governing the insurance sector of Pakistan. It clearly set out rules and regulations in order to support sector growth while at the same time protecting the policyholders. The objective was to strengthen the foundations of the industry. Thereon, the insurance rules 2002 further elaborated the scope of the regulations. They also laid ground for the Takaful operators for which detailed rules were published in 2005. The insurance ordinance 2000 (alongwith amendments later on) became effective with some of the following important highlights. SECP is currently working towards strengthening the Insurance Division by inducting qualified professionals and revising Insurance rules in near future.

2.5.1 Minimum Paid-up-Capital Requirements: The insurance ordinance 2000 required minimum paid up capital for a life insurer/family takaful to be PKR 150mln and for non-life/general takaful to be PKR 80 mln. These were raised by a circular in 2007 as follows:

2.5.2 Solvency Requirements: The ordinance provided detailed requirements to be met for the purpose of solvency. It also established the admissible assets which can be used for the purpose of preparing solvency statements to be submitted to the regulators. As a general rule, the admissible assets should be able to meet the liabilities reflected by calculating solvency ratio.

2.5.3 Miscellaneous: The ordinance provides complete framework on all the possible issues the industry may face with amendments being made periodically. This includes providing criteria for agents, reinsurers, statuary deposit requirements and offences.

Regulator Functions

Securities and

Exchange Commission of Pakistan (SECP) – Insurance Division

The following key areas have been in focus of SECP’s efforts:

1. Protection of the interest of insurance policyholders 2. Amendments in the regulatory framework to strengthen SECP’s role

as an apex insurance regulator 3. Enhancement of regulatory framework for Takaful Insurance 4. Availability of insurance protection to less privileged segment of the

society (Microinsurance) 5. Insurance Awareness Programs 6. Enhanced public image of the insurance industry

3. OWNERSHIP • Ownership with

large business groups

• Listed entities account for

3.1 The majority of the insurance businesses in Pakistan are owned and controlled by large business groups. The ownership of these business groups, inturn, largely rests with known individuals and families. Insurance is a relatively simple business in financial sector. However, traditionally it has required a reputational backing from renowned groups to progress. Many groups initially formed insurance companies to suffice their own group needs, thus providing a stable source of captive premium. Later on, financial institutions


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90% market share

ventured into this sector to diversify their products and improve outreach.

3.2 There are 21 (out of 39 active) general insurance companies listed on stock exchanges, contributing ~90% to the total GPW. Out of 9 life insurance companies, 4 are listed. The only reinsurance company of Pakistan, Pakistan Reinsurance, is also listed.

3.3 Insurance sector traditionally enjoyed upto 4% market capitalization, which has come down to below 2% in recent times, inline with the deteriorating economic environment. Paid up capital has taken a smooth lift after 2007 following the gradual (from PKR 120mln in 2007 to reach PKR 300mln by end 2011) increase in minimum paid up capital requirements for the insurance companies by SECP and gain on strategic investment portfolio of companies. The dip between 2008 and 2009 reflects mainly the investment losses faced by insurance companies due to stock market losses.

3.4 The top five insurance companies of Pakistan contributed around 70% to the market share as at Dec10. A brief profile and ownership structure of the major insurance players of Pakistan is discussed below.

3.4.1 A) EFU General Insurance was incorporated on September 2, 1932 and is engaged in non-life insurance business comprising of Property, Marine/Aviation, Motor and other miscellaneous products. The shares of the company are quoted on Karachi and Lahore Stock Exchanges of Pakistan. The Principal place of business is located at EFU House, M.A. Jinnah Road, Karachi, Pakistan while the company operates through 61 branches in Pakistan.

EFU Life Assurance Limited started operations in 1992 as the first private sector life insurance company as a consequence of the Government of Pakistan reopening the life

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insurance business to the private sector organizations in 1990. The Company has a branch network of over 112 branches throughout the country with employee strength of over 2,800 personnel in its sales force and around 190 personnel at its main offices in Karachi and Lahore. EFU Life is the first life insurance company in Pakistan to be awarded the ISO 9001:2008 certification.

