Misfortunes never come singly. That’s one big misfortune for companies that sell insurance against misfortunes.

Non-life insurance players in Pakistan are in a tight spot. Calamities have struck their clients one after another, triggering insurance events — occurrences that result in insurance providers paying out on a claim.

Premiums should go up correspondingly. Yet their clients refuse to loosen their purse strings as they, too, get squeezed by decades-high inflation and unending political uncertainty.

“Big losses have happened in our market. One big name in textile, one big name in paper manufacturing, one big name in engineering. They’ve all come in a rapid succession in the last year and a half. Premiums are in distress,” said Muhammad Aminuddin, CEO of TPL Insurance Ltd, a listed non-life insurer that wrote gross premiums of Rs1.8 billion in the first half of 2022, up 31.7 per cent from a year ago.

‘Big losses have happened in a rapid succession in the last year and a half. Premiums are in distress’

TPL Insurance Ltd’s market share was 2.9pc in 2021 in terms of gross premiums, making it the 12th largest among the 28 non-life members of the Insurance Association of Pakistan.

General insurance companies are also getting the short end of the stick in the international reinsurance market where they pay a lot bigger insurers to insulate themselves from part of their liabilities.

That’s because of the back-to-back global calamities like deadly hurricanes, once-in-a-century pandemic and all-out wars involving energy-producing countries.

“We’re going through a tough time. Global reinsurance companies like Hannover Re, Munich Re and Swiss Re have had a spate of losses recently. As a result, they’ve reduced their capacities that they offer to insurance companies like us,” said Mr Aminuddin in a recent interview with Dawn.

In layman’s terms, this means that local insurance companies are left with no choice but to reduce their risk (i.e. sum insured) to control losses. Secondly, the changing trend in the international reinsurance market has increased the insurance pricing that local players offer to their clients.

Both factors are getting more visible with each passing day.

Most non-life insurance companies operate on a 12-month cycle with the re-setting taking place at the end of either June or December. It means the insurer gets to re-bid for business on an annual basis while the client decides whether it wants to stick to the existing provider or sign up another company.

“In the mid-2022 cycle, we experienced challenges. Reinsurance companies took a step back and reduced the offered capacities while demanding higher rates. We’re going through a market adjustment phase. The upcoming renewals in January and July of 2023 will lead to further tightening. It may have a substantial impact on our bottom lines if we’re unable to pass it on,” he said.

The nationwide floods that have submerged one-third of the country and driven 33 million people out of their homes have further aggravated the situation for general insurers. “It’s only getting started,” he said about the impact of the losses to crops and livestock.

In absolute terms though, the impact of crop and livestock–related claims aren’t going to be seismic. Farmers don’t usually insure crops and livestock. Their share in industry-wide gross premiums of Rs113.6bn in 2021 was only around 1-2pc, he said.

Even some of the numbers one finds in the agriculture-related insurance data are “misrepresentative,” he noted.

Under regulatory directives, commercial banks have made it mandatory for farmers to get insurance to qualify for loans on five essential crops. The price of such insurance has to be high to make any financial sense for insurers since the number of borrowers from the farm sector is quite low.

So to bring down the pricing, the regulators have capped the crop-related premiums with losses. Under the current arrangement, the maximum payout in case of a calamity is capped at 300pc of the premium. Hypothetically speaking, if the premium is 1pc on the insurance of an asset worth Rs100m, the maximum payout in the case of a claim can only be Rs3m.

In addition to this scheme, TPL Insurance Ltd has also been trying to increase its footprint in crop insurance for the last couple of years, said Mr Aminuddin.

It’s done a pilot programme with the help of two banks and a Swiss company, which helps gather satellite data to determine the area yield index. “We pay the farmer if his yield is less than the average yield in his area. It’s not calamity-triggered,” he said, noting that it’s a “more precise” way of doing crop insurance.

“It’s tailor-made. Pakistan has a lot of catching up to do in crop insurance. It’s sad that we haven’t done that earlier.”

Published in Dawn, The Business and Finance Weekly, October 11th, 2022