Making insurance companies vibrant

Shabbir H. Kazmi
Fully cognizant of opportunities and threats facing Pakistan, Securities and Exchange Commission of Pakistan (SECP) has developed a ‘Roadmap’ for insurance companies to enable them to play their due role. Many of the sector experts have a myopic view that the primary mandate of insurance companies is ‘risk mitigation’ only. They often tend to overlook the fact that insurance companies also play a key role in capital formation. Anyone who chooses to disagree with this point of view should look at the investment portfolio of the leading insurance companies, operating in private as well as public sector. This investment on one hand, provides much needed liquidity to the stock market and on the other hand, their active participation in daily trading helps in price discovery.

Recently, conventional insurance companies have been allowed to open up Takaful windows, like conventional banks are allowed to open up designated Islamic banking branches. Though, the decision has come very late, it is never too late to mend. Since conventional insurance companies have greater outreach as compared to Takaful operators, it is expected that the decision will help in creating a win-win situation for Takaful operators as well as conventional insurance companies. The purpose is same – risk mitigation, but route followed by the two types of companies is different. The point to be kept in mind is that Shariah does not stop individuals or corporate entities from risk mitigation. However, the process should be in conformity with the teachings of Islam.

As the incumbent government wishes to put the economy on track as well as accelerate pace of productive activities, construct mega size infrastructure projects and improve the quality of life of people, insurance companies will have to shoulder greater responsibilities. They have to come up with new products to cater to emerging needs. Over the last two decades new threats have emerged and hedging the risk has become the collective responsibility of all the stakeholders, the Government of Pakistan (GoP) being the largest stakeholder. The GoP is responsible for paying compensation to the victims of various types of eventualities, i.e. act of terrorism, political violence and natural calamities. Three deluges, carnage and destruction on the eve of assignation of Benazir Bhutto and 2005 earthquake have shown that while economic losses ran into billions of rupees insurance claims were minuscule, simply because immovable and movable properties, government assets and even the lives of people were not adequately insured.

Under the Financial Inclusion Program, State Bank of Pakistan (SBP) intends to introduce warehouse receipt financing (WRF) system. SBP’s effort needs to be applauded because it has undertaken a revolutionary and timely initiative, which will be especially beneficial for the farmers and would go a long way in achieving food security in the country by tremendously reducing the wastage. This will also help in achieving greater documentation of commodities trade that runs into trillion of rupees. The desired objectives cannot be achieved without involving insurance companies. Not only that state-of the-art warehouses have to be constructed, but commodities worth trillion of rupees will be kept there. For the collective protection of all the stakeholders these storage facilities have to be insured in the best possible manner.

Every year the federal and provincial governments and state owned enterprises spend billions of rupees on the health care of their employees. Often financial scams are unearthed and there are common complaints about the poor quality of medical services and medicines. Around the world insurance companies are operating which offer health insurance. In Pakistan, one such company is operating, EFU-Allianz but its potential has not been utilized because most of the government offices are reluctant in exercising this option. However, private sector entities are gradually switching over to health insurance from paying employees medical/hospitalization charges.

As stated earlier, one of the prime objectives of the successive governments has been achieving food security. Under this initiative the lending to farmers has increased manifold and now inching towards Rs400 billion per annum. Financial institutions have been able to increase lending to farmers only after the GoP made it mandatory for them to acquire insurance cover. The result has been satisfactory to a large extent, except where state owned National Insurance Company (NIC) was involved. The time has come to go one step forward to crop insurance from credit insurance. To achieve this the apex regulators i.e. SBP and SECP will have to play an even bigger role.

It is pertinent to mention that the GoP has come up with a roadmap to improve the performance of insurance companies, but it has failed in appointing permanent heads of three state owned insurance companies, namely State Life Insurance Corporation (SLIC), National Insurance Company (NIC) and Pakistan Reinsurance Corporation (PRC).

PRC is the only reinsurance company in the country. However, local insurance companies have started expressing concerns the way the Company is being managed. Not only that PRC is operating without Chairman for a couple of years, two of its Executive Directors, who have been managing the Company in the absence of the Chairman, have also retired. Even a bigger concern is that the full Board of Directors has not been in place for a long time. One wonders how such a strategically important company can be left unsupervised. It is often said that PRC has abandoned the building where its head office was located in the past and sooner or later PRC Towers will also meet the same fate. It is a fourteen floor building, but most of the floors are vacant. The largest space has been acquired by Federal Board of Revenue. Some tenants have already quit the building and others are also planning to move to other buildings offering better facilities.

While there may be around two dozen non-life insurance companies operating in the country, the bulk of the business is controlled by about half a dozen companies. The time has come to tell the sponsors of the nonperforming companies to either voluntarily windup their businesses or be ready to face liquidation proceedings.

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