Barring the fact that the country’s insurance penetration remains trifling, insurers have continued to grow bigger and improvement in the industry’s financials speaks volumes of the observation. With the release of 2014 statistics on insurance sector by Insurance Association of Pakistan (IAP), BR Research has attempted to evaluate the performance of non-life insurance sector since 2010.
Following the global financial crisis, premium written by insurance firms and the resulting underwriting profits have increased substantially, having risen at a compounded annual growth rate (CAGR) of 10 percent and 38 percent respectively between 2010-2014.
Yet, insurers continue to bank heavily on investment income for boosting their profitability growth. This is evident from the fact that the industry’s investment ratio has risen from 21 percent in 2010 to 31 percent in 2014.
It should also be noted that it’s the investment income that frames the bulk of profits of non-life insurance companies rather than the underwriting profits. As of December 2014, investment income represented over 30 percent of the sector’s premiums, while being nearly twice the underwriting profits. Little wonder then the country’s insurance penetration levels remain under the weather. A study by PACRA in 2011 on the country’s general insurance sector highlighted that Pakistan’s share of world market stood at a negligible 0.03 percent, thereby ranking poorly among other Asian countries.
Nonetheless, insurers’ efforts in easing off the claims expenses needs to be lauded. Better claims management has fared well in the form of strengthened underwriting profits and has lent a good hand in improving the quality of insurance portfolios. Claims ratio now stands at 50 percent, which is the lowest level ever since 2010.
Interestingly, the non-life sector continues to be dominated by the top 5 players that control around 65 percent of the market share in terms of net premiums. Although the situation seems to have moderated slightly over the years with the consolidation of small and mid-sized insurers, there still lies more room for improvement for smaller firms to attain a greater share of the pie.
Besides, the number of firms as represented by IAP has fallen from 31 in 2010 to 28 currently. This decline in number of firms can be attributed to the tightening of screws by the regulator over time. Recall that in 2007, the paid up capital requirement was enhanced to Rs300 million for non-life insurers, whereby some firms were compelled to wrap up their operations or merge with other insurers.
Moreover, just recently, the regulator has made the regulations stiffer by further increasing the paid-up capital requirement by Rs200 million in a phased manner by the end of 2017. And given the consideration that more than half of the insurers in this sector are currently falling short of the proposed paid-up capital requirement, one can expect the tally of insurance firms to drop down further.
Be that as it may, the insurance industry is gaining traction. Recent years have experienced some important developments on the regulatory front such as the introduction of microinsurance regulations and the allowance of window takaful operations. Besides, insurers are seen focusing on the introduction of alternative distribution channels such as teaming with telecommunication companies and asset management companies to build synergies.
Having said that, the possible next steps for insurers could be the focus on agriculture insurance, collaboration with the government in relation to health policies for the general masses and capitalization on the technological front. To achieve that, the regulator seems to be having a defined roadmap to take the insurance industry to the next level.
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