With rapid diversification of economy, the insurance market 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, the market will reach its full potential when it will overcome structural challenges. As poverty rates and informal employment rates are high, this reduces demand for retirement and other life products. The non-life sector remains heavily reliant upon basic lines and in a fragmented and disjointed marketplace as there is downwards pressure on pricing and limited profit margins. Moving forward, the market could benefit from foreign expertise and investment, though Pakistan remains a challenging operating environment which could deter potential 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 earthquake, floods, and severe weather conditions, etc.) hit the economy. The latter, in turn, provides some protection to households by reducing probability of job and income losses. A developed and healthy insurance industry also protects households from any major financial losses resulting from idiosyncratic shocks such as fires, thefts, illness, accident and death, etc.
The second channel, i.e. increasing supply of 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 facility, allow financial intermediaries to enter into new markets.
Life insurance affects a country’s social and economic structure to a great extent. Due to its nature, life insurance differs from all other kinds of insurance. In the last few years, this sector in Pakistan has experienced tremendous growth of 30-35% annually. There have been many product and operational innovations because of customer needs and increased competition among the players. Although the industry faces the challenges of uncertain economic conditions, it has also benefitted from the changes in the regulatory environment. The impressive growth of the last few years is due to aggressive expansion of distribution channels, especially bancassurance which now comprises of a significant portion of the business of most private sector players. Bancassurance has enhanced the insurance industry in Pakistan in terms of increased market penetration by being able to access millions of bank’s customers.
One of the biggest risks that the insurance industry faces is concentration risk. The private insurance segment is dominated by two companies, though others are catching up with the market leaders. In addition to six life insurance companies, including the state-owned SLIC, operating in the country along, two family Takaful firms are also working in this segment. Though the market share of the Takaful operators remains small owing to lack of much public awareness about Shariah-compliant products and services, the opening of takaful windows by conventional life insurance companies is expected to help grow this segment.
The improved income and awareness of middle class households has also driven the demand for life insurance. Besides, life insurance is now being seen by customers as another investment vehicle, triggering greater public interest and participation. With a significant proportion of premium invested into the life insurance companies’ own managed funds, customers are able to earn a handsome return on their investments. The current growth momentum is expected to continue in the future as more distribution channels are being explored. The use of information technology tools has also increased for back-end operations as well as for sales services to reach out to the customers.
The insurance sector is going through a lot of changes worldwide, creating new challenges and opportunities for both the 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 market should ensure that the 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.