6. Insurance Division

• 6.1 Overview
• 6.2 Regulatory Actions
• 6.3 Monitoring and Enforcement
• 6.4 Other Developments

Substantive changes have been brought about in the regulation of insurance business since the promulgation of the new insurance law-the Insurance Ordinance, 2000 -and the repeal of the Insurance Act, 1938. The new law transferred administrative and compliance mandate for the insurance industry from the Ministry of Commerce to the Commission. Consequently, the Insurance Division (ID) was set up within the Commission on January 1, 2001 to regulate and monitor the activities of insurance companies. The main functions of the ID are:

(i) protection of policy holders' rights and interests in matters concerning settlement of insurance claims and other terms and conditions of insurance contracts;

(ii) issuance of certificate of registration as well as renewal, modification, withdrawal, suspension or revocation of such registration;

(iii) specification of requisite qualifications and code of conduct for insurance intermediaries, agents and surveyors;

(iv) specification of market conduct parameters for insurers to promote efficiency in the insurance business;

(v) collection of Federal Insurance Fees and Annual Supervision Fees from insurers;

(vi) calling for information and undertaking inspections, enquiries and investigations, including special audits of insurers and intermediaries;

(vii) specification of the form and manner in which books of account are to be maintained and statement of accounts to be rendered by insurers;

(viii) specification of the form of actuarial report and conduct of appointed actuaries;

(ix) regulation of investment of funds by insurance companies;

(x) regulation of solvency margins to be maintained by insurers;

(xi) specification of reinsurance base for insurers;

(xii) specification of acquisition costs for insurers; and (xiii) administration of the Insurance Ordinance, 2000.

At present, there are 55 privately owned insurance companies operating in Pakistan, of which 51 are general insurance companies while four operate in the life insurance business. Amongst the general insurance companies, 47 are local while four are foreign. In addition, there are three state-owned enterprises operating in the insurance sector, namely, State Life Insurance Corporation (SLIC), National Insurance Company Limited (NICL) and Pakistan Reinsurance Company Limited (PRCL).

The total premium collected by the five life insurance companies during the year ended December 31, 2001 stood at Rs.8.06 billion, indicating a 7.6 percent increase over the previous year. Of this, Rs.1.39 billion represented first year premium collection by life insurance companies, indicating an increase of 9.35 percent from last year. Group premium also registered a significant growth of 19.27 percent to Rs.1.599 billion during the year. On the whole, the state-owned SLIC remained the dominant player in the life insurance market with a share of 86.2 percent in terms of premium collection. The market share of the five life insurance companies, in terms of premium collected during the calendar year 2001, is presented instable 27.

TABLE 27 Premium of Life Insurance Companies (January 1, 2001 - December 31, 2001)

General insurance business in Pakistan depicts an oligopolistic composition with 10 companies accounting for almost 83 percent of the total private sector general insurance business. The total gross direct premium underwritten by general insurance

companies, excluding the state-owned NICL, during the calendar year 2001 was Rs. 10.9 billion. Of this amount, Rs. 9.1 billion was attributable to the 10 largest companies while the balance gross direct premium of Rs. 1.8 billion was underwritten by the remaining 41 companies. Premium underwritten by NICL during the year ended December 31, 2001 amounted to Rs. 2.3 billion. In Pakistan, general insurance companies underwrite four main classes of business, i.e. fire, marine, motor and miscellaneous. The premium earned by general insurance companies in each class of business during the year ended December 31, 2001 is presented in Table 28.

Under the Insurance Ordinance, 2000, general insurance companies are required to raise their paid-up capital to Rs. 50 million by December 31, 2002 and, subsequently, to Rs. 80 million by December 31, 2004, failing which the companies would not be permitted to continue their operations. The minimum paid-up capital requirement under the repealed Insurance Act was Rs. 1.5 million. The enhanced capital requirement is likely to usher in consolidation in the insurance sector, as under-capitalized companies would either have to merge to meet the regulatory requirement or opt for an orderly exit. At present, a few cases of mergers and acquisition are in process. Consolidation through mergers and acquisition is expected to result in fewer but financially stronger insurance companies, which will have better Claims Paying Ability (CPA) and higher solvency margins.

