Published by BUSINESS MONITOR INTERNATIONAL LTD
Pakistan Insurance Report 2008 Including 5-year industry forecasts
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Pakistan Insurance Report 2008 Including 5-year industry forecasts by BMI
Part of BMI's Industry Report & Forecasts Series Published by: Business Monitor International Publication date: February 2008
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Pakistan Insurance Report 2008
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Pakistan Insurance Report 2008
CONTENTS The Sector At A Glance ...................................................................................................................................5 Table: Overview Of Pakistan’s Insurance Sector .................................................................................................................................................. 5 Key Insights On The Insurance Sector Of Pakistan ............................................................................................................................................... 6
SWOT Analysis.................................................................................................................................................7 Pakistan Industry SWOT........................................................................................................................................................................................ 7
Key Features Of This Report...........................................................................................................................8 Latest News ......................................................................................................................................................9 Table: Analysis By Lines (PKRmn)........................................................................................................................................................................ 9
Projections And Forecasts............................................................................................................................11 Table: Premiums – Historical Data And Forecasts, 2005-2012 .......................................................................................................................... 11 Projections And Drivers Of Growth..................................................................................................................................................................... 11 Table: Growth Drivers......................................................................................................................................................................................... 12
Country Update ..............................................................................................................................................13 Macroeconomic Outlook...................................................................................................................................................................................... 13 Table: Pakistan – Economic Activity ................................................................................................................................................................... 15 Political Outlook.................................................................................................................................................................................................. 15
Insurance Business Environment Ratings ..................................................................................................19 Table: Pakistan – Insurance Business Environment Indicators ........................................................................................................................... 19 Table: Asia Pacific Insurance Business Environment Rankings .......................................................................................................................... 20
Regional Context............................................................................................................................................21 Table: Non-Life Premiums In A Regional Context, 2007 ..................................................................................................................................... 21 Table: Life Premiums In A Regional Context, 2007............................................................................................................................................. 22 Table: Comparison Of Major Lines As % Non-Life Premiums, 2006 .................................................................................................................. 23
Analysis Of Competitive Conditions ............................................................................................................24 Pakistan – Non-Life Segment............................................................................................................................................................................... 24 Table: Presence Of Cross-Border Insurers, Non-Life.......................................................................................................................................... 25 Pakistan– Life Segment........................................................................................................................................................................................ 26 Table: Presence Of Cross-Border Insurers, Life.................................................................................................................................................. 27
Methodology ...................................................................................................................................................28 Basis Of Projections ............................................................................................................................................................................................ 28 Insurance Business Environment Rating.............................................................................................................................................................. 29 Table: Insurance Business Environment Indicators And Rationale ..................................................................................................................... 30 Table: Weighting Of Indicators ........................................................................................................................................................................... 31
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Pakistan Insurance Report 2008
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Pakistan Insurance Report 2008
The Sector At A Glance Table: Overview Of Pakistan’s Insurance Sector
PKRmn
US$mn
EURmn
2007 premiums (estimate)
30,989
500
375
2007-2012 premium growth
62,964
887
707
2007-2012 CAGR, %
25
23
24
Penetration as % of GDP, 2007
0.3
Segment measure of openness to new entrants (out of 10)
4.0
Non-life segment
BMI segment rating
27.5
Life segment 2007 premiums (estimate)
25,014
404
303
2007-2012 premium growth
22,146
292
240
2007-2012 CAGR, %
14
18
12
Penetration as % of GDP, 2007
0.3
Segment measure of openness to new entrants (out of 10)
3.0
56,003
904
678
2007-2012 CAGR. %
20
18
19
Penetration as % of GDP, 2007
0.6
BMI segment rating
22.5
Total insurance sector 2007 premiums estimate)
BMI Insurance Business Environment Rating
36.5
CAGR = compound annual growth rate. Source: BMI
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Pakistan Insurance Report 2008
Key Insights On The Insurance Sector Of Pakistan Any coverage of Pakistan – whether by a commercial intelligence publisher such as BMI or by the mainstream media – focuses on the unstable and complex political situation. In the recent past, the economy has performed well. However, as we explain, it is not clear that this will continue to be the case in 2008. In spite this it is easy to find reasons to be positive about the prospects for Pakistan’s insurance sector. First, it is growing – at double-digit rates – from very low levels of development. Second, the three largest non-life companies, which speak for about two-thirds of the total market between them, are profitable and sophisticated groups. So too is the near monopoly, and still state owned, life company. Third, despite the challenges faced by Pakistan, and the presence of entrenched local players, AIG and Allianz have seen fit to set up operations in the country – although the latter is present via a small joint venture that focuses on health insurance.
The negative features of the insurance sector – only some of which can be linked to Pakistan’s extremely high country risk – are also considerable. Even though the non-life segment is underdeveloped there is no sign that penetration is increasing. Indeed, the H107 results of the three largest local non-life groups indicate that penetration remains stagnant. The implication is that further growth in non-life insurance will depend entirely on further growth in GDP. Second, life density is so low that any optimism for the prospects of the life segment should be questioned. Third, many of Pakistan’s non-life companies are tiny operations, writing US$1mn in premiums (or less) annually. Still, in fairness to Pakistan’s insurance sector it should be noted that the competitive landscape is much less bizarre than that of Nigeria or even Ukraine – where it is not clear that a plethora of very small and obscure insurance companies are really operating as such.
As in other Islamic countries, there has been much excitement in the mainstream and specialist financial media for the prospects of Takaful, or Islamic-compliant, insurance. Four Takaful operators have been licenced over the last two years. It is not clear that any are writing significant business. It is also not clear that the Takaful operators will be able to escape the challenges facing the overall insurance sector.
In the event that Pakistan’s insurance business environment improves, the implications could be huge. On balance, we would expect the main beneficiaries to be the three largest non-life companies and the dominant life group. These have the greatest ability to capture economies of scale or to profit from an association with a major global group.
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Pakistan Insurance Report 2008
SWOT Analysis Pakistan Industry SWOT
Strengths
Weaknesses
Opportunities
Threats
!
