Increasing coverage: Why Pakistan’s life insurance business is taking off

Higher formal sector employment, rising savings rates, easier access to policies cause coverage to expand.

KARACHI:

The trend is now unmistakable: life insurance coverage in Pakistan is rising and the industry is slowly beginning to attract the attention of investors.

In a special report this week, The Express Tribune explores the rise of the life insurance industry in Pakistan. We take a look at its history and the reasons why more than two-thirds of the market is currently dominated by one state-owned player (hint: nationalisation had something to do with it). We examine the rebirth of private sector life insurance and how these companies are making their foray into the market. And we examine how and why banks are helping to contribute towards the increase in life insurance coverage.

But most importantly, we examine just how many Pakistanis are covered by life insurance and why that number appears to be growing.

The insurance industry does not like releasing numbers of policyholders and individuals covered by their group life insurance plans. But based on some data provided by firms, as well as conversations with experts inside the industry, The Express Tribune’s analysis suggests that the total number of people in Pakistan covered by life insurance comes to about 13.6 million in 2011, or about 7.8% of the total population.

While that number is small, it appears to be steadily rising: it was just 5.9% of the total population in 2006. Extrapolations based on data from the State Bank of Pakistan and the State Life Insurance Corporation suggests that the number of people covered by life insurance in Pakistan appears to have grown at 8.3% per year for the past five years. Simply put, that means that the number of insured people in Pakistan doubles every ten years.

The insurance industry as a whole appears to be benefiting from this trend, with gross premiums reaching just under Rs68 billion in 2011. Over the past five years, total premiums at the life insurance industry have been growing at an astonishing rate of 28% per year. Private sector life insurance companies appear to be outpacing the government-owned State Life, though the difference is marginal.

So why are so many Pakistanis opting for life insurance policies? There appears to be a confluence of several factors at work. The first is the rise in formal sector employment, which now includes a greater share of Pakistanis employed than at any time in the country’s history, according to research conducted by the Pakistan Institute of Development Economics, a state-owned think tank.

A second factor appears to be the increasing ability of Pakistani households to save, and what appears to be a propensity among life insurance policy holders to view their policies as a form of forced savings. More than 80% of life insurance policy holders in Pakistan appear to have opted for the unit-linked insurance policies, which mean that they are counting on their life insurance to act as a savings mechanism in lieu of other investment instruments such as mutual funds.

A third appears to be an increasing willingness on the part of financial institutions such as banks to provide a distribution network for life insurance companies. The banks have their own reasons for doing so, which is explored in another part of this special report.

This data, however, points in one direction: that the life insurance business in Pakistan is likely to continue growing in both size as well as profitability. Perhaps it is unsurprising that Adamjee, the country’s largest general insurance company set up a life insurance subsidiary in late 2009. Meezan Bank appears to be trying feverishly to enter the Islamic insurance business. And MetLife, at least for now, appears content in holding on to the Pakistan subsidiary that it inherited from AIG.

The next logical phase would be for foreign players to be attracted to the market and set up shop in Pakistan. Insurance Commissioner Asif Arif believes that many foreign players are keen to invest, and some appear to already be making inquiries.

Should that happen, Pakistanis can expect an even wider array of life insurance options to choose from, and perhaps even a slowing in the rate of growth for insurance premiums, which appear to have grown at 16.2% per year for the past five years, slightly faster than the 13.8% inflation rate average during that period.

Published in The Express Tribune, October 22^nd,  2012.