Lately, commercial banks had laid down certain eligibility/selection criteria for enlisting general insurance companies on their panel. In view of grievances of general insurance companies regarding certain aspects of the eligibility criteria, a joint meeting of banks and insurance companies was held on October 16, 2001 under the aegis of the Commission. The meeting was chaired by the Chairman of the Commission. Various aspects relating to the eligibility criteria and the ensuing difficulties faced by insurance companies in enlisting on the panel were discussed in the meeting. The major areas of contention included the following:

(i) requirement to place deposits with banks under lien in order to procure insurance business; and (ii) payment of commission by insurance companies to banks on the business procured by them.

On representation of banks that the condition for placing compulsory deposits under lien had been imposed with a view to protect their interest in case any insurance company did not pay the claim, they were instructed to bring cases of non-payment of insurance claims to the notice of the Commission so that the delinquent companies could be taken to task. As a result of detailed deliberations, the Commission issued the following directive to insurance companies:

(i) insurance companies should not place deposits in order to secure enlistment or acquire business from banks;

(ii) any deposit already made and placed under lien for the aforesaid purpose with banks should be withdrawn; and (iii) banks should waive the condition of compulsory deposits as a prerequisite for enlistment of insurance companies on their panel.

Subsequently, the SBP also endorsed the decision made by the Commission and directed banks not to take deposits from general insurance companies as a prerequisite for enlistment.

An essential principle of general insurance business is the spread of risk. The insurers reduce their own risk through reinsurance agreements made with reliable and reputable international reinsures. In the domestic market, reinsurance services are provided by the state-owned PRCL.

The ID is involved in examining and approving reinsurance programs drawn up by insurance companies prior to execution of reinsurance treaties and reinsurance arrangements abroad. The examination focuses on ensuring that reinsurance arrangements are made with sound reinsurers. In this regard, the Commission has directed all insurance companies to make reinsurance arrangements with international reinsurers, which have minimum 'A rating from recognized international credit rating agencies.

During the year under review, all insurance companies were advised to furnish their reinsurance plans in respect of risks to be accepted by them for the year 2002, both inside and outside Pakistan. Show cause notices under Section 41, read with Section 63, of the Insurance Ordinance, 2000 were issued to 19 companies, which had failed to secure reinsurance arrangements with 'A' rated reinsurers as stipulated by the

Commission. After providing these companies an opportunity of being heard, it was decided that, as an alternative to reinsurance arrangements with 'A' rated reinsurers, these companies should get their CPA or Financial Strength rated by local credit rating agencies. Necessary directives to this effect were issued by the Commission. The decision was taken mainly to facilitate small insurance companies that were unable to secure 'A' rated reinsurance in the post September 11, 2001 scenario.

To ensure a well-performing insurance sector in Pakistan, it is necessary that other components of the insurance market, i.e. intermediaries, professional bodies and surveyors, develop alongside the insurance companies. For this purpose, the ID has drafted rules in consultation with various stakeholders, including the Insurance Association of Pakistan, Pakistan Society of Actuaries and the managements of leading insurance companies. The final draft of these rules has been sent to the Ministry of Finance for its clearance prior to promulgation.

The draft rules relate to registration of insurers, their market conduct, solvency margins, reinsurance, licensing as well as the code of conduct for intermediaries. The rules also lay down the eligibility criteria for insurance agents/ intermediaries. The criteria include minimum educational qualifications at the point of entry, practical on-the-job training, adherence to the code of conduct and capital requirements for insurance brokers. It is essential that the role of agents be streamlined since agents form the key distribution channel for any insurer, being the bridge between the insurer and the insured. They also play a vital role in increasing the breadth and depth of the insurance market. Under the Insurance Ordinance, 2000, the entire procedure for selection of insurance agents and issuance of agency license to selected candidates has been delegated to registered insurers.