Both life and non-life insurance appear to be growing quite rapidly from a very low base
!
In the recent past, the economic environment has been favourable
!
The three largest non-life groups appear substantial and dynamic. The overwhelmingly dominant life company is a state-owned near monopoly that is one of Pakistan’s largest institutional investors
!
The non-life segment appears to have moved well beyond motor insurance
!
There is no sign that non-life penetration is growing. This means most absolute growth in non-life insurance will depend on increases in nominal GDP
!
None of the local insurers are large by international standards. The non-life segment is characterised by a relatively large number of tiny operations. Some of these groups achieved gross written premiums of less than US$1mn in 2006
!
The comparative absence of multinational groups from one of the world’s most populous, and in some ways quite sophisticated, developing countries suggests that there are significant barriers to entry
!
Any improvement in the overall level of country risk should benefit the insurance sector
!
In the event that the general insurance business environment improves, any of the three largest non-life groups (and the dominant life company) could benefit enormously from a closer association with a major multinational
!
The potential for Takaful may be grossly over-estimated
!
Far more than in most countries, the potential for non-life insurance depends on the growth of nominal GDP, which may slow over the next year or so
!
Risk levels are so high that it is difficult to envisage life penetration rising much from the current – rock-bottom – levels
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Pakistan Insurance Report 2008
Key Features Of This Report This report is substantially different from its predecessor. For virtually all countries considered by BMI, including many for which we do not regularly produce reports on the insurance sector, 2008 reports include hard data – derived from official sources – to the end of 2006. They incorporate forecasts as far as 2012. To a much greater extent than was previously the case, we have incorporated details of the various lines that comprise the non-life segment. Most importantly, we have introduced the new Insurance Business Environment Rating (IBER). The IBER combines our assessment of the insurance sector – which is based predominantly on quantitative data – with BMI’s proprietary Country Risk Rating (CRR). The details are given in the methodology section at the end of this report.
The result is that it is now much easier to consider the business environment for the insurance sector in any one country relative to the business environment for other industries in that country that are considered by BMI, and the business environment for the insurance sector in other countries.
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Pakistan Insurance Report 2008
Latest News The Slowing Growth Of The Non-Life Segment Pakistan’s non-life segment appears not to be growing rapidly or evenly.
In H107 the gross written premiums of EFU General Insurance, Adamjee Insurance and New Jubilee Insurance rose, in local currency terms, by 0.7%, 10.6% and 38% respectively. The combined gross written premiums of these three companies, which account for about two-thirds of the entire non-life segment, therefore rose by about 10%. All three reported positive investment income. The implication of this is that non-life premiums appear to be rising broadly in line with nominal GDP. Put another way, non-life penetration is not increasing – even though non-life insurance is very underdeveloped in Pakistan and the four largest groups (the fourth being AIG’s affiliate New Hampshire) are substantial and sophisticated operations.
Taking a longer term view, this suggests that 2004, 2005 and 2006, when non-life premiums grew by 29%, 35% and 22% respectively, were years in which absolute growth was abnormally large.
The Insurance Association of Pakistan noted that at the end of 2006 total assets of the non-life segment amounted to PKR54,710 mn (or slightly less than US$1 bn). Investments amounted to PKR25,304mn. The Securities and Exchange Commission of Pakistan noted that, at the end of 2004, the total assets of State Life Insurance Corporation (SLIC) amounted to PKR120 bn. The assets of the other four life insurers were insignificant.
Table: Analysis By Lines (PKRmn)
2005
2006
2007e
Fire
6,563
7,770
1,207
Marine
3,562
3,847
285
Accident
8,587
11,061
2,474
Non-tariff
3,825
4,764
939
22,537
27,442
4,905
Total non-life lines
e = estimate. Source: BMI
Other Trends Figures published by the Insurance Association of Pakistan indicated that accident insurance accounted for most of the absolute growth in non-life premiums in calendar-year 2006.
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Pakistan Insurance Report 2008
As in other Islamic countries, the excitement about the potential for Takaful insurance is huge. The reality, on the other hand, is disappointing. The stagnation in non-life penetration and the extremely low level of life density suggests that there is little interest in (or, for much of the population, ability to pay for) insurance of any kind. To date, only four Takaful operators have been licenced. Two of these – one specialising in general insurance, the other in life – are backed by the same group of (mainly) Qatari investors. As yet, it is not clear that any of these companies are writing significant business.
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Pakistan Insurance Report 2008
Projections And Forecasts Table: Premiums – Historical Data And Forecasts, 2005-2012
Non-life premiums (PKRmn)
2005
2006
2007e
2008f
2009f
2010f
2011f
2012f
22,840
28,198
30,989
39,277
48,343
59,045
71,833
93,953
23
10
27
23
22
22
31
21,322
25,014
29,917
34,150
38,480
43,009
47,160
16
17
20
14
13
12
10
49,520
56,003
69,194
82,493
97,525
114,842
141,113
20
13
24
19
18
18
23
471
500
607
733
883
1,060
1,387
22
6
21
21
20
20
31
356
404
462
518
575
635
696
14
13
14
12
11
10
10
827
904
1,069
1,251
1,458
1,695
2,083
19
9
18
17
17
16
23
377
375
461
565
689
827
1,082
22
0
23
22
22
20
31
285
303
351
399
449
495
543
14
6
16
14
13
10
10
662
678
813
963
1,138
1,322
1,624
19
2
20
19
18
16
23
% change Life premiums (PKRmn, estimate)
18,427
% change Total premiums (PKRmn)
41,267
% change Non-life premiums (US$mn)
386
% change Life premiums (US$mn, estimate)
312
% change Total premiums (US$mn)
698
% change Non-life premiums (EURmn)
309
% change Life premiums (EURmn, estimate)
249
% change Total premiums (EURmn)
558
% change
CAGR 20072012, %
25
14
20
23
11
18
24
12
19
e/f = estimate/forecast. Source: Regulator(s) and/or trade association(s), BMI
Projections And Drivers Of Growth In the past we assumed that non-life insurance premiums were driven by two factors: nominal GDP and penetration. Furthermore, we assumed that non-life penetration (i.e. premiums as a percentage of GDP) would rise steadily from the 2006 level to the level we projected for 2011. In a similar way, we assumed
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Pakistan Insurance Report 2008
that life premiums were driven by two factors: total population and density (i.e. premiums per capita). We assumed that life density would rise steadily from the 2006 level to the level that we projected for 2011.
