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A long pull for the emerging insurance industry

A long pull for the emerging insurance industry

The insurance industry in Pakistan is poised for rapid growth leading to greater demand for insurance products and higher rates of affordability among the enormous potential consumer market. However, structural challenges will continue to hamper the market from reaching its full potential. Poverty rates are high, as are informal employment rates, and this lessens the demand for retirement and other life products.

The non-life sector remains heavily reliant upon basic lines and in a fragmented and disjointed marketplace, there is downward pressure on pricing and limited profit margins. Moving forward the market would benefit from foreign expertise and investment, though Pakistan remains a challenging operating environment that could deter interested multinationals.

Broadly, there are two main channels through which the insurance sector can help the economic and social development of a country: first, by reducing uncertainty, and second, by generating long-term financial resources. Through the first channel, a well-functioning insurance sector facilitates the investment decision-making process and enables businesses to continue operating even if catastrophic events (such as earthquakes, floods, severe weather conditions, etc.) hit the economy. The latter, in turn, provides some protection to households by reducing the probability of job and income losses. A developed health insurance industry also protects households from any major financial losses resulting from idiosyncratic shocks such as fires, thefts, illness, accidents and death, etc.

The second channel, i.e. increasing the supply of the long-term financial resource, plays a vital role in economic development. Funds generated by the insurance industry are mainly invested in other financial instruments; especially in government securities, stocks, corporate debt and long-term certificates of deposits issued by other financial institutions. The insurance sector also plays a supportive role in the development of other financial institutions and markets. For example, both availability of funds and insurance facilities, allow financial intermediaries to enter into new markets.

Low levels of insurance penetration and density levels have been the main hurdles in the growth of the insurance industry up till now. Pakistan is a Muslim-dominated country and since conventional insurance products are incompatible with Sharia law, there is a large-scale risk associated with conventional products. Growing fraud and crime act as one of the biggest challenges for Pakistani life insurers operating in the country. The low penetration reveals the segment has positive growth potential, and insurers are targeting customers by offering various traditional life insurance products such as individual term life, individual whole life and group life and pension products. With insurance penetration at just around 0.2 percent of the total population and the size of the insurance industry below 1 percent of GDP, future growth in insurance will come only through increased awareness.

The key drivers of insurance growth in a country are typically macroeconomic factors, regulatory factors and demographics of a country. In Pakistan, the insurance penetration is less than 1 percent, which is very low compared to India and Bangladesh. Yet there is a remarkable opportunity for the whole sector as there is a huge untapped market. Insurance companies can grab this opportunity with innovative products tailor-made for customers’ needs. Life insurance in Pakistan promises exciting growth. There is also room for new players in both conventional and Takaful areas.

A major challenge facing the insurance industry in Pakistan is the lack of quality human resources. Insurance companies need to invest in developing the competencies and skills of their employees along with technical abilities to innovate new products. Further, inculcating ethics and good business practice is also crucial. Another major area of utmost importance is customer service. The needs of the customers are evolving and they rightly demand value and differentiation in return for their loyalty and long-term relationship. The insurers have to abide by various operational, regulatory and financial requirements which make it all the more complex and expensive. When insurers deliver an exceptional customer experience, it ultimately translates into profits. Therefore, continuous improvement and innovation are required in this area for insurance companies to excel. The insurance sector is going through a lot of changes worldwide, creating new challenges and opportunities for both insurers and regulators. Therefore, it is essential for insurance companies to go through organizational and operational restructuring to achieve overall efficiency by avoiding financial risk and uncertainties. The players in the insurance industry in Pakistan should ensure that life insurance is presented to an individual with all its advantages and benefits. Better education and awareness that would result from a fair and quality transfer of knowledge would itself represent a motivational force that could be highly beneficial for the economy in general and for the insurance industry in particular.

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