B) JS group owns majority shares (over 20%) in EFU general and life insurance. JS Group is well reputed in the country with a strong financial footing. The group is involved in a diverse set of activities with focus on the financial sector, including asset management, brokerage, banking, micro finance, and insurance. Its non-financial interests include textile, media services, and transportation.

3.4.2 A) Adamjee Insurance Company Limited (AICL), the leading insurance company with around 28% share in non-life insurance business in Pakistan, was incorporated in 1960 and is listed on all three stock exchanges of the country. With its headquarters in Karachi, the company operates a network of 42 branches in Pakistan and one branch in UAE (Dubai). In 2004, Nishat Group, mainly through MCB Bank Limited, became the largest shareholder in AICL. The combined holding of NG in the company is around 43%. Adamjee foundation is the other major shareholder with 8% holding

B) Nishat Group (NG), is one of the distinguished business groups in Pakistan. The emergence of Nishat Group as a conglomerate spans over fifty years with key interests in textile, cement, power, insurance and commercial banking. Mian Mohammad Mansha – the man behind Nishat Group – is the Chairman of MCB Bank and serves as advisor to AICL’s Board of Directors. MCB Bank, the fourth largest bank in Pakistan, with around 8% share in the banking sector.

3.4.3 A) New Jubilee Insurance Company Limited (NJI), incorporated in 1953, is listed on Karachi and Lahore stock exchanges of Pakistan. NJI, with a market share of ~12%, has maintained its position as the third largest general insurance company of Pakistan. The company underwrites various types of non-life insurance business including fire & property damage, marine, health and motor vehicles. It offers a wide range of covers under the fire category, including burglary, explosion, storm & flood. The company’s network comprises 27 branches. This setup of the company, with its head office in Karachi, covers all major cities of the country.

B) The major shareholding of NJI is with Aga Khan Development Network (AKDN). Hashwani family, through its different companies, is the second main shareholder in NJI. AKDN, founded and chaired by His Highness the Aga Khan, represents a group of development agencies that focuses on various development activities, including health, education, economic recovery, environment, disaster reduction and micro finance. Some of the major agencies included in the network are Aga Khan Fund for Economic Development, Aga Khan Agency for Microfinance, Aga Khan Foundation, Aga Khan University, University of Central Asia and Aga Khan Trust for Culture. AKDN’s outreach extends to 25 countries around the world and provides employment to around 60,000 people. Hashwani Group (HG) has diversified business interests, out of which Pearl-Continental Hotel and Marriott Hotel chains are the most significant. The group is also engaged in oil and gas exploration and production, in addition to interests in trading and real estate businesses. 3.4.4 A) Askari General Insurance Company Limited (AGICO) – listed on all three bourses of the country – commenced commercial operations in 1995. The company, in addition to traditional general insurance business, also underwrites risks in health, bond, travel, crop, and aviation categories. AGICO is also engaged in contractor's all risk insurance, including civil engineering projects. With head office in Rawalpindi, the company operates a nationwide network of over 17 branches, mostly located in North of Pakistan. Most of the company’s business comes from its branches in Islamabad and Rawalpindi.


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B) Army Welfare Trust (AWT) holds, directly and indirectly, the majority stake in AGICO. AWT was set up in 1971 by Pakistan Army under the “Societies Registration Act” with the mandate of promoting the welfare of retired personnel of the Army and their families through the creation of income and employment generating activities. The Trust, over the years, has evolved into a large business group, and is currently engaged in sugar, textile, real estate, banking, leasing, insurance, cement, and travel services. All entities of AWT operate under the ‘Askari’ banner, which serves as a strong brand name as it signifies association with the Pakistan Army

3.4.5 IGI Insurance Limited (IGI) – a general insurance company – was established in 1953 and listed on the Karachi and Lahore stock exchanges. In addition to underwriting insurance business, IGI acts as a holding company for a number of strategic investments of the group, primarily in the financial sector. With its Head Office in Karachi, IGI operates a network of 8 branches across the country.

