- Restrictions, monopolies, and tax burdens limit innovation and fair competition in Pakistan’s insurance industry
The insurance industry is marred with competition vulnerabilities, which erect barriers for new market entry. Some of the main issues are described below:
Restriction on Procuring Reinsurance outside Pakistan:
No insurer may purchase reinsurance for any insurance business underwritten in Pakistan outside the country without obtaining permission from the SECP. All the insurers are thus required to procure reinsurance from inside Pakistan. Once the local capacity is utilized then insurers are allowed to procure reinsurance from outside Pakistan. The restriction on procuring reinsurance from outside Pakistan creates a barrier for domestic insurers intending to procure reinsurance from foreign players. Although, such a restriction helps in managing the outflow of foreign exchange but it distorts competition. The reason being that the domestic service providers operate in a restrictive environment, having less incentive to innovate and offer better services.
PRCL Receives Statutory Reinsurance in Non-Life Treaty Insurance:
All the insurers are required to cover their risk by reinsurance. Section 42 of the Insurance Ordinance, 2000, directs that every insurer shall offer to reinsure with PRCL a certain proportion of its direct non-life insurance business. PRCL benefits from the regulatory support of the Government of Pakistan. PRCL has the ‘exclusive first right of refusal’ to acquire at least 35% of the reinsurance business from insurers operating in Pakistan. This policy gives PRCL the first option to select its preferred reinsurance business, and excludes other reinsurance providers from that 35% of the reinsurance market.
Foreclosure of Public Property Insurance for Private Sector:
The Insurance Ordinance 2000 grants NICL exclusive rights to underwrite and insure public sector firms, their assets, and properties. Therefore, no other entity can insure any public property unless granted permission by the government. These exclusive rights close the entry of other entities in this market segment, which hampers competition.
Government-backed Monopoly of State Life Insurance in Life Insurance Market:
The Federal government provides security to the policies issued by State Life Insurance. Although, the life insurance market is liberalized, however SLIC continues to enjoy this guarantee. SLIC uses this guarantee as a marketing tool, which provides it a competitive edge over others. While such guarantee by the government can distort the level playing field for other players, having a monopoly in the industry, SLIC may also abuse its dominance.
Anticompetitive Behavior of Banks in Bancassurance (Banca):
Insurance providers use banking channels to sell their products. Sometimes, banks impose additional internal limits on the amount of business, insurance companies can conduct through them. This practice hampers competition, as insurers, despite complying with the regulatory requirements of the SECP, are restricted from doing business beyond a certain point. This behavior by banks constitutes a refusal to deal and contradicts the spirit of competition.
Mis-selling and Deceptive Sales Tactics under Bancassurance/Bancatakaful:
Banks usually have large clientage, which the insurance provider targets. The banks sell insurance products to its customers on behalf of the insurance company. The bank/insurer staff do not properly guide the customers about the details of the insurance products, and the terms and conditions applicable. At times the information is in fine print that misleads and exploits the vulnerable customer. A policy holder can lodge his/her complaint with the insurance company and in case the customer grievance is not addressed, he can then lodge a complaint with the Federal Insurance Ombudsman (FIO). Determining who should be held legally accountable in the cases of consumer complaints is a challenge.
Limited Jurisdiction of Federal Insurance Ombudsman (FIO):
The FIO is a specialized institution that aims to develop a sound oversight mechanism for the malpractices in the insurance industry, and to provide protection to the policy holders. While FIO is created under the Insurance Ordinance and it should have mandate over all life and non-life insurance companies (private or public) operating in Pakistan. However, the jurisdiction of the FIO has been restricted to only the private sector insurance companies, while the jurisdiction over the government owned insurance companies (SLIC and Postal Life) remains with the Wafaqi Mohtasib. While on the one hand this jurisdictional issue between FIO and Wafaqi Mohtasib leads to confusion among the policyholders about where to file a complaint regarding insurance. On the other hand, the vast jurisdiction of the later results in filing of huge number of complaints and long time for disposal of the cases creating a barrier for the insurance sector’s growth and penetration.
Non-Implementation of Motor Third Party (MTP) Insurance:
It is obligatory for every motor coming on road in public place to have third party insurance. However, presently, the motor vehicle insurance is very low, as only 3% of the motors are insured. The reasons being a lack of awareness of the law, non-availability of a mechanism for verification of third-party insurance by the traffic police, lack of centralized database, and allegedly complicated procedure with low compensation. Implementation of MTP insurance can have significant benefits for both individuals and society as a whole.
Issues in Applicable Sales Tax on Insurance and Reinsurance Services:
The provincial governments levy sales tax on services in their respective jurisdictions. While the provincial sales tax on insurance premium is paid by the policy holder, the provincial sales tax on reinsurance premium is paid by the insurer, as excess risk is transferred to the reinsurer. At the reinsurance stage, the same insurance premium collected by the insurer is subject to sales tax for procuring reinsurance services. This creates a tax anomaly as sales tax is levied on already taxed premium. Further, sales tax is applicable on reinsurance even when exempted on life and health insurance and some general insurance. The taxation anomalies thus increase the cost of doing business, create a tax burden on the insurance industry at reinsurance stage, and act as an entry and efficiency barrier.
Federal Insurance Fee on Non-Life Insurance:
In 1989, the Government of Pakistan imposed a Federal Insurance Fee of 1% on the premium of non-life insurance policies. The industry was initially assured that this fee would be used to raise awareness about insurance in the country. However, the fee has not been used for this purpose, and instead adds an extra cost for non-life insurers.