Further, the rules drafted by the ID seek to ensure that surveyors conduct their business independently and in a professional manner. Apart from adherence to the code of conduct, individual surveyors have to conform to requirements pertaining to minimum paid-up capital and corporate structure, as prescribed in the draft rules. It has also been proposed that surveying firms should have professional indemnity policy to safeguard the interests of policyholders. These efforts are expected to improve the quality and timeliness of survey reports issued by surveyors. This will not only ensure that policyholders get the reports on time but will also enable the insurers to settle the claims expeditiously.

During the year, ACE Insurance Limited - a branch of a USA based insurance company - was granted a No Objection Certificate (NOC) for conversion into a public limited company under Section 5 (3) of the Insurance Ordinance, 2000. The newly

incorporated company is expected to bring advanced technical expertise in the domestic insurance industry, in addition to foreign investment.

During the year under review, three insurance companies were forbidden from underwriting insurance business in the country with effect from April 2002 due to lack of adequate and sound reinsurance arrangements. The action was taken under Section 63 of the Insurance Ordinance, 2002, which empowers the Commission to restrict a company from entering into new contracts of insurance if it has failed to comply with conditions of registration stipulated in the Ordinance.

To ensure compliance with the Insurance Ordinance, 2000, the ID maintains effective off-site surveillance of insurance companies under its purview. During the year, the ID carefully reviewed and examined the various periodic returns submitted by the insurers. Explanations were obtained in respect of its observations and companies were advised to ensure proper compliance. In order to monitor their performance effectively, the ID plans to hold periodic review meetings with the management of insurance companies and their appointed actuaries.

Customer complaints against insurance companies are lodged with the Commission regarding settlement of their claims and other grievances. The ID continuously follows up on resolution of these complaints with the relevant companies. Prompt attention is given to disposal of complaints and insurers are advised to settle claims and grievances in an orderly manner. For this purpose, the ID established a system to redress grievances of policy holders during the year. The system has proved useful in not only ensuring timely redressed of complaints but also in providing insight into the operations of insurers, specifically into the areas which require further improvement and streamlining.

The events of September 11, 2001 in the US that played havoc with the global financial markets, in general, and the insurance industry, in particular, also had repercussions on the insurance sector in Pakistan. The domestic insurance industry received a major setback as international reinsures refused to provide cover against terrorism risk and increased the rates of premium for future reinsurance

arrangements. To address this problem, the Commission constituted a Task Force, headed by the Chairman PRCL, for formulation of a strategy to mitigate the impact of post September 11 developments. The Task Force submitted its report on November 21, 2001. It recommended that alternate arrangements covering the risk of terrorism be developed as the likely exclusion of cover for terrorism and riot strike damage by international reinsures could create serious problems for the local insurance industry. Further, it was proposed that a 'Reinsurance Pool' should be created with the following salient features:

(i) An amount of Rs. 500 million to be initially contributed as "seed" money to the Pool by the Government of Pakistan. This amount may be increased if the ADB or any other international agency shows willingness to participate in creation of the Pool. (ii) The maximum amount of loss payable through the Pool should be 25 percent of the sum insured or Rs.100 million, whichever is less. (iii) The Reinsurance Pool may be attached with PRCL or NICL and should be supervised by a technical committee comprising insurance experts from the public and private sectors.

However, the scheme could not be implemented because a few leading insurance companies were not willing to participate in the pooling requirements envisaged. The ADB has since expressed its willingness to provide a Political Risk Guarantee of US$ 175 million. This Guarantee will cover certain defined terrorism and sabotage related political risks for which primary insurers are unable to access the international reinsurance market - a surrogate for reinsurance for terrorism-related risks that is generally unobtainable. Effectively, this would serve to increase the retention capacity of the local insurance industry.

During the financial year 2002, the ID collected Rs. 116 million as Federal Insurance Fee from insurance companies on behalf of the Federal Government. In addition, an amount of Rs. 11 million was collected under the head of supervision fee.

In order to strengthen its capacity to achieve regulatory objectives envisaged in the Insurance Ordinance, 2002, the ID took necessary steps for training of its staff. In this connection, services of a consultant from the ADB were obtained under the agreed technical assistance arrangements. More training programs along similar lines are planned in order to develop the expertise and skills of the Division's staff and augment its regulatory capacity.