Non-Life Insurance SECTOR UPDATE. JCR-VIS Credit Rating Company Limited. December, 2018

Transcription

1 Nn-Life Insurance SECTOR UPDATE December, 2018 Insurance plicies are instruments used t hedge against the risk f financial lsses f all magnitudes that may emanate frm damage t the insured prperty. The cverage als includes liability fr damage r injury caused t a third party. Businesses require different types f insurance plicies t insure against specific types f risks faced by the particular business. Fr example, a fast fd restaurant needs a plicy that cvers damage r injury that ccurs as a result f cking. While a car rental cmpany is nt subject t this type f risk, it requires cverage fr damage r injury that culd ccur while a vehicle is driven. Glbal Insurance Scenari As technlgy innvatin and higher custmer expectatins redefine the marketplace, insurers remain fcused n grwing tp-line sales, earning psitive bttm-line, addressing challenges, and cmpeting in a dynamic industry. The glbal insurance industry has gne thrugh its wn digital transfrmatin ver the past five years. Mst insurers have implemented adhc capabilities t make their businesses faster and cheaper, creating nline tls t further engage their distributin channels. These insurers have als strengthened areas such as marketing, digital prtals, custmer self-service capabilities, and autmatin f sme back-end prcesses. Hwever, these cmpanies need t cntinue t cmply with the increasing quantum f regulatry changes being impsed. Glbal nn-life premium is expected t grw at a steady rate f 3% in the next tw years but culd be strnger depending n price increases. Premium grwth in emerging markets is als expected t imprve steadily and may end at a higher rate f arund 7% in Assuming that these years have average lsses, prfitability levels f insurers may imprve. Prir t 2017, the market was based n shaving ff its expense base in rder t ffset its lw investment returns and pricing f all business classes f insurance. Hwever, there were a significant number f catastrphic lsses which were reprted during the secnd half f As a result, it may becme difficult fr the reinsurance market in particular, especially entities t make a prfit with trade-ffs between increased retentins n net accunt and decreasing reinsurance csts. Pakistan s Insurance Market n the Glbal Map During the utging year, the nn-life insurance sectr in Pakistan has grwn at a (CAGR) f 9.5% frm perid falling between 2013 t 2017, thereby reaching a cumulative ttal f Rs. 70.0b at end This grwth was largely emanated frm new infrastructure prjects cming int the cuntry. Ttal grss premiums emanating frm the general insurance sectr amunted t Rs. 36.9b at end-june 2018 and are expected t surpass the preceding year s premiums.. Overall insurance industry s fundamentals have imprved during last three (3) years mainly n accunt f imprvement in the law and rder situatin, imprvement in plitical stability and uptick in the ecnmic fundamentals. Despite sizeable grwth in grss premiums, Pakistan has a nminal market share f 0.04% 1 in the wrld market in terms f grss premiums frm the general insurance industry. Similarly, insurance penetratin and insurance density f general insurance in the cuntry remained n the lwer at 0.27% 2 and $3.9 3 respectively. Pakistan lags behind its Suth-Asian peers (excluding Bangladesh) in terms f general insurance penetratin and insurance density. As per key market players in Pakistan, there still lies significant rm fr business grwth given these metrics. 1 Swiss Re: Figures crrespnd t Swiss Re: Figures crrespnd t Swiss Re: Figures crrespnd t 2015

2 2 Lwer penetratin and density levels in Pakistan are largely n accunt f the widely held perspective that insurance is an un- Islamic prduct / service. In rder t address this religius gap, a number f cnventinal insurers in Pakistan have launched windw peratins fr prviding Islamic insurance cverage. Mrever, insurance cverage in Pakistan is nly bught when it is either mandatry by law r when it is a requirement frm a specific lending institutin. This is in vast cntrast t ther players n the glbal map wh buy insurance as a necessity f life. Lwer literacy rate has als cntributed t negligible penetratin levels in the regin ver the years as ppulatin based in rural areas still lack awareness abut insurance prducts. In rder t imprve this metric, key players in Pakistan have als started inculcating the imprtance f insurance int the minds f its peple thrugh infrmal educatinal sessins. Pakistan s Insurance Industry At present, 30 general insurance cmpanies perate in Pakistan; these are further segregated int, (1)Takaful, and (2) Cnventinal. The market fllws an ligplistic structure with tp three insurance cmpanies cntributing t almst 55% f ttal grss premiums written by the industry.

