KARACHI: Despite strong growth in asset base of 13.3 per cent, the share of insurance sector assets in the GDP declined marginally to 2.8 per cent in calendar year, 2009 as against 2.9 per cent in the previous year, said a State Bank report issued recently.
The report highlighted weaknesses and advantages of the insurance sector and said insurance penetration in Pakistan is one of the lowest in the region.
“The lethargic pace of implementation of insurance sector reforms is another factor resulting in one of the lowest insurance penetration level in the region,” said the report.
It said that the insurance of government assets not only results in additional cost, but it also indicates monopolistic inefficiencies given that all public sector organisations can only avail insurance coverage from the state-owned companies.
The SBP report said the contribution of life insurance sector assets towards total industry assets has witnessed a gradual increase in calendar year, 2009 on account of increased insurance business in terms of rising gross premiums that eventually led to a significant increase in investments.
Moreover, the performance of the life insurance sector that witnessed a net loss in CY08 on account of sluggish capital market performance, registered a significant recovery by posting a profit of Rs1 billion in CY09, said the report.
Much of the recovery in profits emanates from the increase in investment income which also helped contain incidence of rising claims.
The report said besides an increase in the asset base and recovery in profitability, another important development pertains to rising share of private life insurance companies in the total asset structure over the last few years, highlighting the increased participation and rising interest of prospective policyholders.
“The total gross premiums of the entire industry witnessed a significant increase of 12.5 per cent in CY09, translating into a higher stock of investments and liquid assets,” said the report.
Given the mismatch in the nature of long-term liabilities generated by the life insurance contract and the relatively shorter tenor of assets (in terms of requirement of rollover, and hence reinvestment risk) that the premiums are invested in, the life insurance business poses greater potential risks to financial stability than conventional non-life insurance products, said the report.
Furthermore, as opposed to non-life insurance, the demand for life insurance is based on several factors which vary from economic to demographic, and have a substantial influence on performance of life insurance companies.
The report said like other components of the financial system, the insurance sector is also affected by issues related to adverse selection, moral hazard, and market asymmetries and failures.