In the middle of April, the government laid down outlines of a new policy to extend insurance cover to rural areas and the low-income groups.

Responding to the official instance and changing market conditions, the three big public sector insurance companies — the State Life Insurance company (SLIC), Pakistan Reinsurance (PRCL) and the National Insurance (NICL), are being restructured.

“The market conditions warrant restructuring and re-positioning of the public and private insurance companies'', observed a senior executive of a private insurance company. In the last five years, the insurance business has grown at about 22 per cent per annum as the size of the economy doubled to $146 billion and global trade surged to $46 billion a year. Foreign investors are allowed 100 per cent ownership in insurance business and full repatriation of profit. Fast growth in insurance business and a liberal environment has lured foreign companies to invest here. The insurance industry sees even more rapid expansion in future and is gearing up to meet challenges from new competitors.

“Pakistan's economy is being gradually integrated globally which is putting new demands on domestic insurance industry'', observed a retired civil servant who was associated for long with the commerce ministry and insurance regulations.

The new policy has been formulated after extensive in-house commerce ministry’s consultations and studies. But the social objectives for this policy have been set by prime minister with an eye on the election in the coming months. But the government has not yet held any consultations with private insurance industry.

Insurance business foresees hectic round of consultations with the government and the regulator in the coming weeks, for settling modalities and operational rules of the new policy.

But there are doubts whether things would work out smoothly as the regulator- the Security Exchange Commission of Pakistan (SECP)- serves under the finance ministry and state-owned units-- SLIC, NICL and PRCL-are owned by the commerce ministry. These institutions remain under the administrative control of the ministry even after their structuring and turning into companies.

‘The SECP is not a success story,'' says a senior executive of a private company while referring to the controversies that emerged from stock exchanges during the last three years. The SECP has too much on its plate as it regulates the whole financial and corporate sector, leasing companies, investment banks, modarbas and mutual funds.

There is no insurance literate regulator in the SECP following the retirement of Etrat Rizvi in 2005. The insurance company now needs a specialised regulator with experts to supervise the restructuring of public sector companies. More than seven years ago, the proposal for setting up of Pakistan Insurance Regulatory Authority (PIRA) was mooted and was welcomed by stakeholders in the industry. However when the insurance rules were framed in 2002, the proposal of PIRA was dropped.

Under the new policy, private companies have been given an opportunity to participate in the government business except in areas declared strategic. So far, the word `strategic’ remains abstract and is open to more than one definitions. Obviously, the government itself will decide the definition of `strategic’ business. The private companies want an independent and professional regulator to hear both—the government and private business—before deciding the issue.

Still a more complex area is the one where private and public sector companies will take up business jointly. For instance, the NICL has entered into negotiations with four top private general insurance companies for sharing their business. With a reserve fund of Rs16 billion and Rs2 billion capital base, the NICL has for long thrived on a captive government business. It may lack dynamism of the private sector but has a big resource base as a cushion.

Under the changed conditions, the NICL is opting out to work with and also to compete with private general insurance companies. Though the private companies are in business for last five decades, they have relatively a small capital and resource base. ``Instead of sharing business with foreign reinsurance companies we want Pakistan's private general insurance companies to share a part of their risk with us'', Abid Javed, chairman of the NICL said. He is confident that this arrangement will also give his company a new exposure and experience to build up the business.

Executives of private companies support the concept of public private partnership but want a business framework within which this association can be made meaningful. ``There are bound to be new issues and disputes in such a public-private partnership,'' said a senior executive of a company. ``My company is in partnership with a public sector company in one area while it will be competing with it in other areas'', he explained while pointing out that it was difficult to anticipate issues and disputes that will arise in such an arrangement. He is convinced that the SECP lacks competence to visualise the problems.

The government has decided to raise the minimum capital of insurance companies to Rs300 million by 2009. Insurance business maintains that an independent and professional regulator can facilitate mergers and acquisitions of insurance companies rather than letting small companies to die.

“The government is planning to offer 10-15 per cent of the SLIC shares to investors in stock exchanges'', Kamal Afsar, chairman of SLIC disclosed. He said that the government may decide to divest more SLIC shares in future and its affairs may be allowed to be managed by an independent board of directors.

The SLIC is also being asked to give life insurance coverage to rural population on subsidy. Obviously, the subsidy will come from SLIC profits now being shared by policy holders. The SLIC requires a legal cover to share a part of this profit every year towards the subsidised policy holders.

Rural insurance is being advanced by the NICL working in collaboration with Khushhali Bank and Pakistan Rural Support Programme. Mmicro insurance covers live stock, small shops in villages and micro business. A few other private companies too are offering rural insurance policies.

Like rural banking and micro financing, the rural and micro insurance is a pretty expensive business that involves a good number hands and documentation. The insurance executives in public sector companies rely heavily on the micro financial institutions and NGOs to handle documents and monitor policy holders.

Punjab's rural areas are expected to be main beneficiaries of rural insurance. More than 80 per cent of agricultural credit is going to Punjab while share of Sindh and Balochistan in agricultural credit has been falling for the last three years. Market analysts consider this trend of agricultural credit will be replicated in rural insurance.

The government is expanding the capital base of the PRCL by 20 per cent of the existing capital of Rs540 million. At present the federal government has 51 per cent shares while SLIC has 24 per cent. Of the remaining 25 per cent, insurance companies and few other institutions have 13 per cent while individuals have 12 per cent.

As it seems, the government retains ownership control of three big insurance companies but is sharing management with private sector directors on the board. For the time being, privatisation of the three companies is ruled out. These companies have together a capital base of about Rs128 billion- an attractive pool of money- for the private insurance companies to share their risk business with these institutions.

The new insurance policy aims at eliminating the bogus insurance companies that offer third party cover to the owners of vehicles. These one-desk, one-chair companies are found mostly opposite provincial excise and taxations offices, banks and traffic police. The policy is sold in few hundred rupees and it generates billions of rupees business. The SECP has been asked to address this issue, but the insurance companies doubt its capacity to do the job.