Do a high number of companies in an industry invariably lead to more competition, efficiency and overall growth? In theory, it may be true, but not so in practice.
Despite a high number of players, growth in Pakistan’s non-life insurance industry remains stunted. In contrast with India, where only 27 non-life insurance companies operate, there were as many as 30 companies registered with the Insurance Association of Pakistan (IAP) at the end of calendar year 2011 – the latest year for which the IAP has released financial data. This is despite the fact that the Indian economy is at least eight times larger than that of Pakistan.
And yet, annual growth rates for the non-life insurance sector’s premiums for the last three years have been 4%, 9% and 13%, which are hardly impressive given high inflation in the economy.
Experts believe that the primary reason why a high number of players have not translated into overall growth in non-life insurance is their short-range business strategy, which is hindering industry-wide expansion.
According to Securities and Exchange Commission of Pakistan (SECP) Insurance Commissioner Mohammed Asif Arif, non-life insurance companies can broadly be categorised in large, mid-size and small entities on the basis of the premiums they write every year.
However, unlike players operating in any other competitive industry, an overwhelming majority of small and mid-size companies make little or no effort to expand and grow into a large entity. “Top three companies can be called market-oriented in the real sense of the word, but most mid-size non-life insurance companies are what we call group-oriented entities,” Arif told The Express Tribune in a recent interview.
Referring to companies such as Habib Insurance, Century Insurance, UBL Insurers, Saudi Pak Insurance, Alfalah Insurance, IGI Insurance, Atlas Insurance etc, the SECP insurance commissioner said almost 60%-80% business of these entities originates from their parent groups. “They are interested in bottom line alone. They make no effort to increase their top line, fearing they might end up signing bad business on unfavourable terms,” he said.
As for the small companies, Arif is of the view that they lack resources to take big business, which forces them to operate through banks mainly in small cities and suburban areas where nobody buys insurance willingly. “I believe that the way they have met their paid-up capital requirement is questionable,” he said, adding that they survive only by targeting those businesses that buy insurance only to meet bank requirements.
The result is disastrous: the insurance company that offers a higher commission to bank staff ends up getting more business. “While big insurance companies offer banks a commission of around 15%, small companies generally pay them as much as 35%-40% commission,” Arif said.
Understandably, after doling out a considerable chunk of money as commissions, these small insurance companies are left with little resources to pay their claims and establish an effective administrative setup which, in turn, lead to non-compliance issues.
“When we issue notices, these companies go to court against the regulator. They manage to get stay orders in many instances, and then the legal procedure goes on for years. Meanwhile, they keep siphoning off their equity while hurting their clients’ interests,” Arif noted.
No wonder that the non-life insurance industry is dominated by the three largest companies. According to IAP’s data for 2011, Adamjee Insurance, EFU General Insurance and Jubilee General Insurance had a collective stake of 65.3% in the private-sector, non-life insurance market of Rs43 billion.
“Volumes may have increased, but their margins are shrinking,” Arif noted, adding that margins of the core business of non-life insurance companies have now decreased to just 3%-4%.
Published in The Express Tribune, July 24th, 2013.