In this report we seek to improve our forecasting technique. If possible, we will project premiums ‘from the bottom up’. Specifically, we will incorporate hard numbers that have been published by the regulator and/or trade association in relation to the development of the insurance sector in 2007. We will also try to incorporate the data that is available in relation to particular lines. If, for instance, compulstory third-party motor liability (CTPML) insurance dominates the non-life segment (as it does in some countries), then growth in non-life premiums will depend on factors such as the numbers of motor vehicles and pricing.
Figures published by Pakistan’s three largest non-life companies indicate that gross written premiums rose by about 10% in local currency terms in H107. This implies that non-life penetration has remained stagnant since 2005 at around 0.36% – a low level. Given the constraints faced by Pakistan’s non-life segment, we are forecasting that non-life penetration will rise to 0.50% by the end of the forecast period. At this stage we are looking for life density to rise from US$2 per person to US$6 per person.
Table: Growth Drivers
2005
2006
2007e
2008f
2009f
2010f
2011f
2012f
110.26
129.14
145.04
165.11
187.97
213.98
243.60
277.31
Non-life penetration, % of GDP
0.35
0.36
0.35
0.37
0.39
0.41
0.44
0.50
Non-life density, US$ per capita
2.53
3.03
3.19
3.76
4.45
5.26
6.21
7.97
Non-life density, EUR per capita
2.03
2.42
2.39
2.85
3.43
4.11
4.84
6.22
152.50
155.40
156.77
161.56
164.65
167.74
170.84
173.90
Life penetration, % of GDP
0.28
0.28
0.28
0.28
0.28
0.27
0.26
0.25
Life density, US$ per capita
2.04
2.29
2.58
2.86
3.15
3.43
3.72
4.00
Life density, EUR per capita
1.63
1.83
1.93
2.17
2.42
2.68
2.90
3.12
US$/EUR, average
0.80
0.80
0.75
0.76
0.77
0.78
0.78
0.78
PKR/US$, average
59.13
59.87
61.93
64.72
65.93
66.87
67.76
67.76
Nominal GDP, US$bn *
Population, mn
Exchange rate
e/f = estimate/forecast. * Figures quoted are for the calendar year, and may not correspond to the financial years figures quoted elsewhere in the report. Source: IMF, BMI
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Pakistan Insurance Report 2008
Country Update Macroeconomic Outlook Mounting Challenges To Maintaining Robust Growth Pakistan’s economy was among the fastest growing in Asia during FY2006/07 after real GDP expansion accelerated to 7.0% year-on-year (y-o-y). However, as the government strives to maximise economic growth, the economy is coming under increasing pressure. An uncertain political outlook is another factor which will weigh upon Pakistan’s economic prospects.
Real GDP growth of 7.0% y-o-y in FY2006/07 (July-June) propelled average economic expansion in Pakistan over the past five years to 6.9%, the highest level of sustained growth since the FY1978/79FY1982/83 period, according to the State Bank of Pakistan (SBP). However, while the government remains optimistic that 2006’s 7.0% expansion can be bettered in FY2007/08, targeting y-o-y real GDP growth of 7.2%, we remain much less sanguine on the prospect. Macroeconomic imbalances are threatening to derail the economy, with Pakistan showing increasing signs of overheating. As such, we believe that the country will be forced into stepping up efforts to cool its economy in FY2007/08, meaning that growth will likely fall back towards its new higher trend path of between 6.5% and 7.0%.
We are forecasting economic growth in FY2007/08 of 6.6% y-o-y, and subsequently for gradual acceleration towards 6.8% over the duration of our five-year forecast period. However, with Pakistan’s government intent on maximising economic growth, we recognise that there are upside risks to these forecasts. In the SBP’s annual report for FY2006/07, it noted that during the five years up to and including FY1982/83, the country saw an appreciable reduction in poverty levels, and that there is evidence that Pakistan’s recent spell of high growth is having a similar impact. As such, the report suggests that ‘it is important to maintain the elevated growth rates in the medium to long term’.
We believe that this is an attainable goal. It appears that Pakistan has now moved onto a new, higher growth trend, as the initial consumption-led growth boom makes way for more sustainable investment-led growth. Gross fixed capital formation grew by 20.6% y-o-y in FY2006/07, having risen by 17.6% and 13.5% in the previous two years, and the ratio of investment-to-GDP reached a record 23%, according to the central bank. While we do not expect to see these growth rates continuing to accelerate at their current pace over the medium term, we do expect investment levels to remain robust, forecasting gross fixed capital formation to average annual growth of around 12% throughout our forecast period.
In addition to this, private consumption looks set to remain stable throughout the duration of our forecast period to 2012, growing at an expected average 3% y-o-y over the coming five years. This will continue to make it a key contributor to economic growth, even as investment overtakes it as the economy’s main
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engine. Nevertheless, we recognise that downside risks to our consumption forecasts exist. With inflation remaining stubbornly high, we expect to see further tightening from the SBP, and we believe that the bank’s most recent tightening moves are still yet fully to feed into the economy. As such, consumer spending will likely be more constrained in future than during previous years.
Inflation spiked to a nine-month high of 8.37% y-o-y in September 2007, having fallen to a 15-month low just two months earlier. A slowdown in price growth in the first two months of FY2007/08 (annual inflation came in at 6.37% and 6.45%, respectively, in July and August 2007) had raised hopes that inflation would continue to moderate throughout the current fiscal year, and that consequently the central bank could begin to entertain the thought of ending its current tightening cycle and cut rates in 2008. However, with food prices and money supply growth remaining stubbornly high, we expect the SBP to retain its tight monetary policy stance, until inflation is brought down closer to the government’s 6.5% target. This will continue have a negative impact on both consumption and investment.