3 3 Classificatin Given that risk prfile f different insurance cmpanies varies cnsiderably, we have accrdingly divided these cmpanies, n the basis f their relative market share 4, int three different categries: large (relative market share > 3.0x), medium (0.75x < relative market share < 3.0x) and small (relative market s\hare < 0.75x). Large Insurance EFU Insurance Cmpany Limited (7.30x) Adamjee Insurance Cmpany Limited (7.08x) Jubilee Insurance Cmpany Limited (3.44x) Medium Insurance United Insurance Cmpany f Pakistan (1.61x) IGI General Insurance Limited (1.26x) Askari General Insurance Cmpany Limited (1.00x) UBL Insurers Limited (0.98x) Atlas Insurance Limited (0.98x) East West Insurance (0.93x) Security General Insurance Cmpany Limited (0.87x) Alfalah Insurance Cmpany Limited (0.81x) Allianz EFU Health Insurance Limited (0.81x) Small Insurance TPL Direct Insurance Cmpany Limited (0.57x) Habib Insurance Cmpany Limited (0.54x) Reliance Insurance Cmpany Limited (0.51x) Premier Insurance Limited (0.49x) Century Insurance Cmpany Limited (0.45x) Sindh Insurance Limited (0.42x) New Hampshire Cmpany Limited (0.30x) SPI Insurance Cmpany Limited (0.29x) Pak Qatar General Takaful Limited (0.29x) Asia Insurance Cmpany Limited (0.24x) Chubb Insurance Pakistan Limited (0.21x) Pakistan General Insurance Cmpany Limited (0.15x) Shaheen Insurance Cmpany Limited (0.14x) Takaful Pakistan Limited (0.10x) Crescent Star Insurance Limited (0.08x) Alpha Insurance Cmpany Limited (0.06x) PICIC Insurance Limited (0.06x) Universal Insurance Cmpany Limited (0.02x) The C-perative Insurance Sciety f Pakistan Limited (0.003x) Excel Insurance Cmpany Limited (0.002x) 4 Relative Market Share = Average Grss Premium Written f the Cmpany / Average Grss Premium Written f the Industry

4 4 Business Vlumes General insurance industry in Pakistan is highly cncentrated as large insurance cmpanies accunt fr mre than half f the industry s grss premiums. Increase in grss premiums was largely n the back f grwth in business vlumes written under facultative arrangements. Given that larger and medium players tend t retain an ptimal level f premium n their net accunt, a significant prprtin f business is retained n wn bks by smaller players. Anther reasn fr the same is that it is difficult fr smaller insurers t negtiate desirable term with internatinal reinsurers given their claims histry and financial strength. With cnventinal players launching windw peratins fr Takaful cvers, business prspects f the tw existing Islamic players have reduced significantly. With prevailing pricing war, the cnventinal cmpanies were able t absrb expsures at lwer prices in cmparisn t Takaful cmpanies. An impact f business cannibalizatin where custmers mved frm cnventinal t windw Takaful peratins f the same cmpany was als witnessed in the previus years; n further impact is expected in the cming perid. Grss Premium % Net Premium % Cntributin f Takaful in Ttal Business Large 41,460, % 20,346, % 7.1% Medium 15,315, % 8,350, % 8.5% Small 19,446, % 12,372, % 10.1% Ging frward, a number f cmpanies are fcusing n building business vlumes in the mtr segment given that the law and rder situatin has imprved during the years and that such a business prvides a cushin t its cash flws. Given that such a segment incurs higher number f small quantum lsses, the cmpanies must ensure that their underwriting abilities are nt cmprmised. Prfitability Similar t business vlumes, large insurance cmpanies cumulatively represent almst 60% f the sectr s prfits. Althugh their insurance related peratins prvide a significant supprt t the bttm line, their investment prtflis als generate healthy returns. Return n investments frm larger cmpanies cntributed 57% f ttal investment prfits earned in the industry. This was n the back f higher quantum expsures held by the three cmpanies. A few f the smaller cmpanies have been reprting an underwriting lss fr the past few years n accunt f significant lsses retained n net accunt. Ability t maintain their perfrmance metrics remains a challenge given the underwriting practices f these smaller cmpanies cupled with the prevalent cmpetitin that they face in the industry. Underwriting Prfit % Investment Incme % Net Prfit % Large 3,088, % 3,657, % 4,695, % Medium 2,042, % 1,745, % 2,251, % Small 1,095, % 1,011, % 889, % Lss ratis fr the cnventinal business have remained within manageable limits during Hwever, there is still rm fr imprvement acrss the industry fr the Takaful business. Accunting fr their relative expenses, large insurers have a favrable cmbined rati in cmparisn t the remaining market players. Ging frward; trend in prfitability indicatrs is expected t remain favrable fr the prminent players while smaller sized insurers will need t fcus n their underwriting abilities. Net Claims - Cnventinal Net Claims - Takaful Net Claims Rati Ttal Large 47.8% 67.5% 49.4% Medium 45.3% 32.6% 43.9% Small 46.6% 56.0% 47.5%

