Q. Does it bother the SECP that insurance companies dealing in non-life insurance business are leaving Pakistan? The SECP has the legal mandate of both the regulator as well as facilitator for market development.
The impression that non-life insurers are leaving Pakistan is rather misleading in substance since only one insurer, which was in fact operating in the country as a branch of a foreign insurance company, has wound up its business from Pakistan for the reason that its presence in the country does not align with its global corporate strategy i.e. as part of its global strategy, it has intended to offer commercial insurance in Pakistan till 2018 only, however, the reinsurance arrangements show that it will be able to offer insurance to the local industry that will contribute to the economy.

Moreover, the SECP is in the process of examining the application for registration of one non-life insurer and the number of registered insurers in Pakistan has, over the period, remained consistent, if not increased.

It is worthwhile to mention that the non-life insurance sector grew by approximately 19pc during the 2016 in terms of gross written premium, compared to 5pc in 2015. The state owned national reinsurer has also shown growth of 8pc during 2016.

(The growth rate for 2016 is based on unaudited account and estimated figures since the statutory timeline for submission of annual accounts is April 30 and some companies seek extension in this timeline, hence, accounts of all companies are submitted by end of May)

Q. Why has the retention ratio been declining in the sector? It has come down from 54.7pc in 2010 to 49pc in 2014 according to AXCO Global statistics. Companies say it has dipped vertically in the recent past?

The retention ratio put forward by the named research firm is not accurate since it has not taken into account the premium ceded to the national reinsurer i.e. PRCL which is effectively retained within the country.

The accurate retention ratio for 2015 is 57pc and not 49pc. As mentioned above, the non-life sector is growing consistently in terms of gross written premium/ business volume, while there’s only one reinsurer to absorb the reinsurance risk for the consistently increasing insurance risk which is state owned national reinsurer.

In the absence of adequate reinsurance risk absorption capacity in Pakistan, the insurers are compelled to obtain reinsurance from reinsurers outside the country, which results in flight of reinsurance premium abroad and affects the retention ratio.

Q. What did the SECP do to reverse the trend? Why are agents and brokers allowed to operate without registration? Why would a global company care to take the trouble of opening an office in Pakistan if it can operate freely through front men? Does this lead to funnelling funds out of the country?

Since reinsurance is a global business, the insurers in Pakistan are also willing to and are capable of accepting reinsurance risks from abroad, which will lead to an inflow of reinsurance premium into the country.

The SECP has taken up the matter with the State Bank of Pakistan so as to allow insurers to issue US dollar denominated policies. This will enable insurers to accept inward facultative reinsurance from abroad (per risk basis) which is transacted in US dollar denomination. The SBP had been restricting such policies due to concerns related to foreign exchange reserves.

As regards the registration of insurance brokers and insurance agents, 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 the detailed form and manner for seeking registration and ancillary requirements thereto.

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.

Q. Does the lack of any risk based capital requirement further accentuate the trend? With CPEC gaining steam how does the SECP assess business going forward?

It would not be correct to state that the regulatory regime in Pakistan is not risk based.

The minimum capital requirement for life and non-life insurers has been increased in a phased manner through a notification issued in August, 2015 while the solvency requirement for insurers is effectively risk based i.e. the insurer is required to maintain assets in excess of its liabilities by certain prescribed margin.

Also, a rigorous criterion has been prescribed for the admissibility of assets for solvency purposes i.e. certain percentages of assets are taken towards calculation of solvency based on the liquidity and risk profile of such assets, instead of taking the total value of assets towards calculation of solvency margins. This phenomenon is effectively risk based.

Insurers are required to maintain assets in excess of liabilities by certain specified margins worked out through the admissibility regime as aforesaid, however, the solvency regime also requires insurers to derive the solvency requirement through business margins i.e. if business margins are higher, the absolute amount prescribed as the solvency margin requirement will not apply, instead, the solvency margin requirement worked out through the business margins of the insurers, will apply.

Moreover, enabling provisions for introducing the Risk Based Supervision (RBS) regime have been made part of the draft Insurance Bill which will enable a phased shift towards the RBS.

Other measures in this respect include the requirement levied by the Code of Corporate Governance for Insurers 2016, to establish a dedicated risk management department to implement the policies of Board of Directors regarding risk management.

Q. What is the current status of Draft Insurance Bill 2016?

The draft Insurance Bill was issued for public comments on 28 December, 2016.

Based upon requests from stakeholders two months’ time was allowed for submission of comments. In the light of discussion held at a consultative session 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.