B) IGI is a part of the Packages Group, a leading business group of Pakistan. Packages Group owns majority stake in IGI through Packages Limited and sponsoring family. The Packages Group ranks among the larger industrial groups of the country. Apart from financial services, the group has strong presence in packaging, dairy, and chemical sectors.

4. MANAGEMENT • Mature Human

Resource • Committee

Structure

4.1 Insurance sector organizational structures are usually subject to the size and scale of different entities. However, entities generally classify their operations into insurance and non-insurance functions. Non-insurance functions include Administration, Finance, Investments, IT, Audit, Marketing, and Human Resource. Core insurance functions are divided into Underwriting, Risk Management, and Claims. 4.2 Operational Structures: Many entities divide operations into geographical regions with some operations located remotely, while others are centralized as required. In a centralized structure, all the important functions like underwriting, risk management and claims are carried out from the centre or head office. The structure promises more control and cost savings but can become time taking since everything needs to go through the head office. Solution to this problem is a decentralized structure. Under this arrangement, the departments in the branch offices are given autonomy to work on their own with the processing of all the functions being done remotely and notified to the head office. Although the functions become quick, but the head office has less control over the process. Moreover, specialists are to be hired on each location adding to the cost. A hybrid structure overcomes the problems of both the structures discussed by picking up advantages of each. However, the size of the entity determines the features to be picked up from centralized or decentralized structure with some departments working centrally e.g. risk and others remotely e.g. marketing. In Pakistan, majority of the companies (especially medium and small sized) operate under a centralized approach to ensure effective control and cost efficiency. 4.3 Profiles: The industry has been in existence in the region even before the creation of Pakistan. This has provided ample time for the industry participants to mature in terms of its human resource. The top reputable insurance firms have qualified MBA-IRMs, ACIIs, CPAs, FCMAs, MPAs and MCP individuals. Some entities also offer sponsored programs for its employees to achieve professional diplomas such as insurance diploma from Chartered Insurance Institute, London. The growth of health segment has also included doctors in the human resource pool having insurance related diplomas. Likewise, life insurance companies employ human resource related to actuarial sciences. 4.4 Large players have also implemented Human Resource Management Systems, which are comprehensive HR Tool that caters to all HR and Payroll related functions. Often careeer working groups are formed. The responsibility of groups includes identification of high


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performing individuals, succession planning, training requirements and human resource requirements. Moreover, training calendar are developed, which specifies the nature of training activities and date and location of workshop. The marketing model for the insurance companies is commission based on sales. The marketing agents often work for many companies and sell insurance against commissions. Hence, an insurance agent could be exclusively offering products of a single company or providing policies for several companies based on customer needs. However, the latter raises issue over moral hazard where a policy could be sold more because of higher commission rather than its characteristics. This also poses a high turnover rate in the insurance human resource where executives often shifting within the industry. 4.5 Management: The general insurance industry model is not a complicated one and most of the business is reliant upon marketing efforts. Karachi being the largest, industrial and coastal city captures most of the insurance business in Pakistan. Since the industry in early days was dominated by marine business, Karachi remains the hub. Even today, most of the companies are located in Karachi with branch operations around the country. 4.6 Management Committees: The sector often manages its operations through committee structures. These committees focus on areas such as underwriting, claims and reinsurance. A typical committee structure with its policy/operational role are presented in the table.

Committee Policy Matter Operational Role

Underwriting Committee

To formulate and review the pricing and under-writing policy of the company and to set out the criteria for assessing various types of insurance risks and determining the premium of different insurance covers.

The committee regularly reviews the underwriting and premium policies with due regard to relevant factors such as business portfolio and the market development.

Claims Committee

To devise the claim settlement policy of the company and determine the circumstances under which the claim disputes are brought to its attention, and decide how to deal with such claims.

To oversee the claim position of the company and to ensure that adequate claims reserves are made. The committee pays particular attention to significant claim cases or events. It also oversees the implementation of the measures for combating fraudulent cases.

Re-insurance/Co-insurance Committee

To ensure that adequate reinsurance arrangements are made for the company.

