30pc firms unlikely to operate after Dec: Insurance business
By Sabihuddin Ghausi
KARACHI, July 8: Turmoil grips Pakistan's private general insurance business as 30 per cent companies lack adequate capital base to remain in operation after December 2004
, hardly 10 per cent chief executives and senior executives of the total 37 companies are qualified professionals and quite a substantial number of companies are said to be insolvent.
There is now no system to fix tariff of various insurance business (fire, marine and motor) because the Insurance Association of Pakistan (IAP) has been rendered ineffective. It was the IAP's job to fix tariff, which was endorsed by the regulators. The companies are now fixing their own business tariff and there is a virtual rat race.
With a capital base of about Rs8 billion (Rs3.40 billion paid-up capital and Rs2.58 billion free reserve), an annual premium business of over Rs14 billion that involves about 50 per cent amount in claims payment, most of it without any proper survey, private general insurance business of many of the 37 companies in operation remain scandalous without any professional supervision and regular monitoring.
"Even the regulators of the insurance business are not qualified insurance professionals," a senior executive of an insurance company informed Dawn when he was asked how many of the insurance operators conform to the requirements of section 12 of the Insurance Ordinance 2000.
"The in-charge of the insurance division in the Securities and Exchange Commission of Pakistan is a retired lease operator", he angrily retorted. He was confident that the other officers and staff of the insurance division lack required qualifications.
The section 12 of the Insurance Ordinance 2000 lays down the criteria of the chief executives and the key position holders in an insurance company who are reinsurance manager, claim manager, and others. The section 12 condition demands specialized qualifications to carry out jobs.
"Recently a banker has been appointed chief executive of a Karachi-based insurance company," he disclosed. In Lahore, where 14 private general insurance companies are based, quite a few chief executives and professionals have criminal background.
The chief executive of the biggest life insurance company in the public sector, State Life Insurance Corporation, is a bureaucrat whose performance at Karachi Electric Supply Corporation and Pakistan Insurance Corporation brings smile on many faces.
SLIC maintains over Rs100 billion life fund, bulk of which is invested in government securities and real estate. A non-professional management and uncertain market conditions have put at stake the future of almost 25 per cent population of the country who are covered under the group and life insurance business of SLIC.
The SECP's insurance division has asked 14 companies out of 37 in operation to enhance their capital base to a minimum requirement of Rs80 million before end of December 2004, but no effort is made to scrutinize the qualifications and conduct of insurance business executives.
Under the repealed law Insurance Act 1938, a system was laid down to monitor the financial solvency and flow of foreign exchange of the insurance company. Under the Insurance Ordinance 2000, the companies are neither giving any periodical information through financial statements nor the SECP insurance division is said to have enough skill and competence to monitor the companies.
The section 32 of the Insurance Ordinance 2000 lays down the conditions of the financial solvency. Insurance sources say that quite a big number of companies do not comply with these conditions. The companies have shown real estate with imaginary market value as their assets.
The SECP wants the insurance companies to seek partnership with 'A' category reinsurance companies. The growing lawlessness and deteriorating conditions are forcing the insurance companies to offer high commissions to the reinsurance companies. It is resulting in outflow of substantial amount of foreign exchange from Pakistan.
At present three big companies share 65 per cent of insurance premium business, while eight other companies share 25 per cent business. The remaining 24 companies share 10 per cent of the business, resulting in a rat race that has created distortion and led to corrupt business practices.
Distortion in insurance business has led to a virtual death of the Insurance Association of Pakistan. More than two dozen staff of the IAP were not paid salaries for last several months because it has virtually ceased to exist.
Under the IAP constitution, the subscription fixed for the member companies is not a fixed amount. It is 0.02 per cent of their insurance premium of the premium year. But a minimum limit of Rs50,000 and a maximum limit of Rs1,200,000 has been fixed for subscription.
The three big companies with a premium business of about Rs8 billion are paying only Rs1,200,000 each, which is much less when calculated on the basis of 0.02 per cent. But the burden fell on the small companies which are paying a minimum of Rs50,000 each.
Now the big companies, three in the top slot and eight relatively small but bigger than al the remaining, were demanding more votes for them in the association business.
The small companies stayed away resulting in disfunctioning of the IAP. One of the IAP's job was to fixed tariff of different insurance business. Since there is no IAP, the tariff is being determined by the individual companies. The companies are offering high discount rates and insurance analysts say that the claims being paid need to be looked more closely.
