Insurance sector growth continues; assets increase to Rs1,207 billion

KARACHI: The assets for the Life Insurance sector grew by 11.92 percent to Rs1,207 billion for CY18 as life insurers increased their Total Investments by 13.52 percent to Rs997 billion; investments now constitute 82.63 percent of total assets, State Bank of Pakistan (SBP) said in a report.

Low insurance penetration (0.83 percent of GDP) indicates that there is room for growth in the Pakistani insurance sector (Global insurance penetration = 6.3 percent in 2016), the SBP said in Financial Stability Review (FSR) 2018.

The asset base for the insurance sector has been estimated to have grown by 10.88 percent to Rs1,435 billion as of December 31, 2018 mainly due to an increase in the Life Insurance business.

Investments and properties have registered an increase of 12.11 percent to Rs1,128 billion as of December 31, 2018. Equity for the industry has increased by 5.87 percent to Rs119 billion in CY18 as insurers try to comply with the enhanced regulatory paid-up capital requirements.

Life insurers are considered among the large institutional investors for capital and debt markets.

Given the volatility in the financial markets, life insurers have decreased their share of investment in equities from 20.32 percent in CY17 to 18.10 percent in CY18 while increasing their share of investment in fixed income and term deposits from 1.93 percent in CY17 to 5.38 percent in CY18.

Life insurers continue to have a significant portion (76.14 percent in CY18) of their investments in government securities.

In addition, the dominant public life insurer has increased its investments in properties by 14.82 percent to Rs3.7 billion; overall, investment in properties constitutes 0.37 percent of total investments in CY18.

Growth rate comparison of real GDP and real gross premiums for the life sector shows a positive correlation indicating that an increase in economic activity may lead to an increase in gross premiums for Pakistan.

Total gross premium for Life insurance sector has increased to Rs203 billion in CY18 from Rs185 billion in CY17. The increase of 19.46 percent in Subsequent Year Premium to Rs109 billion, coupled with the 12.55 percent YOY increase in Second Year Premium, signifies that the sector has been able to retain its business.

Moreover, the First-Year Premium to Gross Premium sustained its growth of 9.40 percent in CY18 indicating that the sector sustained issuance of new insurance policies.

The increasing interest rate environment may have led policyholders to look for better rates, which may have led to redemption of policies; this is supported
by the spike in Surrender Claims in CY18.

However, there has been a substantial decline in Single Premium from Rs16 billion in CY17 to Rs7 billion in CY18 as a private life insurer registered a significant decrease in this category over the last year. This policy (along with other life insurance policies) is used to claim tax rebate.

The reduction in tax rates in 2018 along with the prevailing inflationary pressures (which reduces the net future value of the upfront single premium) may have lowered the demand for this product, as they may no longer form an attractive tax saving option, the SBP said.

Life insurers are required to maintain statutory funds in respect of each class of life insurance business; statutory finds are separate from shareholders’ fund, which contains only those assets and liabilities that are solely attributable to the life insurer.

Analysis of statutory funds indicates that Family Takaful Fund has shown extraordinary growth for Gross Premiums in CY16 and CY17 of 1190.61 percent and 136.58 percent, respectively. While this illustrates the widespread demand for an Islamic alternative to conventional insurance, the growth rate of Gross
Premiums for Takaful Fund is extraordinary because of the small base in 2015. This is demonstrated by the lower (albeit still impressive) growth rate of 34.61 percent to Rs14 billion in Gross Premiums for Takaful Fund in CY18.

Ordinary Life, which includes individual and group insurance, still forms the largest statutory funds; its Gross Premiums have increased from Rs100 billion in CY17 to Rs112 billion in CY18.

Due to the initiatives of one of the provincial government to increase health coverage for its population, the gross premium for the public life insurer’s Health Investment Fund has increased by 38.83 percent to Rs5 billion in CY18. It is expected that there will be further growth in this Fund as the federal government has re-launched a national-wide health insurance program.

Claims under individual policies increased from Rs63 billion in CY17 to Rs72 billion in CY18. This was mainly due to increases of Rs4 billion and Rs3 billion to Rs44 billion and Rs16 billion in Surrender Claims and Maturity Claims, respectively.

Surrender Claims, forming 49.24 percent of Gross Claims for CY18, have registered a 19.05 percent YOY increase, indicating that significant number of policyholders are exiting from their insurance policies before maturity; this development may lead to maturity mismatches for the sector.

Several factors have led to an increase in Surrender Claims including the prevailing financial market conditions, which has reduced the value of unit-linked policies (with significant investments in equities); this, coupled with the increasing interest rates, may possibly lead policyholders to surrender their policies in search of higher yields.

In addition, in order to meet their sales targets, agents may encourage recycling of policies, which increases Surrender Claims.

While the Life Insurance sector is relatively stable, some of its indicators have started to deteriorate slightly. Return on Assets has decreased from 0.79 percent in CY17 to 0.69 percent in CY18, as there was only a marginal increase in profitability compared to a significant increase in the asset base for the sector.

Profitability was affected due to an increase in management and marketing expenses as some insurers invested in their branch network, salesforce, IT software, etc. for higher future returns.

In addition, the Claims Ratio has increased from 41.91 percent in CY17 to 43.83 percent in CY18, which is still quite comfortable. In addition, the Return on Investments has increased from 7.10 percent in CY17 to 8.08 in CY18 due, in part, to a tightening of monetary policy in CY18 as the sector maintains a significant portion of investments (76.14 percent) in government securities, the SBP said.

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