The committee pursues the proposed reinsurance arrangements prior to their execution, reviews the arrangements from time to time, and subject to the consent of the participating reinsurers make appropriate adjustments to those arrangements in the light of the market developments.

5. RISK

MANAGEMENT • MIS – real time

solution

5.1 MIS: The industry is moving towards solutions devised on real time basis, using client/server technology, and capable of running in centralized and distributed environments. Consultancy firms have come up with specialized software for insurance industry. They ensure data integrity, maintain audit trails and allow crystal report generation. The system ensures strong control environment, supporting centralised operation by allowing policy locking and posting at head office levels. The system generates summary reports for higher management, including monthly agent performance report, premium reports and claims reports. Furthermore, the solutions are capable of custom made MIS, used by top management, including daily bank position, weekly performance reports on investment, quarterly branch performance report. 5.2 Systems: The most common insurance system being used in the industry is the


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General Insurance System (GIS), developed by Sidat Hyder and Morshed Associates. It has released various versions with changes in its modules from time to time. However, large insurance companies have moved to more customized systems. The expansion of business requires more control and real time processes, which are often beyond the reach of general systems. This flexibility also allows implementing hybrid control systems with variation of centralization and decentralization mode of mechanism. 5.3 Underwriting: The underwriting risks are managed differently throughout the industry depending upon their risk volumes. However, in a effectively controlled environment, the entities have developed detailed underwriting and operational procedural manuals. All specialized risks, and risks above specified limits, are defined separately for various classes of risks, and referred to the Head Office for approval in a centralised system. The approval is subject to the prior analysis and written recommendations of the risk management department and/or any of the professional firms of surveyors. In tightly controlled environments, Maximum Probable Loss (MPL) is also estimated at the time of underwriting. Branches are assigned per party risk authorization limits, whereas, all risks underwritten above the said limit require Head Office approval, and the Country Head of underwriting has ultimate authority for approval. The entities have formal ‘decline list’ for risks considered potentially hazardous. The limits and risk definitions vary from entity to entity in the industry while weaker players benchmark large firms following these formalized procedures. Some insurers have dedicated Risk Management department for large and complex transactions. The department employs trained staffs who are responsible for risk assessment for various policies and deliver input to the underwriters in the form of Probability of Loss assessments. 5.4 Claims: In a centralized environment, claims are handled at the Head Office level. The department being most important one in controlling losses for the entities is the most scrutinized one. Subsequent to the reporting of loss by the client, claims department makes initial estimate in-house; a site visit is conducted by the Securities and Exchange Commission of Pakistan's authorized surveyors to make final estimate of loss. The surveyor’s estimate is subject to formal consensus by the insured before approval from the department head. Losses above certain limit may require approval from the top management; CEO. Whereas, in case of health claims, cognizant of specialised nature, the health department makes use of professionals from health sector including medical practitioners.

6. BUSINESS RISK • Insurance

penetration less than 1% of GDP

• Top five firms having over 70% market share

• Dominated by Fire & Motor segment

• Investment stance: conservative

6.1 Pakistan’s insurance sector experienced accelerated growth and robust profitability in past years in unison with benign economic environment. Although insurance penetration in the country remains low (<1%), the sector now faces major challenges arising from economic slowdown, security concerns, widening fiscal and trade imbalances, and stressed global reinsurance market. These factors coupled with subdued performance of certain industrial sectors and slow pace of recovery are likely to continue impacting growth prospects of the insurance sector. The overall profitability of the sector could be further stressed partially on the back of continuing recent floods in the country, and volatile performance of capital market.

0%

5%

10%

15%

20%

25%

30%

‐

8,000

16,000

24,000

32,000

40,000

48,000

2006 2007 2008 2009 2010 1Q11*

Prem

ium (m

ln)

GPW‐Industry

Non‐Life Insurance Life InsuranceNon‐Life Growth Life Growth

* annualized


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Insurance penetration in Pakistan has been low due to various reasons ranging from cultural to religious and product awareness grounds. However, the recent developments are attempting to mitigate such barriers with the introduction of Takaful (Islamic) insurance, introduction of new channels to approach customer (through mobile operators), and making the underwriting/claims processes less cumbersome. These efforts are yet to materialize and require consistent efforts to improve penetration in the insurance industry. As a region, Asia Pacific is on the growing spree with ~39% of the world’s economy to be in the region by 20157. China is likely to become second largest insurance market, after USA, within a decade. It currently stands at sixth place with India at number eleven having penetration level of 5.1%.

