Financial Institutions: Term Report

Trend Analysis of the Insurance Industry

TABLE OF CONTENTS

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 Financial Institutions: Term Report
Trend Analysis of the Insurance Industry

LETTER OF TRANSMITTAL

December 10th, 2010

Respected Sir,

Subject: REPORT ON THE TREND ANALYSIS OF THE INSURANCE INDUSTRY OF PAKISTAN

This letter is pertaining to the report that shows the trend analysis of the “Insurance Industry of
Pakistan”. Now this report is complete, it can be viewed for assessment.
This report has been prepared as a part of my course requirement, “Financial Institutions” in
order to understand the basic working as well as the shortcomings of one of the Financial
Institutions here in Pakistan.
Thank you for giving the opportunity to prepare this report. I hope this report will fulfill your
expectations from me regarding this course.

Sincerely,

Ammara Ather

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Trend Analysis of the Insurance Industry

ACKNOWLEDGEMENT

I am grateful to my teacher Sir Sharique Ayubi for teaching me the curriculum of “Financial
Institutions”. His versatile knowledge in this field and the unique teaching style has developed
my knowledge and cleared many concepts regarding the finance institutions. Sir Shariq Ayubi
demonstrated the real financial existence, providing us with practical cases from daily routine
life, as well as those available in the financial world.

I am all the most grateful to him for assigning this research work, which has helped me to
evaluate the trend in the insurance industry and to see where it is lacking. Moreover I am also
thankful to him for his guidance and help which he has extended during the course for this
report.

Finally I bestow my appreciation to all those who have directly or indirectly supported me with
their assistance and guidance to complete this research work and to those who helped me in
making this report more meaningful by participating in the survey and sharing their views
regarding the services of the insurance industry.

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 Financial Institutions: Term Report
Trend Analysis of the Insurance Industry

ABSTRACT
The reason behind this research is to analyze the trend in the “Insurance Industry of Pakistan” and to
see to what extent are the customers satisfied with the services offered by the Insurance Industry.
In developing economies, Insurance is unfortunately considered an unnecessary expense by potential
buyers. It is also seen as a superior good by economists, which becomes regularly and widely available
only after many other needs are covered. This is wrong, Insurance is not an unnecessary expense, but if
done right it is an investment worth doing. It is not a superior good in the sense that it is a luxury and
should only be considered after many other issues; it is intertwined with the most basic human needs
and aspirations. The availability of insurance has important positive effects and externalities that go far
beyond the purely financial. In many cases, being uninsured is in the long term the most costly option;
to an individual, to an economy, to a society. The Insurance Industry needs to be competitive in order to
attract customers and make them realize that insurance is an important investment in some way or the
other. The results of my research would therefore help the service providers to see where they are
lacking and what they need to do so as to make customers realize the benefits of insurance.

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 Financial Institutions: Term Report
Trend Analysis of the Insurance Industry

INTRODUCTION

In order to better appreciate the contribution of insurance to an economy, we have to understand the
complex position that insurers find themselves in when they conduct their business. One of the classical
definitions understand insurance as a social or commercial device providing financial compensation for
the effect of misfortune, and the payment being made from the accumulated contributions of all parties
participating in the scheme.

The insurance industry of Pakistan has enjoyed robust growth in the past few years, spurred by rapid
economic growth, expansion of the financial sector a as whole, privatization, foreign investment and
rising levels of income and also insecurity. According to the Insurance Association of Pakistan (IAP)‘s
2007-2008 Annual Report, gross premiums in the non-life sector rose by 17%, while life premiums rose
by 36%. This growth in the insurance sector is underpinned by solid performance of the three largest
companies, which account for around two-thirds of the non-life market. The life sector is dominated by
the state-owned life company, the State Life Insurance Corporation of Pakistan (SLIC).

After strong growth in recent years, Pakistan‘s insurance sector faced a challenging 2008, as did the
country at large. The already acute risks to Pakistan‘s security were accompanied by a sudden change of
political leadership, which was followed by a period of precipitous fiscal and economic decline. In 2009,
the political and economic situation has stabilized to an extent, while the security situation has
deteriorated yet further. These cross-currents have been felt in the insurance sector.

Therefore to understand what can be organized in the insurance industry, the service providers need to
have a good know how of their customers’ perceptions and expectations. Also due to the increase in
globalization and advancement in technology, the insurance industry is also facing massive amount of
competition, like many other industries.

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 Financial Institutions: Term Report
Trend Analysis of the Insurance Industry

Insurance in its pure form is a social good and in a number of cases can

be classified as a public good (that is, it generates desirable externalities).

Insurance companies, mutuals and cooperatives enable individuals

and firms to protect themselves against infrequent but extreme

losses at a cost which is small compared to the feared loss. They do this

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 Financial Institutions: Term Report
Trend Analysis of the Insurance Industry

through the workings of the law of large numbers and the central limit

theorem which ensure that a sufficiently large number of reasonably

homogenous risks will produce well behaved and highly predictable

aggregate results following a roughly Gaussian loss distribution.

Life insurance contracts can be for short periods (for example,

accidental death) or very long periods (for example, whole of life). In

consequence life insurance can intrinsically include a savings element,

and in many late transition and industrial countries this component

dominates funds flows in the sector. This flow of funds effect can be

exaggerated by the fact that in recent decades the life insurance sector

has begun to compete directly with mutual funds and unit trusts

through unit linked contracts offering a life insurance ‘tax wrapper’.

Non-life insurance contracts, which insure material and financial

risks, typically run for one year and are renewed on the basis of

updated risk information.

Given its fundamental role in spreading risk it is not surprising

that references to insurance can be found in antiquity. A form of risk

sharing for marine ventures known as bottomry (not unlike modern

catastrophe bonds in concept) was in existence more than two