KARACHI, Aug 9: The most powerful tool in shedding off excess fat in insurance sector just as in banking appears to be to gradually increase the paid-up capital requirement.

In case of banks, sponsors who could neither inject cash nor raise it from shareholders in right issues, went for merger with larger banks. Dozens of smaller insurance companies are also finding it difficult to swim in a sea of competition mainly due to their smaller equity base. Many insurance companies, who could not wipe out the red from their balance sheet, have already bled to death.

The recent agreement between the Securities and Exchange Commission of Pakistan (SECP) and Insurance Association of Pakistan (IAP) by virtue of which insurance companies would go into phased increase in the minimum paid-up capital requirement from Rs80 million to Rs300 million by 2011 for non-life insurance companies and to Rs500m by 2010 for life insurance companies from existing Rs150m, is another reform in providing strength to the sector.

Financial sector in Pakistan is arguable the fastest growing segment and regulators have been keeping a watchful eye on its movements. In case of insurance just like banking, the concentration appears to be on developing fewer and stronger entities rather than retaining large number of weak and sick banks/insurance companies.

Analyst Muhammad Imran at JS Capital Markets calculated that at present only five of the 29 insurance companies listed on the stock exchange (four non-life and one life sector) come up to the required capital requirement. Other companies would have to push their way through in ways such as adopted by smaller banks, if they wish to continue in business. The obvious options are either to issue bonus shares or ask shareholders for cash in right issues. Sponsors could also decide to inject equity. But smaller insurance companies could be counting on mergers. Acquisitions by bigger entities with huge resources cannot also be ruled out.

“Currently the insurance sector comprises less than three per cent (in terms of assets) in the financial sector of Pakistan and it is one of the highly concentrated sectors. In the non-life insurance companies almost 75pc share in gross premium is in the hands of top four players (namely Adamjee, EFU General, National Insurance Company and New Jubilee),” says the analyst.

Due to increasing industrialisation (representing last two years average growth at 9pc), improving per capita income (that has been officially declared to have reached $847 in FY06,

reflecting growth of 13pc annually in last two years), construction of large infrastructure projects, increasing trade activities, privatisation of public entities, rising awareness and competition amongst the insurance companies are expected by the industry analysts to be able to post five-year (2006-2010) CAGR gross premium of 25pc. Non-life insurance penetration is also visualised to rise to 0.5pc by 2010 from 0.4pc in 2005.

Shares in even some visibly fast growing insurance companies are tightly held and seldom does a big chunk come up for trading. Excepting a couple of insurance stocks, most are regarded as dormant. People at the market, nonetheless, believe that in at least some of the insurance companies, the under performance of their stocks are not quite reflective of their business growth.