Elevated price growth continues to erode the competitiveness of the country’s exports. Pakistan recorded a current account deficit of 5.3% of GDP in FY06/07, driven largely by the country’s US$9.94bn merchandise trade deficit. While remittances and capital inflows have thus far largely been able to cover the country’s trade deficit, on a longer-term basis this will ultimately prove unsustainable, especially given the volatile nature of capital inflows, and the susceptibility of remittances to global economic downturns. Indeed, with US economic growth forecast to slow to 2.1% in 2008, we are anticipating a slowdown in remittance growth in Pakistan after reaching a record US$5.49bn in FY2006/07. Failure to improve the competitiveness of Pakistani exports will increasingly weigh upon economic activity, as the current account deficit widens towards our end-of-period forecast of 8.5% of GDP.
Monetary Policy Suffering At The Hands Of Fiscal Policy A key issue that must be addressed if the central bank is to be able to effectively attain its goals however, is the country’s incongruous mix of fiscal and monetary policy. While the central bank struggles to keep inflation under control, the government is embarking on an expansionary fiscal policy to encourage growth. This is consequently reducing the impact of the central bank’s monetary tightening, which thus constrains the SBP’s ability to keep a tight lid on inflation. Government spending jumped by almost 50% y-o-y in FY2005/06, and remained at this elevated level in the following fiscal year. However, in light of its conflicting effect upon monetary policy, and its impact on inflation, and in view of the country’s poor tax-to--GDP ratio, we believe that this recent increase in government spending will be unsustainable. As such, our growth forecasts are based upon the assumption that government spending will normalise to levels seen prior to FY05/06, but we recognise that this may not be the case, especially if the government opts to pursue populist policies in order to recoup some of its lost popularity.
Indeed, the uncertain political outlook in Pakistan remains the key downside risk to our current growth forecasts. Pakistan’s recent high growth rates can be largely attributed to strong foreign direct investment
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(FDI) inflows. Pakistan attracted US$4.873bn worth of FDI (excluding privatisation) in FY2006/07, a massive 146% y-o-y expansion, with total investment into the country (including privatisation receipts and portfolio investments) increasing by 79.7% y-o-y to US$6.960bn. However, while the economy has remained largely resilient to the rising political headwinds of the past year, President Pervez Musharraf's decision to impose emergency rule on November 3 2007 may well prove to be a step too far in the eyes of investors.
Musharraf’s increasingly erratic political decisions have muddied the political outlook, and consequently increased the risks of investing in the country. While the president promised to restore democratic rule in time for general elections to take place in January 2008, his decision to declare emergency rule, despite persistently ruling out such a move, will ensure investors remain wary while he remains in power. Furthermore, his plummeting popularity will likely mean that Musharraf will face an obstructionist parliament in the aftermath of general elections, thus potentially constraining his efforts to push ahead with his reformist agenda. This too will likely prove to be an unattractive prospect for investors.
Table: Pakistan – Economic Activity
2004/05
2005/06
2006/07
2007/08f
2008/09f
2009/10f
2010/11f
2011/12f
152.50
155.40
156.77
161.56
164.65
167.74
170.84
173.90
Nominal GDP (PKRbn)
6,500
7,594
8,707
9,890
11,202
12,631
14,196
15,922
Nominal GDP (US$bn)
108.8
125.0
143.7
160.6
179.5
200.5
223.9
250.4
GDP per capita (US$)
714
805
916
994
1,090
1,195
1,311
1,439
Real GDP growth (% y-o-y)
9.0
6.6
7.0
6.6
6.7
6.7
6.8
6.8
Population (mn)
f = BMI forecast. Source: Ministry of Finance
Political Outlook Regionalism Simmers Post-Benazir As attention turns to whether opposition parties will gain sufficient support in February’s postponed election to form a parliamentary majority, we note that while the Pakistan People’s Party (PPP) and Pakistan Muslim League-N (PML-N) may be able to forge a working relationship following the assassination of Benazir Bhutto, there is nonetheless potential for increased regional tension in Pakistan. If Pakistan’s main political parties increasingly focus on their provincial powerbases, the country’s unity should not be threatened, but the authority of Islamabad will ultimately be undermined.
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Loyalty Test For New Army Chief With the increasingly isolated President Pervez Musharraf facing the prospect of a hostile National Assembly, we believe that new army chief General Ashfaq Parvez Kayani will back Musharraf only so far as his presidency does not have a negative effect Pakistan’s internal stability. In the short term, Musharraf can rely on the support of Kayani, his former protege. However, the first loyalty of Kayani, who was brought up in military schools, lies with the army. If the public’s growing anti-Musharraf sentiment translates into street protests – a plausible scenario if opposition parties fail to command a majority after the forthcoming elections and claim widespread vote rigging – Kayani will be forced to choose between bolstering the man who installed him as army chief or the stability of the nation as upheld by the armed forces. We therefore hold the view that Musharraf’s position as president will weaken, despite shedding his uniform after lifting emergency rule in December 2007.
Musharraf’s resignation from the military and the resulting elevation of Kayani could see the armed forces adopt a more aloof role in Pakistani politics, although as it is the strongest institution in the country, its watchful eye will linger in the background. Kayani, who received a military education in the US, tried to dissolve links between members of the Inter-Services Intelligence (ISI) and religious extremists when he headed the ISI. Since becoming army chief he has also ordered the military and intelligence agencies not to interact with politicians, further boosting his non-political credentials. However, while we tentatively conclude that Kayani is disinterested in politics, we note that Musharraf also seemed similarly detached when he became army chief in 1998, before launching a coup a year later. We therefore cannot rule out the possibility of the army suspending Pakistan’s transition to democracy, although our overall verdict is that Kayani will maintain his distance and only intervene if a crisis emerges.