6.2 Market structure: The insurance industry is dominated by few big players. Top five players controlling ~70% of the non-life market segment (Dec10). In the past, the industry has been dominated by reputed families generating business mainly through personal contacts. However, trends have changed since 2000, when financial institutions have entered the sector. Although premiums remain individual driven, concentrated efforts on product innovation and marketing is more evident in the industry. The following analysis is based on listed companies having Gross Premium Written (GPW) of PKR 1bln and above as at Dec10.

6.3 Business source and mix: The industry generates bulk of its premium from fire and motor segment (65%). Traditionally motor segment remains a high loss business with the exception of a few entities. Resultantly, industry business mix has experienced rebalancing where motor segment has gone down from 32% to 27% in favor of miscellaneous segment which experienced growth owing to the introduction of new products including bancassurance, travel, health and terrorism covers. Health insurance has become significant contributor for many entities, which have started classifying it as a separate segment while for others it is clubbed into miscellaneous.

6.4 Performance: The industry experienced significant changes in business trends and accelerated growth soon after the introduction of insurance ordinance 2001. By 2004-05, the conducive business and economic environment spurred growth in various sectors including real estate, telecommunication, automobile, agriculture, and large scale manufacturing. Insurance sector also enjoyed its share of the flight. Higher production and demand in automobile industry (local and imported) lead to robust growth in motor segment. The assassination of former Prime Minister Benazir Bhutto ignited riots in the country, causing damage of billions of rupees. Pakistan has been continuously targeted by terrorism and suffered natural calamities (floods 2010 & 2011) damaging property and lives resulting in losses for the industry and slow premium growth.

7 “Windows of Opportunity” 2011 global insurance outlook by Ernst & Young

34% 33% 36% 38%

15% 16% 13% 13%

37% 37% 32% 27%

2% 2%3% 2%

13% 12% 16% 19%

0%

20%

40%

60%

80%

100%

0

6,000

12,000

18,000

24,000

30,000

2007 2008 2009 2010

PKR

mln

Segment Wise Breakup of GPW

GPW (LHS) Fire Marine Motor Health Misc.


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6.4.1 Underwriting: Underwriting margins, arising from core operations of the business, form a very small portion of profits for the insurance industry. If general and administration expenses (classified separately) are included in the calculation for the underwriting margins, they would turn negative for most of the entities. The underwriting margins are majorly dependent upon the claims paid against the premiums written for the period. The underwriting margins of major insurers hover ~8% in 2008 and 2009 but witnessed a decline in 2010 on the back of flooding in the country.

6.4.2 Expense: The expenses for the large players in the industry have grown in line with the net premium revenue growth. This has enabled the margins to be consistent.

6.4.3 Claims: The large players have been able to minimize their overall loss ratio in recent years. This has been due to the major shift away from the motor segment, which always had the largest share of loss. Over the years, marine has served as a low loss segment while fire and miscellaneous segments remain volatile. The growth is witnessed in the miscellaneous insurance segment on the back of new products being introduced in the industry.

6.5 Investments: The major portion of profitability for insurance sector comes from its investments. Hence, treasury function plays critical role in profitability of insurers. The sector’s huge losses in 2008 due to its considerable capital market exposure, which crashed,

‐15%

‐10%

‐5%

0%

5%

10%

15%

(45,000)

(30,000)

(15,000)

‐

15,000

30,000

45,000

2008 2009 2010 1Q11PKR m

ln

Investment Yield

Investment Portfolio Investment Yield

0%

4%

8%

12%

16%

20%

0

4,000

8,000

12,000

16,000

20,000

2008 2009 2010 1Q11

PKR

mln

Underwriting Performance Trend

NPR (LHS)




0%

10%

20%

30%

40%

50%

60%

70%

80%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2008 2009 2010 1H11

Fire Marine Motor Health Misc. Loss Ratio (RHS)

Loss Trend


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caused insurance industry to suffer.

