Strengthening industry: Non-life insurance firms to increase paid-up capital

SECP says it will be ‘appropriate’ for minimum amount to be Rs500m.

KARACHI: The Securities and Exchange Commission of Pakistan (SECP) has said it will be ‘appropriate’ to increase the minimum paid-up capital requirement for non-life insurance companies to Rs500 million by 2017.

In a recent report prepared by the SECP’s insurance industry reform committee, the top regulator said the increase in the capital requirement will be the most important step in strengthening the insurance industry.

The SECP had directed non-life insurance companies in 2007 to gradually increase their paid-up capital from Rs80 million to Rs300 million by the end of 2011. However, the capital of 40 companies operating in the country at the end of 2012 varied from company to company.

For example, there were seven insurers at the time with paid-up capital exceeding Rs500 million, four insurers with capital between Rs400 and Rs500 million, 13 insurers with capital between Rs300 and Rs400 million and four insurers with capital of less than Rs300 million.

When the capital requirement was enhanced at the end of 2007, Rs300 million was equivalent to approximately $5 million. Given the depreciation of the rupee against the dollar, however, the same amount was equivalent to less than $3 million by the end of 2012, the report noted.

Paid-up capital forms the basis of financial strength for any insurance company by allowing better risk management and market confidence.

Out of the total premium income of Rs57 billion for 2012 – the last year for which complete data is available – the market share held by the top three players in the non-life segment was 60%. These companies were EFU General Insurance, Adamjee Insurance and Jubilee General Insurance.

If the next two largest players are also included, their collective share in total premium income increases eight percentage points to 68%.

“One of the primary reasons for the current state of affairs of the (non-life) industry was that a majority of insurers had too little resources to invest in the right infrastructure, technology, risk management processes and human resource development,” the report noted.

Emphasising that 65% of companies in the non-life insurance industry hold a market share of only 18%, the report said these insurers generally rely on the smaller market share and do not have financial resources to develop better quality branch network and distribution channels.

Indeed, data from 11 Asian countries shows that the prescribed minimum paid-up capital requirement for non-life insurers in Pakistan exceeds the limit set by Bangladesh and Iran only.

Dollar-denominated policies

The SECP has also recommended that the restriction imposed by the State Bank of Pakistan (SBP) on the issuance of dollar-denominated insurance policies should be reviewed.

“The non-life insurers face immense administrative issues while providing insurance cover to the clients involving foreign direct investment, which requires insurance policies be issued in dollar denomination,” it said, noting that the issue should be taken up jointly by the SECP and SBP.

Published in The Express Tribune, March 3^rd, 2014.

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