A cornerstone of Peak Re’s value proposition is to facilitate economic and societal progress by providing access to insurance protection, as mandated by the International Finance Corporation (IFC), which holds 14.9% of the company’s shares. While Peak Re is rapidly expanding on a global scale, it is also keen to grow its footprint in its core region Asia Pacific, such as in Pakistan, where insurance penetration is still exceptionally low. Recent initiatives by Pakistan’s regulator, the Securities & Exchange Commission of Pakistan (SECP) regarding Takaful and microinsurance have increased opportunities for the country’s population to gain access to insurance cover.
Based on Peak Re’s emerging markets expertise, frontier-markets, such as Pakistan, play an important role in the company’s portfolio mix, as they offer a wide array of opportunities. Pakistan insurance markets are set to benefit from the country’s increasing population and the emergence of a growing middle class.
In addition, supported by economic policy changes, which are beginning to show their effect, Pakistan’s urbanization and industrialization are steadily accelerating. Subsequently, the country’s risk profile will alter. However, in particular low-income households remain exposed to the disruptive effects, which illnesses, accidents, death or natural catastrophes exert. This is where Peak Re is determined to bring its value to bear as reinsurance can play a vital role in providing protection to solutions that reach out to this market segment.
Improved economic outlook for Pakistan
Pakistan, a country with a population of almost 200 million people and a GDP per capita of roughly US$ 1,313, is usually not associated with growth opportunities and a stable business environment. In fact, AM Best rates the country as one of the most challenging places in Asia due to its high economic, financial and political risks. However, the recent slump in oil prices proved to be a blessing for its economy. According to the International Monetary Fund (IMF), Pakistan’s macroeconomic outlook has brightened significantly. The import bill for fuel dropped while the trade balance improved. Real GDP is expected to grow by approximately 4.3% in 2014 and 4.7% in 2015. Inflation hovers around 5%, three percentage points below previous predictions.
While security conditions remain difficult, political pressure has eased somewhat as the current government of Prime Minister Nawaz Sharif remains committed to driving forward economic reform. Acknowledging the government’s efforts to improve its budgetary position and enhance the country’s fiscal consolidation, Standard & Poor’s has revised its outlook on the long-term ratings of Pakistan from stable to positive.
A nascent insurance market
With a premium volume of US$ 1.6 billion in 2013, Pakistan’s insurance industry is still relatively small. Its modest insurance penetration of 0.7% (premiums written as a share of GDP) ranks the third-lowest in Asia. Non-life represents 40% of the total, while life accounts for the remaining 60%. At 7.3%, premium growth outpaced GDP, very much in line with emerging markets premium growth in general, but below the rate of expansion in most other emerging Asian markets.
The insurance market is challenged by continued security concerns, widespread poverty and constrained access to capital, as BMI Research remarks. Floods caused by monsoon rains are the most frequent natural catastrophe event. The largest non-life lines of business are property, motor and marine, aviation & transit (MAT).
According to Aon Benfield, growth is driven by foreign direct investments, spending in infrastructure and bancassurance as the most efficient distribution channel. However, the industry is faced with challenging original pricing of insurance rates as well as legal uncertainties. In addition, similarly to other emerging markets, Pakistan’s insurance industry still suffers from low awareness among its population of the benefits of insurance in protecting assets and securing progress.
Increasing role of micro-insurance
In May 2014, Pakistan’s regulator, the SECP, passed a regulation, which allows conventional insurance companies to underwrite sharia-compliant (Takaful) products. A few months earlier, it had already approved micro-insurance products. Both moves are widely believed to help households with low income to access insurance products at affordable levels. Both Takaful and micro-insurance products target to provide cover for crops, livestock, domestic households, life and health – with a strong bias towards life rather than non-life products. Primary insurers are increasing volumes and rates, partly due to the creation of innovative products, but also driven by new concepts to boost the distribution of micro-insurance products, for instance through the use of mobile phones, to people with no formal access to financial services.
Pakistan’s burgeoning micro-insurance sector
In Pakistan, micro-insurance is a small albeit rapidly growing business segment. According to the Lahore Journal of Economics, the number of policies amounted to 7.4 million in 2013, sharply up from an estimated 2.5 million policyholders in 2012. It is assumed that only about 1.9% of Pakistan’s population have some form of insurance cover – mainly through their employer, as most of the country’s insurers predominately deal with large corporate accounts and provide a limited range of retail products. The potential client base for micro-insurance is far wider as defined by the SECP. It includes those households that live below or just at the poverty line. These are roughly 80 million people or about 45% of the population.
Most of the products provided are life – primarily credit life products – which account for roughly 60% of all policies. They are mainly sold as a mandatory part of a micro-finance loan and cover the cost of repaying the loan, in case of the borrower’s premature death. Some of these policies also cover the funeral cost, which is a significant expense in Pakistan. Most of the remainder are health products, protecting the borrower and in some cases also the spouse.
Against the payment of a small premium they cover catastrophic events such as hospitalization or other cases such as caesarean deliveries up to a cap. Crop insurance, mainly distributed as part of a bank loan, and in the more recent history also Personal Accident have not yet reached a significant scale.
Typically, the products are distributed through microfinance providers, NGO’s or, as part of a social safety solution for the ultra-poor, through the Government. The providers rely mainly on primary insurers as the ultimate risk-taker, which see these types of partnerships as an efficient means of distribution. In more recent times mobile phone networks have started to provide credit life insurance as an add-on to their offering.
These providers have the advantage of scale as Pakistan counted 114 million mobile phone subscribers already in 2011. Since many of these consumers are familiar with branchless banking, mobile phones are an efficient way to enroll and collect premiums. Although the SECP encourages the sector’s expansion, the dominance of simple credit life products as a mandatory component of a microfinance loan suggests that a genuine and broad-based demand for insurance products is still missing. Policyholders are hardly aware of the fact that they pay premiums for a risk-protection product. Rather, they see their payment as a purchase for a bundle of services. Currently, we witness an increasing sophistication of the market, albeit from low levels. More voluntary products with increased benefits and choices start complementing the compulsory ones while distribution is widened along further channels. In addition, the reach of micro-insurance products could be scaled up, extending its cover to the spouse or the family of the policyholder.
Although well-capitalized, Pakistan’s private insurance sector is still small. Without government support, clear mandates for private sector players, subsidies or public-private partnerships as well as automatic enrolment or mandatory cover, and finally, efficient payment systems, Pakistan’s microinsurance sector will continue to lack sufficient momentum to build up scale.
Reinsurance plays a key role in providing expertise gathered in other emerging markets, but also by sharing the risks with cedants in the market’s build-up phase, as reliable data is still scarce. Typically reinsurers support their clients through the provision of stop-loss programs.
Peak Re is confident that the proactive and forward-looking regulatory approach of the SECP will contribute to strengthen Pakistan’s insurance sector and ultimately deepen market penetration. In addition to its existing presence in the Property & Casualty segment, Peak Re will also seek to create value in the development and implementation of innovative insurance products, such as trade credit insurance which is currently not yet available in Pakistan, as well as the promotion of micro-insurance.
Peak Re will collaborate with public entities to engage and encourage more public-private partnerships, facilitating access to insurance products and contributing to market strengthening. Peak Re is here to further contribute to this important frontier market.
