Pakistan is losing 95pc of insurance premium funds to reinsurance entities overseas.

Despite moderate growth the retention ratio of non-life insurance business is the lowest in the region and declining. The economy is underserved by the insurance industry.

Insurance companies, with a few exceptions, were not particularly concerned. Some leading insurers pointed out that the ‘Draft Insurance Bill 2016’ focuses on best practices but misses out on the core issue of the low insurance penetration ratio and foreign exchange drainage from the sector because of the limited depth of the country’s reinsurance sector. They said the sole reinsurer, Pakistan Reinsurance Company, is too conservative and lethargic to respond to the market’s call.

The shallow operations of the sector are reflected in low retention ratios in the country. According to a global insurance information service, AXCO, the non-life retention ratio in Pakistan has declined from 55pc in 2010 to 49pc in 2014 against 81pc in India, 57pc in Bangladesh, 59pc in Indonesia and 73pc in Turkey. Retention refers to amount of premium retained as opposed to portion transferred abroad to buy reinsurance.

A closer study of this service landscape reveals that many Pakistani companies are local just in name. They are actually functioning as front offices for global players, who are reluctant to open their own offices in Pakistan. Under the arrangement, a local company fulfils legal requirements and books business locally but transfers premium funds to the veiled patron in return for 4-5pc of the proceeds.

Certain dynamic companies who wish to expand their business base in Pakistan find the insurance policy framework stifling. Besides avoidable financial hurdles for serving clients in the region they blame the weak oversight and framework that fails to check defacto agents for the sectors under performance.

“Some insurance giants exited while others are contemplating relocating their business to Dubai, Singapore or elsewhere. This is sad. On the one hand the government is offering liberal incentives to lure new foreign investors but on the other it looks the other way when the established ones, operating in the country against all odds, land in trouble”, a top executive of a multinational insurance company commented.

The situation appears to be grim as the regulator was unruffled. Zafar Hijazi, chairman SECP, was not accessible but in a detailed response the SECP defended its role. It did indirectly confirm the huge outflow of foreign exchange for reinsurance purposes every year.

In its email the SECP contested that companies are leaving. “The SECP has the legal mandate of the regulator as well as facilitator for market development... The impression that non-life insurers are leaving Pakistan is rather misleading ... only one insurer ... has wound up its business ... insurance grew by 19pc during 2016 in terms of gross written premium, compared to 5pc in 2015”.

It dismissed OCAX data as incorrect but confirmed the foreign exchange bleeding. “... OCAX has not taken into account the premium ceded to the national reinsurer i.e. PRCL which is retained within the country. The accurate retention ratio for the year 2015 is 57pc and not 49pc ... the non-life sector is growing consistently ... while there’s only one reinsurer to absorb the reinsurance risk... In the absence of adequate reinsurance risk absorption capacity in Pakistan, insurers are compelled to obtain reinsurance abroad, which results in the flight of reinsurance premium...”.

It added, “Since reinsurance is a global business, the insurers in Pakistan are also willing to, and are capable of, accepting reinsurance risks from abroad ... The SECP has taken up the matter with the State Bank so as to allow insurers to issue dollar denominated policies. This will enable insurers to accept inward facultative reinsurance from abroad (per risk basis) ... The SBP had been restricting such policies due to concerns related to foreign exchange reserves”.

On the issue of unregistered insurers the SECP said, “... it may be noted that primary insurance law, the Insurance Ordinance 2000, stipulates the regime for registration/licensing of insurance brokers while the subordinate legislature i.e. Insurance Rules 2017 (previously Insurance Rules, 2002) stipulate detailed form and manner for seeking registration…

“Moreover, the Insurance law prescribes detailed requirements to regulate the conduct of insurance agents including the qualification, training, integrity and track record, disclosure requirements, receipt and payment of money related to insurance policies, conflict of interest, among others. In addition to this, an enabling provision to prescribe the registration of insurance agents has been added in the draft insurance bill”.

The regulator did not forward a direct comment on the future prospects of the insurance sector in the wake of the CPEC. On the Draft Insurance Bill 2016 it gave a detailed account of the consultation exercise asserting, “The draft insurance bill is in the process of revision and once done it will be processed further including legal vetting of the draft bill”.

The 30-member Insurance Association of Pakistan did not offer its position as the chairman, Hasan Ali Abdullah, CEO EFU, was out of station. Most members were shy and discussed contentious issues informally.

Muhammad Ali Zeb, CEO Adamjee Insurance, talking over phone from Lahore, stressed the need to address anomalies and strengthen the reinsurance segment.

Sohel Najam Kidwai, CEO, Shaheen Insurance, defended insurance companies. In a mailed comment he said, “The reinsurance premium is passed on to foreign companies due to limited financial capacity of the local industry that retains a very small percentage risk coverage ... we need more reinsurance companies to start operating.

“For growth, the regulators needs to take steps to increase consumer awareness”, he added.

Published in Dawn, The Business and Finance Weekly, May 8th, 2017

The SECP’s full response regarding the country’s insurance sector can be read here.