Elections Unlikely To Produce A Majority Win Our core scenario is that opposition parties may not gain a substantial majority, although they should nonetheless defeat the pro-government Pakistan Muslim League-Q (PML-Q). The PML-Q faces a backlash from voters due to Musharraf’s imposition of emergency rule in November 2007 and lingering insinuations that the intelligence services were involved in Bhutto’s death. The latest survey by the USbased International Republican Institute (IRI), taken before Musharraf had lifted emergency rule on December 15, indicated that the PPP would win 30% of the vote in a general election, with the PML-N gaining 25% and the PML-Q third with 23%. Following Bhutto’s death, the PPP is likely to gain at the expense of the PML-Q, but we do not foresee any single party dominating the National Assembly.
The PPP stands to gain a substantial sympathy vote following the assassination of Benazir Bhutto on December 27 2007, especially since the election commission was only able to delay January’s scheduled elections until February 18. The appointment of Bhutto’s widower, Asif Ali Zardari, and son Bilawal, who has taken Bhutto as his surname in the wake of his mother’s death, as co-chairs of the PPP will keep the assassination in the limelight. This will sustain popular sentiment for the PPP, which continues to put
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Pakistan Insurance Report 2008
the blame on Benazir Bhutto’s death firmly at the door of the government for failing to adequately protect her from security threats. However, given that she was not universally popular, it is still doubtful that the party will gain sufficient seats for a majority, even if fears of pro-government vote rigging prove unfounded.
The PPP may therefore try to fashion a parliamentary understanding with the PML-N, an outcome that seemed improbable before Bhutto’s death. The very emotional reaction to the tragedy by PML-N leader Nawaz Sharif, who has again demanded President Musharraf’s resignation, may win over Zardari into developing an anti-Musharraf parliamentary movement. Such a loose partnership would be shaky at best, given the history of conflict between the parties and the probable desire of both leaders to assume centre stage alone. Nonetheless, the two major opposition leaders would be tempted to work together were their parties to win enough seats to reach the combined two-thirds majority needed to impeach the president. Although winning such a majority is doubtful, the likelihood of a coalition being able to take office unimpeded is greater now that Musharraf has left the army. Kayani, who privately met with Zadari after Bhutto’s assassination and briefly served as a military aide to Bhutto during the 1980s, would not be inherently opposed to a government partly composed of the PPP.
Regionalism Returns Given our anticipation that no one party will claim outright victory in the election, we envisage provincial politics becoming more vocal, especially following the loss of Benazir Bhutto. Although she was a polarising figure, she was also strongly federalist, assuring her fellow Sindhis that their best interests were served by preserving national unity. Pakistan, which has long been troubled by instability in Balochistan and the Northwest Frontier Province (NWFP), may now encounter increasing disquiet in Sindh, the country’s second most populous province.
As the PPP is the favourite to win back control of the Sindh assembly from Musharraf’s allies, calls for outright separation from Islamabad should be contained. That said, we caution that the new PPP leaders, including Zardari (who is a Baloch), may be too inexperienced to control Sindhi discontent. Indeed, if the PPP’s performance in the national election is disappointing, Zardari may find his leadership challenged. Zardari was a controversial choice as PPP leader due to widespread allegations of corruption, while his son Bilawal will not be able to participate heavily in Pakistani politics until after he completes his studies abroad.
A leadership vacuum in the PPP would further undercut its ability to assuage Sindhi restlessness. The province experienced the worst of the rioting after Bhutto’s assassination, and discontent over the traditional hegemony of Punjab province in the country’s affairs runs deep. Indeed, the pre-eminence of the Punjab economy has led to it diverting the Indus River, fuelling resentment among Sindh’s farmers.
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Punjab is also likely to witness a resurgence of provincial politics. With 56% of Pakistan’s population living in Punjab, the province holds the key to national elections and will be fiercely contested. According to the IRI, the PML-Q currently polls 30% support in the province but is overshadowed by the Punjabbased PML-N, which received 36%. These two parties will fight over the PPP’s support, which we expect to decline in Punjab as Benazir Bhutto’s successors have a much lower profile outside Sindh.
Realising that its hold on power in Islamabad may be coming to an end, the PML-Q is changing its strategy to emphasise its Punjab roots in order to maintain its control of the province. The PML-Q is highlighting the anti-Punjab attitude in Sindh, and has courted support from non-Sindhis affected by the post-assassination violence. While this may help secure the re-election of Punjab Chief Minister Chaudhry Pervaiz Elahi in what will be a close race, it will also exacerbate tensions between Pakistan’s two largest provinces.
Pakistan is not in danger of fracturing, but we expect increased regionalism in 2008 which, combined with probable government losses in February’s national elections, will further weaken the authority of President Musharraf.
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Insurance Business Environment Ratings Table: Pakistan – Insurance Business Environment Indicators
Limits of potential returns
Data
Score (out of 10)
Ratings score
Non-life premiums (2007)
US$500.4mn
2.0
27.5
Non-life premium increase (5 years to 2012)
US$886.2mn
4.0
0.3%
1.0
Non-life penetration (2007) Measure of openness
4.0
Life premiums (2007)
403.9
1.0
Life premium increase (5 years to 2012)
292.1
3.0
Life penetration (2007), %
0.3%
2.0
Measure of openness GDP per capita (2007) Active population, % of total
22.5
3.0 US$925
1.0
57.6%
7.0
Tax
4.8
GDP volatility
4.0
Financial Infrastructure
3.8
41.1
Risks to realisation of potential returns Regulatory framework and development
5.0
Regulatory framework and competitive landscape
3.0
Long-term financial risk
9.0
Long-term external risk
5.3
Long-term policy continuity
4.5
Legal framework
3.4
Bureaucracy
4.6
Insurance business environment rating
40.0
53.7
36.5
Source: BMI
From 2008 we are taking a much more systematic approach to assessing the current and potential conditions of the insurance sectors in each of the countries surveyed by BMI. Specifically, we have calculated the Insurance Business Environment Rating, which takes into account objective measures of the current state and long-term potential of both the non-life and the life segments. It also takes into account an assessment of the openness of each segment to new entrants, and economic conditions. Collectively, these measures enable an objective assessment of the limits to potential returns across all
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Pakistan Insurance Report 2008
countries and over a period of time. The IBER also incorporates an objective assessment of the risks to the realisation of potential returns. The risk assessment is based on BMI’s objective and proprietary Country Risk Rating. It also embodies a subjective assessment of the impact of the regulatory regime on the development and the competitive landscape of the overall insurance sector. Further details are given at the end of this report.
