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Growth in life insurance business

February 27, 2017

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The trend appears to be unmistakable. Life insurance coverage is growing and the share of private insurers in this market segment is increasing.

The numbers show that the profit of private life insurers continues to rise with assets and investments under their management posting a robust growth in line with the trend seen in the industry over last five years to six years.

The life insurers’ pre-tax profits, for example, spiked by almost a fifth to Rs3.7bn in the first nine months of 2016 to Sept from Rs3.1bn a year ago.

Assets under management of the five private companies operating in the life insurance segment of the industry increased by 28.6pc to Rs225bn from Rs175bn and investments grew by 26pc from Rs152.5bn to Rs193bn.

A financial analyst working at a major brokerage firm in Karachi attributed the performance of the life insurers to rapid growth in the country’s ever rising capital markets.

“As all the private insurers have invested heavily in the stock market, their earnings are showing a healthy growth and pushing their profitability,” he said.

In comparison with the growth in their profits, assets and investments, the premium rose slowly by a mere 5.1pc from Rs52.7bn to Rs55.5bn during the first three quarters of the year.

“With lower expense as a proportion of their gross premium written, the profitability of life insurance companies has remained strong (in the recent years),” the analyst said.

The private life insurance industry reported in 2015 that its net claims ratio had improved 3.5pc from 31.8pc a year earlier to 28.3pc. Higher business acquisition costs notwithstanding, the expense ratio of the industry fell from 28.6pc to 22.4pc.

Indeed, the premium base of the life insurance firms, including the state-owned State Life Insurance Company, has grown at a compound annual growth rate (CAGR) of 25pc since 2009, with total gross premium rising to Rs162bn at the end of 2015.

Private insurers had underwritten a little over half of it or Rs82.3bn, up by 52pc from Rs54.1b, at the end of 2014.

The industry owes much of its premium base growth to the introduction of Bancassurance, or the sale of life and other insurance products through banks.

Bancassurance helped private insurers reach banks’ customers through their vast branch network.

The improved income and awareness of middle class households has also driven the demand for life insurance. “Besides, life insurance is now being seen by customers as another investment vehicle, triggering greater public interest and participation,” argues Fahad Irfan, an analyst at Alfalah Securities.

With a significant proportion of premium invested into the life insurance companies’ own managed funds, customers are able to earn a handsome return on their investments.

Nevertheless, the private insurance segment is dominated by two companies, though others are catching up with the market leaders.

Despite years of high growth, life insurance coverage remains significantly small.

“Pakistan’s life insurance market remains very small despite rapid growth in its premium base in recent years,” Muniba Khan, manager at JCR-VIS, a credit rating agency, told Dawn.

She said both life insurance penetration and density remained very low in Pakistan compared with its regional peers.

Insurance penetration measures premium booked as a percentage of a country’s Gross Domestic Product (GDP) while insurance density assesses gross premium per capita.

Low penetration and density mean the life insurance industry has tremendous scope for expansion.

Life insurance penetration remained at lower levels and was around 0.57pc at the end of 2015 against the world average of 3.3pc.

“A similar trend was also observed in terms of insurance density depicting significant room for growth,” she said.

“The lack of development of networks on the part of life insurers to target prospective rural consumers who form a significant proportion of overall population, is also contributing towards low penetration.”

She said the insurers target only the urban population. “Though the situation is changing since the introduction of new distribution channels like Bancassurance, the companies would do themselves a service by reaching out to the rural population.”

In addition to six life insurance companies, including the state-owned SLIC, operating in the country along, two family Takaful firms are also working in this segment.

Though the market share of the Takaful operators remains small owing to lack of much public awareness about Shariah-compliant products and services, the opening of takaful windows by conventional life insurance companies is expected to help grow this segment.

Analyst expect the current growth momentum to continue in the future as more distribution channels are being explored. The use of information technology tools has also increased for back-end operations as well as for sales services to reach out to the customers.

The life insurance business has had good years and is likely to continue to grow in both size and profitability.

Published in Dawn, Economic & Business, February 27th, 2017