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Pakistan’s insurance sector

Published on 4th Mar, Edition 10, 2013


Insurance in Pakistan has come a long way since the time when businesses were tightly regulated and concentrated in the hands of a few public sector insurers. Factors like slowdown of economic activities, law and order issues and high inflation are deteriorating the performance of this sector. Though insurance market in Pakistan is highly concentrated in urban areas and many insurance companies are subsidiaries of large industrial groups that were created mainly to reduce the outflow of funds in the form of premiums, to manage the risks of these industries and to generate profits out of it. Gross premium has crossed Rs70 billion mark in 2012 by 4 public and 50 private sector insurance companies in Pakistan. Like many other developing countries, the size of Pakistan’s insurance industry is relatively small in proportion to its GDP i.e. 0.3 percent and globally ranks at 74. However, in India, Sri Lanka and Bangladesh, life insurance penetration remained 4.4, 0.6 and 0.7 percent, respectively.

At the time of independence, Pakistan had five domestic and 77 foreign insurance companies but private companies were nationalised in 1973. There were several reasons behind that decision; firstly, government wanted to channel more resources to national development programmes. Secondly, it sought to increase insurance market penetration through nationalisation. Thirdly, government found a number of failures of insurance companies. It was argued that the failures were the result of mismanagement and nationalisation. However, besides nationalisation this sector remained underdeveloped due to various other reasons.

Following the economic reforms in the early 1990s, various plans to revamp the sector finally resulted in the passage of private sector. Significantly, insurance business was opened on two fronts; firstly, domestic private-sector companies were permitted to enter into both life and non-life insurance business. Secondly, foreign companies were also allowed to participate. This shift brought about major changes to the industry in Pakistan. After the inauguration of a new era of insurance, development saw the entry of international insurers, the proliferation of innovative products and distribution channels, and the raising of supervisory standards. A range of new products were also launched to cater to different segments of the market, while traditional agents were supplemented by other channels including the Internet and bank branches. Notwithstanding the rapid growth of the sector over the last decade, insurance in Pakistan remained at an early stage of development. One of the biggest challenges private insurance companies is facing these days is the shortage of trained field force. In addition, high inflation is also one of the major impediments to the sector, which erodes disposable income of general public.

Per capita spending on life insurance in Pakistan is negligible and can be referred to as one of the lowest in the world. Lack of awareness of availability of life insurance as a viable support and its role in bringing economic stability and benefiting society is one of the key reasons for its low penetration in the country, though once can’t ignore affordability issue. Moreover, general perception is also against this form of insurance, where most of the people consider it as an un-Islamic and this factor is even more pronounced in the case of ‘Life’ assurance. Even then data of 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 percent per year in the past five years, whereas total number of people in Pakistan covered by life insurance comes to about 14 million in 2012, or about 8 percent of the total population.


Total size of insurance business in various countries depends on the nature of insurance markets, regulatory environment, accounting procedures and financial development. Moreover, the demand for insurance also depends on real disposable income of the prospective policyholder, the individual’s preference about the need for financial security, economic environment, interest rates, inflation and insurance premium rates. Furthermore, cultural and religious aspects of a country also make effect in the development of insurance business. In case of Pakistan where 65 percent of the population lives in rural areas and given the low per capita income, the insurance industry has not been able to create sizeable demand for its services. Because of this, people generally tend to opt for insurance coverage only where it is either mandatory by law, as in the case of motor vehicles a third party insurance, or when it is one of the requirements of lending institutions. However, there are no two opinions that substantial vacuum exists in the country, which can only be filled once the generally negative perception about insurance is removed and people are made aware of its benefits to the national economy in general and to their own personal well-being in particular.

The mix of non-life business in Pakistan resembles to most of the other developing regional economies. Motor and fire policies are the backbone of non-life business. They also contribute the most to the overall premium growth in the last five years. Personal lines insurance is relatively well-developed that is mainly manifested in personal motor and private residential fire policies. Despite the relatively well-developed personal lines business in Pakistan, it is expected that growth in the area will also be strong in the coming years. The growth in sales of motor vehicles remains high and demand for additional protection strong. Furthermore, there is a plenty of room for growth in personal accident, health and other liability classes. Rising household income and risk awareness can be the key catalysts to spurring more demand for these lines of business in future. In particular, health insurance could potentially have an important role in driving development of insurance market forward.

If economy grows, then there are good reasons to expect that the growth momentum can be sustained. In particular, there is huge untapped potential in various segments of the market. While the nation is heavily exposed to natural catastrophes, insurance to mitigate the negative financial consequences of these adverse events is underdeveloped. The size of the insurance industry in Pakistan is expected to double over the next five years just as it has doubled over the same period prior to it with an annual growth exceeding 30 percent.

Pakistan’s economy needs to grow annually at a rate of at least 4 percent and ignoring this important, sector will undermine the overall potential of country’s economy. It is therefore, vital to educate people on the importance of insurance. It would be more appropriate to put this sector on the top of the priority list.


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