At the beginning of 2008 the overall IBER for Pakistan was 36.5. This suggests that the overall attractiveness of the insurance sector is less than in any other country surveyed by BMI in the Asia Pacific region, other than Sri Lanka and Bangladesh. The corresponding figure for India is 52.3.
The IBER has five components. Relative to other countries in the region, Pakistan appears to rate poorly in terms of all five. The level of development and the absolute growth prospects of both non-life and (especially) life insurance are low. Structural factors do not favour the development of insurance in Pakistan. Regulations appear to be unhelpful and the overall level of country risk is high.
Table: Asia Pacific Insurance Business Environment Rankings
Limits of potential returns
Risks to realisation returns
Non-life segment
Life segment
Country structure
Regulatory framework
Country risk
Overall rating
Ranking
Hong Kong
57.5
77.5
77.1
100.0
80.9
76.5
1
Singapore
62.5
77.5
72.6
95.0
83.8
76.2
2
Australia
70.0
65.0
72.5
90.0
68.8
74.4
3
South Korea
72.5
72.5
72.6
60.0
73.9
71.3
4
Malaysia
55.0
60.0
63.6
75.0
69.9
63.5
5
China
60.0
70.0
54.4
55.0
70.0
61.7
6
India
52.5
65.0
40.6
45.0
60.2
52.3
7
Philippines
40.0
45.0
50.0
75.0
58.6
51.4
8
Indonesia
45.0
55.0
50.3
55.0
49.9
50.7
9
Pakistan
27.5
22.5
41.1
40.0
53.7
36.5
10
Sri Lanka
22.5
25.0
40.1
45.0
48.7
35.4
11
Bangladesh
20.0
15.0
46.9
20.0
44.2
30.8
12
Scores out of 100, with 100 the highest. Source: BMI
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Pakistan Insurance Report 2008
Regional Context Table: Non-Life Premiums In A Regional Context, 2007
Premiums, US$mn
Premiums, EURmn
Penetration, % of GDP
Density, US$ per capita
Density, EUR per capita
34,016
18,012
2.74
1,166.96
875.22
198
148
0.29
1.39
1.04
China
31,677
23,758
1.00
23.79
17.84
India
6,717
5,038
0.81
5.98
4.48
Indonesia
2,513
1,884
0.60
11.01
8.26
Malaysia
3,515
2,636
1.96
133.96
100.47
Pakistan
500
375
0.35
3.19
2.39
Philippines
920
690
0.65
10.71
8.03
Singapore
3,661
2,746
2.47
826.40
619.80
36,388
27,291
3.77
755.87
566.91
279
209
0.93
13.75
10.31
Taiwan
9,348
7,011
2.47
406.42
304.82
Thailand
3,121
2,340
1.31
47.80
35.85
Vietnam
563
422
0.80
6.50
4.87
Australia Bangladesh
South Korea Sri Lanka
Source: BMI
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Table: Life Premiums In A Regional Context, 2007
Premiums, US$mn
Premiums, EURmn
Penetration, % of GDP
Density, US$ per capita
Density, EUR per capita
34,060
25,545
3.90
1,655.00
1,241.25
350
263
0.51
2.46
1.85
China
54,568
40,926
1.72
40.99
30.74
India
33,366
25,024
4.01
29.70
22.27
Indonesia
3,821
2,866
0.90
16.75
12.56
Malaysia
5,541
4,156
3.09
211.17
158.38
Pakistan
404
303
0.28
2.58
1.93
Philippines
1,204
903
0.85
14.02
10.52
Singapore
16,784
12,588
11.30
3,788.65
2,841.49
South Korea
56,878
42,658
5.90
1,181.51
886.13
186
139
0.62
9.15
6.86
44,317
33,238
11.70
1,926.84
1,445.13
Thailand
5,494
4,121
2.30
84.16
63.12
Vietnam
726
545
1.04
8.39
6.29
Australia Bangladesh
Sri Lanka Taiwan
Source: BMI
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Pakistan Insurance Report 2008
Table: Comparison Of Major Lines As % Non-Life Premiums, 2006
Total motor
Total accident and health
Total marine/ aviation/transport
Property/fire
Personal liability
Other lines
Australia
0.26
na
0.05
0.22
0.15
0.14
China
0.68
0.04
0.04
0.13
0.04
0.07
Hong Kong
0.11
0.22
0.08
0.13
0.25
na
India
0.43
0.11
0.13
0.18
0.05
0.10
Indonesia
0.45
0.10
0.11
0.20
0.00
0.14
Malaysia
0.42
0.11
0.12
0.21
0.03
0.11
Pakistan
0.17
0.39
0.14
0.28
na
0.03
Philippines
0.30
0.18
0.16
0.32
na
0.03
Singapore
0.14
0.08
0.10
0.08
na
0.15
South Korea
0.35
0.46
0.02
0.01
na
0.17
Taiwan
0.21
0.62
0.04
0.08
0.02
0.06
Thailand
0.60
0.02
0.06
0.08
0.01
0.25
Vietnam
0.70
na
na
0.20
na
0.10
na = not available/applicable. Source: BMI
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Pakistan Insurance Report 2008
Analysis Of Competitive Conditions As in previous reports, we have looked at which cross-border insurers are present in which country across each region. Unlike in previous reports, we have endeavoured to describe the competitive landscape in some detail on the basis of recently published official information – whether sourced from the regulator or the trade association.
