Despite the volatile law and order situation, a higher risk of accidents from subpar infrastructure, dilapidated buildings, workplace safety violations and the impact of climate change that threatens life, property and assets, Pakistanis remain reluctant to use insurance services.

A lack of awareness about actual risk levels and available mitigation options, low service quality, limited market choices and high cost of insurance likely contribute to this reluctance. Less than one per cent of Pakistanis — 0.8pc to be exact — have insurance coverage, compared to 4pc in India.

The role of insurance in developing a market economy is established and documented, becoming even more critical in uncertain times and a relatively riskier environment.

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Insurers perform four critical functions. First, they provide protection to producers and consumers from financial loss. For companies, insurance safeguards against risks such as operational disruptions, data breaches, natural disasters, and supply chain issues. For consumers, it covers unforeseen expenses, medical care costs, property damage, car theft, and more.

Amidst limited insurance penetration, biased support to public-owned companies creates an unfair landscape for private companies

Second, they promote economic growth by keeping businesses afloat during emergencies, encouraging innovation and attracting investors. Third, insurers provide direction to the economy by offering coverage in areas such as environmental, social and corporate governance and fostering diversification. Fourth, they help stabilise during crises by providing a safety net, mitigating losses, and facilitating recovery.

In Pakistan, there are 42 insurance companies, of which 38 are members of the Insurance Association of Pakistan, but the market is dominated by four public sector entities: the State Life Insurance Corporation (SLIC), Postal Life Insurance Company, National Insurance Company Ltd. (NICL), and Pakistan Reinsurance Company Limited.

Insurance penetration remains limited, a concern marked by the country’s key regulators, including the State Bank of Pakistan (SBP), Securities and Exchange Commission of Pakistan (SECP), Competition Commission of Pakistan (CCP) and noted by global development agencies such as the World Bank. Private sector players and their collective platforms have also long advocated for a more conducive business environment, calling for a level playing field and a supportive tax regime to foster growth.

A recent in-depth study of the insurance sector by the CCP has highlighted the complexities of the regulatory environment, identified key challenges and proposed bold reforms to create a more competitive and dynamic insurance industry, according to senior CCP sources.

Sharing the details, they noted competition concerns stemming from the government’s preferential treatment of public sector companies, which creates barriers for new entrants and disadvantages private sector players.

“This support to state-owned insurance companies not only places a significant burden on the state treasury but also distorts the competitive landscape. For example, under the Insurance Ordinance of 2000, NICL is granted exclusive rights to insure public property, further restricting opportunities for private insurers.

“Similarly, life insurance policies issued by SLIC are backed by federal government guarantees under the Life Insurance (Nationalisation) Order 1972, giving it an unfair advantage over private competitors,” the CCP note stated.

The CCP has therefore recommended amendments to Rule 18 of the Insurance Rules, 2017, to allow insurers the freedom to choose between domestic and foreign reinsurers. This change could promote greater competition, efficiency, and innovation in the market.

Similarly, in bancassurance, banks often impose restrictions on insurance companies, limiting their business activities even when they comply with the regulatory requirements set by the SECP.

It also recommended stronger enforcement of Section 94 of the Motor Vehicles Act of 1939 to improve insurance coverage. Although this law mandates Motor third-party insurance for all vehicles, only 3pc of the vehicles in Pakistan are currently insured.

The CCP suggests that provincial governments consider exempting both the insurance and reinsurance sectors from sales tax on premiums that lead to double taxation and drive up costs. Additionally, the 1pc Federal Insurance Fee on non-life insurance premiums should be used to raise public awareness and dispel misconceptions about insurance.

Commenting on the situation, an expert with experience at a reputable overseas insurance company offered a cautiously critical perspective: “Insurance is an integral part of an economy’s financial services sector. For it to offer meaningful products and remain competitive in the region, foreign exchange regulations and local, federal and provincial taxation policies must be supportive. Currently, the SBP does not allow the settlement of claims outside of Pakistan, even when a premium has been received through inward foreign remittance.

“Similarly, settlement of claims outside the country is permitted only on travel insurance related to Schengen countries. Additionally, excise duty on both insurance and reinsurance places our market at a competitive disadvantage globally. Premiums are often shifted to territories with more favourable taxation and foreign exchange regimes.

“Regarding the insurance sector, the government’s continued involvement is a minor factor in its overall development. What is needed now is a holistic and pragmatic app­roach to this industry,” she concluded.

Published in Dawn, The Business and Finance Weekly, September 9th, 2024