General Insurance in Pakistan-PACRA

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Transcript of General Insurance in Pakistan-PACRA

  • December 2012

    The Pakistan Credit Rating Agency Limited



  • The Pakistan Credit Rating Agency Limited


    December 2012


    Summary Report 1

    Detailed Report:

    1. Insurance Key Concepts 2


    2. Global Snapshot of General Insurance Industry 3

    3. Review of Insurance Performance Globally 6


    4. Sector Profile 7

    5. Governance 8

    6. Management 10

    7. Systems and Controls 10

    8. Business Risk

    8.1.Sector Structure 11

    8.2.Business Growth and other trends 12

    8.3.Business mix and segments growth 13

    8.4.Profitability 15

    9. Risks summarized 17


  • The Pakistan Credit Rating Agency Limited


    PACRA has used due care in preparation of this document. Our information has been obtained from sources we consider to be reliable but its accuracy or completeness is not guaranteed. PACRA shall owe no

    liability whatsoever to any loss or damage caused by or resulting from any error in such information. None of the information in this document may be copied or otherwise reproduced, stored or disseminated in

    whole or in part in any form or by any means whatsoever by any person without PACRAs written consent. Our reports and ratings constitute opinions, not recommendations to buy or to sell.

    Tel: 92 (42) 35869504 Fax: 92 (042) 35830425





    Penetration 0.3%

    Density USD 4

    Gross Premium^ ~PKR 60bln

    Gross Sum Insured^ ~PKR 18 trillion

    Equity base^ ~PKR 80bln

    Loss Ratio* 54%

    Investment income

    as %age of NPR* 25%

    Operating Ratio* 74%

    Penetration: premium as % GDP

    Density: premium per capita

    ^public and private sector, estimated

    *private sector


    Slow growth in gross premium

    Intensifying competitive landscape

    Diversifying into non-conventional insurance, and product innovation

    evolving Investment strategy, risk averse stance

    Improving Underwriting Risk Management Framework

    Strengthening human resource

    Technology up gradation

    Regulators focus

    ANALYSTS Amara S. Gondal

    Jhangeer Hanif

    Abdul Haye

    Noman Umar

    +92 42 35869504

    ABOUT INDUSTRY: Pakistans general insurance penetration level (0.3%) is lower than the regional average (1.6%), and in terms of penetration, is ranked at 18


    position in Asia. Low penetration is because of various reasons ranging from cultural to sentimental however, low density beams out growth potential. The sector holds unique strategic significance for the countrys economy as it is predominantly used by the banking sector as a tool to mitigate risks associated with the credit exposures. More than half of gross premium is referred through banks. The General Insurance sector comprises 31 active companies, including one state owned and three takaful companies. A majority of premium (~85%) is written by the private sector, and is highly concentrated in top three players.

    PERFORMANCE: After having witnessing economic boom until CY07,the slowed down in economic growth in the country gave challenge to the industry; real GPW declined between CY08 and CY10.Meanwhile, law and order situation, equity market turbulence, and natural calamities spurred unique challenges to the industrys profitability, year after year. Since CY11 the GPW growth is picking up, yet, at slow pace. The motor segment declined with shrinking leasing portfolio of banks; on the other hand, the fire segment witnessed expansion, and health emerged another area of growth to the portfolio. Moreover, the sector shifted to a more risk adverse investment strategy, post stock market bump, diverting funds into risk free securities. This helped to attain relatively stable investment income to support the bottom line.

    STRENGTHS: The sector not only sustained its equity base from the pressure times but also took corrective measures in bridging the loopholes identified in crisis; though some smaller players had to quit. The sector witnessed shift towards a more diversified business mix with varied growth patterns observed in each segment. After witnessing saturation in conventional insurance, the sector is exploring opportunities in non-conventional insurance and bringing innovation to its product slate. Meanwhile, the sector is eyeing retail clientele. This is expected to tapper down the concentration risk in the medium to long term. Despite underwriting a large size of risk, the sector retains a small proportion of the exposure on its books on the back of strong reinsurance pool; which in itself witnessed expansion in the number of participants due to emerging regional reinsurers entering the Pakistani market. Sophistication in IT infrastructure and MIS, improving risk management framework, and more professional HR, though raised expense level, has improved ability to handle respective growth strategies. This has also helped in achieving efficiency while improving quality of service. Regulators enhanced attention to the sectoral reforms is ensuring better monitoring.

    KEY RISKS: Increasing risk of catastrophic disturbance due to recent geographical changes in Pakistan is critical for the insurance sector. In this regard, reinsurers strong backing and favorable treaty terms with adequate capacity arrangement would remain vital for the sector. Moreover, reasonable premium pricing plays its role, which is on declining trend. The business growth is expected to follow random walk amidst slow demand and high competition, and, hence, the core underwriting profitability remains uncertain. Reconciliation system of inter-company balances have traditionally remained inefficient, resulting in pilling up of old accounts write offs may be inevitable in small companies books. Small companies remain exposed to regulatory non-compliance, unless sponsors support is provided.

  • The Pakistan Credit Rating Agency Limited


    GENERAL INSURANCE Page 2 of 18

    December 2012



    Insurance; Risk sharing and Risk


    Insurance dates back as far as

    6000 B.C.

    Marine Insurance was

    the first ever

    form of


    Reinsurance; liability is joint

    Co-insurance; liability is

    several, limited

    to each

    participants respective share

    1.1 The concept: Insurance is an arrangement by which a company or the state undertakes to provide a guarantee of compensation for specified loss, damage, illness, or

    death in return for payment of a specified premium1. While the Insurance Association of

    Pakistan (IAP) defines it as a method of shifting the responsibility for losses to specialists

    (insurance companies) who handle the risk by spreading it over a large number of people or

    firms. It is a system of protection against loss in which a number of individuals agree to pay

    certain sums of money, called premiums, to create a pool of money which will use the

    contribution of these individuals to pay the losses of the few caused by events such as fire,

    accident, illness, or death.2

    1.2 Insurance categories: Insurance today is broadly categorized in two categories 1) Life Insurance and 2) General Insurance or Non-Life Insurance as the terms are used


    1.2.1 Life Insurance: Under this policy, the insurance company pays in case of demise of the policy holder or at the time of maturity of the policy. Hence the products available are

    either whole life insurance or term insurance.

    1.2.2 General Insurance (Non-Life): Most commonly it is divided into Fire, Marine, Motor (Auto), Engineering, and Health insurance. However, there are several general,

    specific and sub-classifications available in non-life insurance category having variations

    owing to geographical regions, cultures, customs and economic environment. The

    miscellaneous segment has also received significant growth in recent years with new

    innovative products being added to the category inline with the growing consumer needs. Reinsurance: In order to reduce risks involved in writing more risky and large policies, insurance companies also transfer portion of their risk to reinsurers. The two basic

    types of reinsurance are treaty reinsurance and facultative reinsurance; (1) Treaty

    reinsurance written to cover a particular class of policies issued by the reinsured automatically passes the risk to the reinsurer for all policies that are covered by the treaty,

    not just one particular policy; (2) Facultative reinsurance is issued on an individual analysis

    of the situation and facts of the underlying policy. It may cover all or part of the underlying

    policy. The reinsurance company after reviewing the associated risk may either accept or

    reject the proposed offer. Treaty policies are more general than facultative policies because

    the reinsurance decision is based on general potential lia