The China-Pakistan Economic Corridor (CPEC) will provide new opportunities for the local insurance industry especially the non-life sector, the State Bank of Pakistan (SBP) said in its annual Financial Stability Review 2016.
“Pakistan is expected to witness continued growth in almost all sectors of the insurance industry with significant growth expected in the Takaful segment,” said the report.
However, the report noted that the operations and investment returns of the insurance industry are subject to market volatility and macro-economic factors.
Investments constitute about 76% of total insurance industry assets as of June 30, 2016. Consequently, the insurance industry may face financial risks ie an adverse change in the capital markets or a “low for longer” interest rate environment.
If there is a “low for longer” rate environment, insurers’ investment income will suffer and they may invest in higher risk securities in search of greater profitability.
In addition, while the low yields affect both sides of the balance sheet, they generally imply lower capital ratios for long-term business such as life insurance. There is potential for credit risk for some insurers; as of June 30, 2016, the estimated carrying amount of financial assets representing the maximum credit exposure for life insurers and non-life insurers is Rs222 billion (representing 28% of total life insurer assets) and Rs67 billion (representing 47% of total non-life insurer assets), respectively.
However, most insurers continually monitor credit exposure to mitigate this risk. In addition, insurers avoid any significant credit risk exposure to any single counterparty. In addition, while bancassurance has helped insurers reach banks’ customers through their large branch networks, there is potential for mis-selling, which may lead to compliance risks.
Citing the Securities and Exchange Commission of Pakistan’s (SECP) Bancassurance Regulations 2015 and the SBP’s circular on Sale of Third Party Products by Banks in 2012, the report said that the SECP and the SBP have taken steps to mitigate these risks.
One of the biggest risks that the insurance industry faces is concentration risk; one of the Public Life Insurer comprises more than 60% of the insurance industry’s Rs955 million asset base. The financial information on its size or performance is not available for the other big public player in the life insurance sector. Even the non-life insurance sector has a prominent public player. All these entities are significant state-owned market players which need to be brought under market discipline to improve their efficiencies.
Moreover, the public non-life insurer has not published its financials since 2011 (reportedly, in part, due to alleged irregularities worth billions); nothing substantive can be said about its health. The possibility of its failure may lead to significant systemic risk buildup in the non-life sector.