Pakistan – Non-Life Segment The Insurance Association of Pakistan published Key Information for 2006 indicating there are 29 players in Pakistan’s non-life segment. Two-thirds of gross written premiums are accounted for by just three companies, all of which are major local groups. EFU General Insurance was (just) the largest non-life insurer in Pakistan in 2006, with a market share of about 30%. It was closely followed by Adamjee Insurance, with 28%. Smaller, but significant, is New Jubilee Insurance, with a market share of about 9%. As we explain below, all three companies also have affiliates that are minor players in the life segment.
In 2006 the next largest non-life group, with a market share of about 4%, was New Hampshire Insurance, an affiliate of global giant AIG. The only other multinational groups with a presence in Pakistan appear to be ACE and Allianz. The latter has a health insurance joint venture with EFU.
The next 10 largest insurers were small operations by any standards. They are each parts of domestic financial groups. Their market shares varied between 2% and 4% each. In practice, this meant that their annual gross written premiums ranged from PKR404mn to PKR900mn. In decreasing order of size, these groups were: IGI, Askari Insurance, Shaheen Insurance, Atlas Insurance, Premier Insurance, Universal Insurance, Habib Insurance, Reliance Insurance, PICIC and East West. Of these East West is the only insurer that is also associated with a life operation in Pakistan.
The remaining companies are extremely small, and include several names whose gross written premiums in 2006 were less than US$1mn. This group included Agro General Insurance, Alpha Insurance, Asia Insurance, Capital Insurance, Central Insurance, Century Insurance, Cooperative Insurance, Crescent Star, Excel Insurance, Pakistan General Insurance, Saudi Pak Insurance, Security General, Silver Star, Tracker Direct Insurance and United Insurance.
Press reports indicate that three non-life Takaful operators have set up operations in Pakistan in the last two years ago. These include Pak Kuwait Takaful and Pak-Qatar General Takaful, both of which are backed by financial institutions in their home countries. These groups were licenced in late 2005 and mid2007 respectively. Takaful Pakistan was licenced in early 2007. None of these groups appear to be writing significant business as yet.
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Pakistan Insurance Report 2008
ACE AIG
X
Allianz
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Aviva
X
X
X
Bank of China Group Insurance
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
China Ping An
X
X
X
X
X
X
X
X
X
X
X
Euler Hermes Fortis
X
Generali
X
Gerling
X
X
X
HSBC
X X
Hyundai M&F
X X
X
X
X X
Liberty Mutual
X X
X
X
X
X
X
X
X
X
X
X
Mapfre
X X
X
Millea Holdings
X
Mitsui Sumitomo
X
X
Nipponkoa
X
X
Old Mutual/Skandia
X
PICC
X
X
X
X
Royal/Sun Alliance
X
X
Samsung F&M
X
Sompo
X
QBE
X
X
Groupama/GAN
ING Group
Vietnam
X
China Life
Chubb
Thailand
Taiwan X
X
AXA
BUPA
Sri Lanka
South Korea
Singapore
Philippines
Pakistan
Malaysia
Indonesia
India
Hong Kong
China
Bangladesh
Australia
Table: Presence Of Cross-Border Insurers, Non-Life
X
XL Insurance
X
Zurich Financial Services
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X X
X X
X
X
X
X
X
X
X
X
X
X
X X
X
X
X
X
X
X
X
X
X
X
X
X X
X
X
X
Source: Company websites
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Pakistan Insurance Report 2008
Pakistan– Life Segment Pakistan’s underdeveloped life insurance segment is dominated by State Life Insurance Corporation of Pakistan. According to the Securities and Exchange Commission of Pakistan, SLIC had a market share of 74% in calendar 2004. We assume that this remains the case. The second- and third-largest life insurance companies are EFU Life and New Jubilee Life Insurance. Each of these has a market share of about 10%. EFU and New Jubilee are affiliates of the eponymous, and substantially larger, non-life groups.
The remainder of the market is accounted for by the local subsidiary of global giant ALICO and Metropolitan Life. The latter is an affiliate of Pakistan’s East West financial services group. In mid-2007 a licence was issued to Pak-Qatar Family Takaful. Shareholders of this company include Qatar Islamic Bank, Qatar International Islamic Bank, Qatar National Bank and the Amwal Group. For the time being, though, its business appears to be insignificant.
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Pakistan Insurance Report 2008
ACE
X
X
Aegon
X
X
AIG
X
Allianz
X
Aviva
X
X
X
AXA
X
X
X
Bank of China Group Insurance
X
X
Cardif
X
China Life
X
X
China Ping An
X
X
X
X
CIGNA
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X X
X
X
X
Fortis
X
Generali
X
X
X
Vietnam
X
X
X
X
X
X
X
X
X
X
X
X
CNP Assurances
X
Thailand
Taiwan
Sri Lanka
South Korea
Singapore
Philippines
Pakistan
Malaysia
Indonesia
India
Hong Kong
China
Bangladesh
Australia
Table: Presence Of Cross-Border Insurers, Life
X
X
X
X
X X
X
Gerling Great Eastern Life
X
HSBC ING Group
X
X
Liberty Mutual Manulife
X
X
X X
X
X
X
X
X
X
X
X
X
X
X
X
X X
MassMutual
X
X
X
X
X
X
MetLife
X
Millea Holdings
X
New York Life
X
X
X
X X
X
X X
X
Old Mutual/Skandia
X
Principal Financial
X
X
Prudential Financial (USA) Prudential plc (UK)
X
X
X
Standard Life
X
X
X
Sun Life Financial
X
X
X
Swiss Life
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X X
Source: Company websites
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Pakistan Insurance Report 2008
Methodology BMI’s insurance sector reports seek to provide insights about the operating conditions in – and prospects for – insurance in each of over 60 (mostly developing) countries. The reports do this by incorporating the latest information available from official sources such as regulators, international associations of regulators and trade associations; comparable information from other countries; and economic and risk data compiled by BMI.
As of early 2008 we have been able to incorporate final figures and statistics for 2006 in relation to almost all the countries that we consider.
