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For business information, annual reports, laws, ordinances, regulations and articles. |
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Insurance
Division
6.1 Overview
The promulgation of the Insurance Ordinance in August 2000 heralded the beginning of a new
regulatory regime for the insurance sector, which had previously been regulated under the
Insurance Act of 1938. The Insurance Ordinance, 2000 aims to protect the interests of
policyholders and to develop the insurance market by raising capitalization standards and
strengthening the solvency of insurers. The new law also provides for the redressal of
policyholders' grievances pertaining to non-settlement of claims by insurers. For this,
the office of Insurance Ombudsman has been instituted under the Insurance Ordinance. The
Ombudsman will take cognizance of an insurer who has (a) failed to comply with the
Ordinance; (b) failed to act in good faith; or (c) acted in such a manner as to disrepute
the insurance industry. New provisions have been included in the Ordinance to regulate the
market conduct of insurers. Another salient feature of the Ordinance is that it brings
public sector organizations, namely, State Life Insurance Corporation (SLIC), National
Insurance Company Limited (NICL) and Pakistan Reinsurance Company Limited (PRCL) within
its purview. Under the new Insurance Ordinance, the Commission has been delegated the
power to regulate the insurance industry.
Consequent to the promulgation of the Insurance Ordinance, 2000, the Insurance Division
(ID) of the Commission was established on January 1, 2001, which replaced the Department
of Insurance under the Ministry of Commerce. The ID is now responsible for regulating and
monitoring the performance of insurance companies through powers vested in the Commission
under the Insurance Ordinance, 2000.
The main functions of the ID are:
i) Registration of insurance companies under the Insurance Ordinance, 2000.
ii) Framing of new Insurance Rules under the Insurance Ordinance, 2000.
iii) Regulation and monitoring of insurance companies.
iv) Monitoring of reinsurance arrangements/treaties.
v) Supervision of insurance intermediaries (insurance agents).
Some 50 years ago, foreign insurance companies dominated the Pakistani insurance market,
there being just seven local insurance companies. This situation changed significantly
over the years. The growing pace of economic development in the country lent impetus to
local enterprises to enter into the insurance arena and by 1970 local insurance companies
outranked their foreign competitors, both in terms of number as well as volume of
business. In 1972, with nationalization of the life insurance business, the number of
insurance companies was drastically reduced to 22 comprising seven foreign and 15 local
insurance companies. At that time, 27 companies underwriting life insurance business were
merged into the state-owned SLIC. In August 1990, the life insurance business was
deregulated and opened once again to the private sector.
At present, there are 55 private insurance companies, of which five are foreign while the
rest are local enterprises. The majority operates in non-life and general insurance
business while only four underwrite life insurance business. The public sector consists of
three state-owned entities, i.e. SLIC, NICL (formerly National Insurance Corporation), and
PRCL (formerly Pakistan Insurance Corporation). While SLIC continues to concentrate on the
business of life insurance, NICL provides insurance coverage to other public sector
entities and PRCL remains the only local enterprise in the business of reinsurance. Every
insurer in Pakistan is required to cede a certain proportion of sums assured on all
policies to reinsurance, which has to be ceded to PRCL. The insurance sector is
represented on the stock exchanges with 39 listed companies having a market capitalization
of about Rs. 9.9 billion as at June 30, 2001. The market shares of the private and public
sector enterprises in terms of premium income are graphically presented as follows:
Chart 8 - Life Insurance Business
Chart 9 - General Insurance Business
During the year under review, general insurance business fared well with around 12 percent
growth in gross direct premium. Local companies registered a growth of 12.6 percent in
gross direct premium, while for foreign companies growth remained low at 4 percent. Life
insurance business remained dominated by the state-owned SLIC. Insofar as life insurance
business in the private sector is concerned, the performance of American Life Insurance
Company (ALICO), Commercial Union and Metropolitan remained less than satisfactory -
Eastern Federal Union (EFU) was the only profitable enterprise.
A major development during the year was the joint venture between ALLIANZ AG of Germany
and EFU Group of Pakistan to provide health insurance in Pakistan. This is expected to
attract more foreign investment not only in the health insurance business but also in
other areas of general insurance, particularly crop insurance.
Another significant change during the year was the reduction in the compulsory reinsurance
with PRCL. General insurance companies in Pakistan had been demanding abolition of
compulsory cession of 20 percent to PRCL. This demand had engaged the attention of the
Federal Government and it was finally decided in January 2001 to reduce the proportion of
compulsory cession from 20 to 15 percent, with effect from January 1, 2001. This will be
further reduced to 10 percent with effect from January 1, 2003 and altogether abolished
from the following year, i.e. January 1, 2004.