5 5 Capitalizatin Given the structure f the insurance market, the tp three players cntribute the highest t equity base f the industry; cntributin f large insurers was almst 54%, at end Similarly, medium sized insurance cmpanies cumulatively cnstitute ne-furth f the industry s ttal asset and equity base. While all cmpanies cmply with the minimum paid up capital requirement issued by the regulatr, a number f cmpanies are still struggling with their leverage indicatrs where they have underwritten higher business n their net accunt in cmparisn t their equity base; this may impse a threat t such cmpanies where they have lwer levels f risk absrptin capacities. Equity % Large 40,963, % Medium 18,539, % Small 16,668, % Challenges/Opprtunities fr the Insurance Market in Pakistan In 2016, the gvernment impsed unifrm crprate tax rate f 31% n all surces f incme f the insurance cmpanies, cupled with an additinal super-tax f 3%. Previusly, the tax rate n capital gains and dividend incme earned by insurance cmpanies were in the range f 7.5% t 15.0%. This increase in tax rates will have negative impact n prfitability f several general insurance cmpanies as rely mst f these cmpanies heavily n investment incme in the frm f bth capital gains and dividends. In a bid t imprve insurance penetratin, Securities & Exchange Cmmissin f Pakistan (SECP) is cnsidering varius alternatives fr prmtin f micr-insurance market in the cuntry. In this regard, SECP is revising the regulatry framewrk fr micr insurance and changes are expected in the SEC (micr Insurance) Rules, At present, ptins under cnsideratin include intrductin f lwer capital requirements fr dedicated micr-insurance cmpanies, relaxatin in slvency requirements t encurage investment in micr-insurance infrastructure and allwing cllabratin between life and nn-life insurance cmpanies t ffer integrated prducts t the lw incme grups. China Pakistan Ecnmic Crridr (CPEC) wrth $45.6b is expected t facilitate grwth in engineering and bnd segments f general insurance industry n accunt f initiatin f infrastructure prjects. Wrk n prjects has already started with timeline f all prjects being 15 years. CPEC cnstitutes the fllwing initiatives : 24 energy prjects (US$34.4bn). 4 infrastructure prjects (US$9.8bn). Develpment f Gwadar prt (US$800mn). Frmatin f ver 30 Special Ecnmic Znes. Cnsidering the recent uptick in the rupee dllar parity, premiums f the insurance industry are expected t increase at healthy rates. Given that mst f the infrastructure prjects cming in are dllar-denminated, insurance premiums n these prjects are als expected t increase. Alng with insurance related peratins, cmpanies als maintain a sizeable investment prtfli. During 2017, equity expsures were adversely impacted n accunt f the dwnturn in stck market, as was witnessed acrss the entire financial sectr. As a result, a number f cmpanies shed ff these investments and earned ne-time gains. Ging frward, ability t reinstate returns n investments wuld be amngst the key rating drivers. Analyst Cntact Muniba Khan Senir Manager muniba.khan@jcrvis.cm.pk