The reports focus on Gross Written Premiums in two segments – non-life and life. Unless stated otherwise, ‘premiums’ refers to Gross Written Premiums. Within BMI’s reports, non-life insurance includes health insurance premiums if these are normally considered by industry observers to lie within the mainstream insurance sector. Non-life insurance includes inwards reinsurance premiums if these would normally and reasonably be considered a significant part of the non-life segment. In practice, this means that we generally include inwards reinsurance in developed countries and offshore financial centres that specialise in insurance. We consider outwards insurance to be an expense.
Life insurance includes all long-term savings products that are legally structured as insurance products. Life insurance premiums do not, therefore, include contributions to pension plans and other long-term savings schemes unless they are legally constituted as lying within the insurance sector.
Basis Of Projections Non-Life Segment In making projections of premiums in the non-life segment, we consider two aspects: the likely development of nominal GDP and the likely development of non-life penetration (i.e. non-life premiums as a percentage of GDP). Typically, we forecast non-life penetration for 2012 (i.e. the end of the forecast period) and assume that non-life penetration changes evenly from 2006 to 2012. However, in some cases, an examination of the various lines (motor, accident/health, liability etc) that constitute the non-life segment will indicate that the non-life penetration is not likely to change evenly over time. In such cases we will forecast the non-life penetration from year to year. Naturally, we will explain our reasoning in full. Forecasts of non-life penetration for 2012 typically take into account the following factors: non-life penetration in 2006 (being the last year for which hard numbers are available); penetration in nearby countries at a similar level of development; whether or not health insurance is generally considered to be within the insurance sector; and other factors promoting or retarding the evolution of the non-life segment.
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Life Segment In making projections of premiums in the life segment, we consider two aspects: the likely development of population and the likely development of life density (i.e. life premiums per capita). Typically, we forecast life density for 2012 (i.e. the end of the forecast period) and assume that density changes evenly from 2006 to 2012. However, in some cases there will be clear reasons why life density is not likely to change evenly over time. In such cases, we will forecast the life density from year to year. Naturally, we will explain our reasoning in full. Forecasts of life density for 2012 typically take into account the following factors: life density in 2006 (being the last year for which hard numbers are available); density in nearby countries at a similar level of development; the relative importance of life insurance in terms of overall retirement savings; and other factors promoting or retarding the evolution of the life segment
Insurance Business Environment Rating In early 2008 BMI introduced a new Insurance Business Environment Rating for each of the 60+ states we assess. In introducing this rating, our approach has been threefold. First, we have explicitly aimed to assess the market attractiveness and risks to the predictable realisation of profits in each state, thereby capturing the operational dangers facing companies operating in this industry globally. Second, we have, where possible, identified objective indicators that serve as proxies for issues/trends within the industry to ensure consistent evaluate across states. Finally, we have used BMI’s proprietary Country Risk Ratings in a nuanced manner in order to ensure that the ratings accurately capture broader issues that are relevant to the industry and that may either limit market attractiveness or imperil future returns. Overall, the new rating system – which now integrates with those of all 16 industries covered by BMI – offers an industryleading insight into the prospects/risks for companies across the globe.
Rating System Conceptually, the new rating system divides into two distinct areas:
Limits of potential returns: Evaluation of industry’s size and growth potential in each state, and also broader industry/state characteristics that may inhibit its development.
Risks to realisation of those returns: Evaluation of industry-specific dangers and those emanating from the state’s political/economic profile that call into question the likelihood of anticipated returns being realised over the assessed time period.
Indicators The following indicators have been used. Almost all indicators are objectively based.
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Table: Insurance Business Environment Indicators And Rationale
Limits to potential returns Market structure Non-life premiums, 2007 (US$mn) Growth in non-life premiums, 5 years to end-2012 (US$mn)
Indicates overall sector attractiveness. Large markets are considered more attractive than small ones Indicates growth potential. The greater the likely absolute growth in premiums the better Premiums expressed as % of GDP. This is an indicator of actual and (to an extent) potential development of non-life insurance. The greater the penetration the better
Non-life penetration, % Non-life segment measure of openness Life premiums, 2007 (US$mn) Growth in life premiums, 5 years to end-2012 (US$mn)
A measure of the market’s accessibility to new entrants. The higher the score the better Indicates overall sector attractiveness. Large markets are considered more attractive than small ones Indicates growth potential. The greater the likely absolute growth in premiums the better
Life penetration, %
Premiums as % of GDP. This is an indicator of actual and (to a certain extent) potential development of life insurance. The greater the penetration the better
Life segment measure of openness
A measure of the market’s accessibility to new entrants. The higher the score the better
Country structure GDP per capita (US$) Active population
A proxy for wealth. High-income states receive better scores than low-income states Those aged 16-64 in each state, as a % of total population. A high proportion suggests that market is comparatively more attractive
Corporate tax
A measure of the general fiscal drag on profits
GDP volatility
Standard deviation of growth over 7-year economic cycle. A proxy for economic stability
Financial infrastructure
Measure of financial sector’s development, a crucial structural characteristic given the insurance industry’s reliance on risk calculation
Risks to potential returns Market risks Barriers to entry Regulatory environment
Subjectively evaluates de facto/de jure regulations on development of insurance sector Subjectively evaluates impact of regulatory environment on the competitive landscape
Country risk (from BMI’s Country Risk Ratings) Short-term financial risk
Evaluates currency volatility
Short-term external risk
Denotes a state’s vulnerability to externally-induced economic shock, which tend to be the principal triggers of economic crises
Policy continuity
Evaluates the risk of a sharp change in broad direction of government policy
Legal framework
Denotes strength of legal institutions in each state. Security of investment can be a key risk in some emerging markets
Bureaucracy
Denotes ease of conducting business in a state
Source: BMI
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Weighting Given the number of indicators/datasets used, it would be wholly inappropriate to give all subcomponents equal weight. Consequently, the following weight has been adopted.
Table: Weighting Of Indicators
Component Limits of potential returns – Insurance market
Weighting, % 70 – 65
— Life
— 50
— Non-life
— 50
– Country structure Risks to realisation of potential returns
– 35 30
– Market risks: regulations and impact on development and competitive landscape
– 40
– Country risks
– 60
Source: BMI
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