6.2 Regulatory Actions
6.2.1 New Insurance Rules Framed
The Insurance Ordinance, 2000 is yet to be fully implemented due to lack of the required
rules. Realizing the urgency for introduction of these rules, immediate attention was
directed to the task. Draft rules have been framed in consultation with the
representatives of the insurance industry and the Insurance Association of Pakistan (IAP)
and are pending clearance by the Government prior to notification.
6.2.2 Registration of Companies Under the Insurance Ordinance, 2000
All existing insurance companies were required to submit applications for obtaining fresh
registration from the Commission under the new Insurance law. During the period under
review, 55 companies were accorded registration certificates, of which 51 are
non-life/general insurance companies while four are life insurance companies. On the basis
of a detailed scrutiny of the financial statements, returns and reinsurance treaties, six
insurance companies were refused registration and were served Show Cause notices on
account of the deficiencies noted.
6.2.3 Requirement to Enhance Paid-up Capital
To improve and strengthen the capital base of general insurance companies operating in the
country, the Insurance Ordinance, 2000 stipulates that these companies must enhance their
paid-up capital to Rs. 50 million by December 31, 2002 and to Rs. 80 million by December
31, 2004. At present, about 35 non-life insurance companies are still maintaining paid-up
capital below Rs. 50 million. A detailed action plan is being prepared to facilitate these
companies to comply with the statutory requirement. The ensuing re-capitalization is
expected to strengthen the financial health of the insurers. Regarding life insurance
companies, except one all the other three companies meet the minimum paid-up capital
requirement laid down under the new Insurance Ordinance.
6.2.4 Reinsurance Arrangements
To safeguard the interests of policyholders, effective measures are being taken to enhance
the capacity of the local insurance industry to enable it to honor the claims made on it.
This is expected to be achieved through adequate reinsurance treaties executed by the
insurers. In this connection, all insurance companies operating in the country have been
directed to make reinsurance arrangements through at least 'A' rated international
reinsurers.
6.3 Monitoring of Private Sector Insurance Companies
The ID currently supervises 55 life and non-life/general insurance companies in the
private sector. The Division examines the statutory returns and audited accounts of these
companies to determine their financial position and the course of action, as envisaged in
the Insurance Ordinance, 2000. The Special Audit - as provided in the Ordinance - of all
the companies has also been assigned to a panel of independent auditors and their
respective reports are under preparation.
6.3.1 Development of New Formats for Periodic Reports/Financial Statements
About 24 new periodical reports/financial statements for different classes of insurance
business have been introduced under the new Insurance Ordinance, 2000. The ID is actively
engaged in developing the formats of such returns/statements with the help of a Committee
comprising Chartered Accountants and Actuaries, appointed by ICAP and the Society of
Actuaries, respectively.
6.3.2 Examination of Reinsurance Arrangements/Treaties
Insurance is generally considered a risk coverage system and is incomplete without
adequate reinsurance arrangements. As reinsurance forms an insurance company's first line
of defense, the law envisages that sound reinsurance arrangements should be in place.
Under the Insurance Ordinance, 2000, insurance companies are required to annually furnish
necessary details in respect of the reinsurance arrangements made by them. To satisfy
itself that sound reinsurance arrangements have been made, the ID examined all reinsurance
treaties submitted by insurance companies for the current year. Based on this information,
separate reporting forms are being developed for non-life reinsurance arrangements, to be
filed by companies for the next year in January 2002. The new reporting forms would help
in determining company exposures and retention ratios, thereby outlining their respective
risk profiles. The ID has also initiated steps to monitor the financial position of
reinsurers with special focus on their Claims Paying Ability (CPA) ratings assigned by
international rating agencies.
6.3.3 Insurance Intermediaries (Insurance Agents)
With the repeal of the Insurance Act 1938, licensing of insurance agents - that was done
by the Controller of Insurance under the repealed Act - has also been abolished. Insurance
companies will now register their own agents and will be responsible for their conduct.
However, the ID shall exercise a supervisory role to ensure compliance by each company
with statutory provisions relating to appointment, qualifications, supervision and payment
to agents so that the interests of policyholders remain protected. The ID is developing
necessary guidelines in consultation with the Pakistan Insurance Institute and IAP for
effective oversight of the process of appointment of agents by insurance companies.