6.5.1 The vulnerability of security situation in the country has prompted the composition of investments to shift towards more liquid investments in recent years. Investment in equities has been one of the picks but the largest growth has come in the mutual fund investments. On the other hand, the investments in listed equities have seen significant drop due to the stock market volatility.

6.6 Small & Medium sized Insurers8: The dynamics of small and medium companies are different from large insurance operators. In contrast to large players, most of the companies are owned and controlled by business groups. Consequently, a large chunk of revenue is generated from captive business (from group companies) where loss ratio is low due to lower moral hazards. These insurers are also confined by geographical regions and face intense competition. The major mode of business for majority of small and few medium companies is through banks.

6.6.1 Performance: The growth in GPW of small & medium insurance companies has been comparatively low over the years because of stiff competition. However, the retention rates have been satisfactory owing to captive business.

6.6.2 Underwriting: Small & medium firms often register profits on underwriting due to their conservative approach in writing the business. The trend over the years suggests that the underwriting margins in the small & medium segment are substantially higher than the large segment.

6.6.3 Expense: the expenses have increased slightly over the years causing a minute decline in margins.

6.6.4 Claims: The claims are low for small & medium segments due to the large proportion of captive business. Since the businesses insured are part of the group, the likely

8 Insurers having GPW less than a billion on December 31, 2010

0%

5%

10%

15%

20%

25%

0

1,000

2,000

3,000

4,000

5,000

2008 2009 2010 1Q11

PK

R m

ln

Underwriting Performance Trend (Small & Medium)

NPR (LHS)




‐

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

2007 2008 2009 2010 1Q11

PKR m

ln

Liquid Investments Composition

Cash and Other Equivalent Bank Deposits Placements with Financial Institutions Government SecuritiesEquities ‐ Listed Mutual Fund UnitsDebt Securities ‐ Listed


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chance of moral hazards; filing of false claims are limited.

6.7 Investments: Similar trend of moving towards more liquid investments can be witnessed in the large firms. Mutual fund industry has also taken off in these years providing liquid investments to the investors, keeping insurers interested and offering tax benefits. However, small & medium segment has kept some faith on equity investments as well and have been able to generate healthy returns on them.

6.8 Overall the insurance industry has witnessed a mixed trend with large, small and medium firms having their own characteristics. The industry has faced a lot of uncertainty in recent past and things are moving towards stability. Deteriorating security environment in the country along with financial crises contributed to sector worries. However, the industry is moving on and have incorporated majority of unforeseen risks into their business models. With the introduction of new products and distribution channels, things are likely to improve. Islamic insurance (Takaful), though in its infancy can create an impact. The long waited allowance from SECP for conventional insurance businesses to carry out takaful could also improve penetration in the country.

6. FINANCIAL RISK • Shift in Re-

insurers • Solvency

remains strong

6.1 Re-insurance: In order to manage risk exposures in the industry, the role of re-insurer is very important, especially in a volatile market like Pakistan, with multiple risk factors. Reinsurance is an insurance policy that is purchased by an insurance company from another company (reinsurer) as means of risk management. The reinsurer and the insurer enter into a reinsurance agreement which details the conditions of revenue and loss sharing. The reinsurer is paid a reinsurance premium by the insurer, and the insurer issues insurance policies to its own policyholders. The main reason for insurers to buy reinsurance is to transfer risk from the insurer. 6.2 Reinsurance Methods: There are two basic methods of reinsurance, 1) Facultative Reinsurance, and 2) Treaty Reinsurance. In facultative reinsurance, the ceding company cedes premium and the reinsurer assumes all or part of the risk upto specified limit for a particular insurance policy. Facultative reinsurance is negotiated separately for each insurance contract that is reinsured. Whereas, Treaty Reinsurance is a method in which the insurer and the reinsurer formulate and execute a reinsurance contract. The reinsurer then covers all the insurance policies coming within the scope of that contract. Most of the reinsurance is covered under treaty reinsurance in Pakistan with the treaties also divided into two broad categories:

6.2.1 Proportional Treaty (Quota share/Surplus Treaty): It involves reinsurer taking a stated percent share of each policy that an insurer writes. This means that the reinsurer will receive that stated percentage of each dollar of premiums and will pay that percentage of each dollar of losses. In addition, the reinsurer will allow a ceding commission to the insurer to cover the initial costs incurred by the insurer. 6.2.2 Non-Proportional Treaty (Excess of Loss): It only responds if the loss suffered by the

0%

3%

6%

9%

12%

‐

5,000

10,000

15,000

20,000

2008 2009 2010 1Q11

PKR m

ln

Investment Yield (Small & Medium)

Investment Portfolio Investment Yield


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insurer exceeds a certain amount, which is called the retention.

The insurance industry in Pakistan uses both methods of reinsurance dependent upon the financial muscle and risk strategy of the company. However, the financial crises in recent years have forced shifts in treaty types. With increasing risks, companies have moved from proportional to non-proportional type of reinsurance allowing them to write large risks. In addition, the introduction of new products has also increased cession levels. At the same time, the appetite for facultative reinsurance has also grown to cater for new products.

Pakistan Reinsurance Company Limited (formerly Pakistan Insurance Corporation) is the only local reinsurer operating in Pakistan. It provides reinsurance support to the local insurance industry in respect of treaty & facultative business as well as managing specialized insurance schemes assigned by the Federal Government of Pakistan. With the deteriorating law and order situation, the major re-insurers of the world have also been reluctant to take exposure in Pakistan. Consequently, many local insurance companies have been forced to move to second tier re-insurers with lower ratings in recent times.

Cession levelsi have remained constant over the years. The major shift has been in the miscellaneous segment on the back of new products being introduced. The newly introduced health segment is also clubbed under the miscellaneous segment. Cession levels for motor segment have historically been low and continue their trend.

6.3 Liquidity: Liquidity and solvency in the industry is quite healthy having a lot of room available for expansion through sufficient equity available. Liquid Investments constitute 42% of equity. Most of the liquidity is derived from the short term investments in mutual funds and capital market. However, majority of

0%

20%

40%

60%

80%

100%

2008 2009 2010 1Q11

Cession Levels Trend

Fire Marine Motor Misc.

0%

10%

20%

30%

40%

50%

60%

70%

80%

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2008 2009 2010 1Q11

PKR

mln

Risk Absorption Capacity

Equity (LHS) NPR/Financial Base* (RHS) Net Claims/ Financial Base (RHS)


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firms have moved from equity investments to mutual funds and government securities. Reduction in strategic investments is also witnessed in the past decade. Moreover, industry has been managing its payables and receivables. On average, the receivables stand at 160 days while the payables are over 500 days. The delay in payables is mainly due to the claims which have gone in litigation or the delays in the damage assessments because of coinsurers. 6.4 Solvency: The solvency in the industry has been closely watched by the regulators and statuary requirements have been introduced to protect policy holders. The stats suggest a satisfactory level of solvency also owning to the minimum capital requirement increased to PKR 300mln in the industry. 6.5 Small & Medium sized Insurance Companies: The reinsurance trend in small and medium sized companies is similar to the large ones. With the minimum capital requirements falling equally on the industry, small companies are facing challenges to meet the minimum threshold. This could lead to mergers or winding up of certain players.

i The statistics are based upon listed insurance companies of Pakistan having over billion GPW as on December 31, 2010 * Financial Base = (Equity + Underwriting Provisions + Unrealized gain/loss on liquid investment book + Unrealized gain/loss on strategic investments – deferred commission expense – prepaid reinsurance premium ceded)

pakistan credit rating agency(pacra) - insurance sector 2011 · 2012-09-14 · 1.3 insurance...

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