OVER the last three years, most insurance companies in the country relied on government securities that were offering quite handsome returns for their investment income.

With yields on government bonds and treasury bills now lower, these companies expect to shore up their earnings by investing in stocks.

However, sustained profitability of insurance firms is also ensured by accelerated sales of insurance policies, which create more funds for them to invest. Insurance executives say that “premiums are eventually invested somewhere. And our profitability has to come from investment anyway. So, there is a need to expand premium volumes, through broader product base and enhanced sales”.

In nine months of 2012, net profits of all listed non-life insurance companies surged a staggering 121 per cent, primarily due to a massive 82 per cent growth in investment income. Meanwhile, in the previous year, the growth in the companies’ investment income was even more pronounced — a whopping 215 per cent.

However, the drop in investment income in 2012, when compared with 2011, has been attributed to the base effect, and also to declining interest rates on government-issued paper. It was not until February 8 this year that the State Bank of Pakistan opted to not change its policy rate.

“The profitability of the insurance sector would largely depend on which way interest rates move, or whether they remain stable, and also on whether the stock market makes more gains,” said an office bearer of the Insurance Association of Pakistan. He added that some companies that have been aggressively targeting newer clients, or are coming up with tailor-made insurance products, would “definitely see their profits grow, even if the investment scenario dulls a bit.”

However, life insurance companies are seemingly better positioned in this low-rate environment, as they have capitalised on a growing awareness among people to seek insurance policies so as to meet their future expenses. Jubilee Life Insurance Company, for example, reported a 47 per cent increase in its gross premiums in the full calendar year 2012 (compared with an average 29 per cent rise between 2006 and 2011). Company officials linked the rise to their ability “to reach out to people and sell more policies”.

Meanwhile, the State Life Insurance Corporation of Pakistan (SLIC), the market leader in the insurance segment, reported over 25 per cent growth in its premium revenues in CY11, as the company diversified its product base and reached out to more customers. More recent data for the company was not available.

Without disclosing any numbers, company officials said the trend had continued through CY12 as well. Commerce Minister Makhddom Amin Fahim said that the insurance giant’s overall profit in FY12 may have risen to Rs30 billion.

Encouraged by steady income flows, the company “opened new offices in Sharjah and Al-Ain last year,” said SLIC chairperson Shahid Aziz Siddiqui during a press briefing mid-January. “Now, we have a presence in Dubai, Abu Dhabi, Kuwait, Jeddah, Riyadh and Dammam.”

Insurance executives say that premium revenues of life insurance firms continued to grow even when economic growth was hovering around two to two-and-a-half per cent, with inflation around 14 to 15 per cent. That dispelled the traditional belief that low economic growth and high inflation hit premium revenues.

Now, with the economy poised to grow between 3.5 and four per cent, and inflation in single digits, these executives believe that premium revenues would rise further.

The country’s insurance sector has been growing steadily since 2009, and a couple of new firms have also entered into the business, increasing the total number of companies to 38. Of these, six are in life insurance, 31 in non-life insurance, and one provides reinsurance cover.

But despite the growth in the sector, the insurance penetration rate (the ratio of insurance premiums-to-GDP) is still very