Insight into Pakistan April 2013 life - Profitability - Assets
Snapshot Key concepts life Highlights in selected regions of life Profitability Assets Allocation and Investment Strategy Key strengths of life sector in Pakistan Risks analysis life - - Assets
The insurance company pays in case of demise of the policyholder or at the time of maturity of the policy The Payment of benefit is contingent upon termination or continuation human life. of Investment linked contract: the benefit is calculated with reference to either (i) a running account, or (ii) units. Participating life : The policyholder has an entitlement to participate in distributions by the life insurer of profits or surpluses. This excludes investment-linked contracts, health contracts, group life contracts and group health. Mortality Risk, Morbidity Risk, Longevity Risk life - prfitability - Assets
insurance differentiated in Pakistan Business Classes H U M A N General Business Classes 1 Ordinary life business; 1 Fire and property damage business; 2 Capital redemption business; 2 Marine, aviation and transport business; 3 Pension fund business; and 3 Motor third party compulsory business; 4 Accident and health business. 4 Liability business; 5 Workers compensation business; 6 Credit and suretyship business; Company registered as General and term of contract is not greater than one year 1 1 7 Accident and health business; and 8 Agriculture insurance including crop insurance; 9 Miscellaneous business; of agricultural Assets (e.g. livestock) life - prfitability - Assets
Risk Protection insurance products Risk and earnings profile 2 Savings Products Term Assurance Whole Deffered Fixed and variable Annuities Group Universal Unit-Linked Savings Disability Variable Guaranteed interest contracts Long term Care Endowment Defined Contribution Pension Critical illness Combined Annuity Payout Annuities Risk of a Company Mortality Mortality Lapse Morbidity Morbidity Interest Rate Longevity Longevity Equity Market Lapse Lapse Interest Rate Equity Market Main Source of earning Underwriting result Underwriting result Investment Income Investment Income Investment Income Fee Income life - prfitability - Assets
life - - Assets
3 Mix Markets Picked up for comparison Premium USD (market share penetration Density) United States: 554 (21% 3.6% 1,737) Germany: 114 (4% 3.2% 1,396 ) India: 60 (2.3% 3.6% 68.7) Pakistan: 0.8 (0.03% 0.7% 7.7) Regions Premium (USD bln) Market Share 2011 Premium % of GDP Premium Per Capita (USD) America 661 25% 3. 704 Europe 940 36% 4. 1,082 Asia 924 35% 4.2% 224 Africa 47 2% 2.5% 45 Oceania 47 2% 2.8% 1,298 WORLD 2,619 3.8% 376 ly, life insurance accounts for 57% of total premium PREMIUM GROWTH During 2011, the life sector premium dropped by 3% in real terms (2010: growth of 2.9%); business in western Europe witnessed a significant dip of 9.5%, while South and East Asia plunged by 10.6% in real term. Premium Growth during CY11 in Pakistan (24%) was superior to that of India (negative 6.6%), US (growth 7.3%), UK (growth 4.1%) and Germany (0.1%). life - - Assets
Demographics compared World Pakistan India US Germany 4 Population 7,016,238,890 190,291,129 (ranked 7th) 1,205,073,612 (ranked 2nd) 313,847,465 (ranked 3rd) 81,147,265 (ranked 16th) Mix 1.01 male(s)/female 1.06 male(s)/female 1.08 male(s)/female 0.97 male(s)/female 0.99 male(s)/female Population growth 1.1% 1.55% 1.31% 0.9% -0.2% Death rate 7.99 deaths/1,000 6.8/ 1,000 7.4/ 1,000 8.4/ 1,000 11.0/ 1,000 Urbanization 52% 38% 32% 84% 74% 5 Savings as %GDP n.a 2 34% 12% 24% potential market; Age of population 0-14 15-24 25-54 55-64 65 and above - younger population, higher growth rate - Lower death rate - Growing urbanization Germany US 13% 2 11% 14% 42% 41% 13% 12% 21% 14% 34% India 29% 18% 4 7% 6% Pakistan 35% 22% 35% 5% 4% 9% World 26% 17% 41% 8% 8% life - - Assets
Highlights In Selected Regions life - - Assets
US Highlights 6 (2), Annuities (53%), and Health (27%) Regular Premium (77%), single premium (33%) Individuals (63%), Group (37%) Net Gain from Operations: (5%), Annuities (2%), and Health (6%) Voluntary termination Rate: 6.1% Commission Ratio: 8% 9 8 7 6 5 4 3 2 1 1 26% 49% 1% 36% 22% US - Claims Experience 7 2% 24% 41% Annuity Health Aggregate Matured endowments Policyholder dividends Surrenders Payment to beneficiaries Home- and field-office expenses : 9% life - - Assets
US Highlights ( continued) Assets - Separate Account Other invested assets 6% Non-invested assets 1% Government securities 3% Stocks 79% Other 14% Corporate securities 6% Mortgage-backed securities 5% Net return on invested assets Total Assets: 4.4% General Account: 5.3% Weighted Average Maturity of bonds: 10 years Bond Quality: 93% investment grade, and 0.2% default Note: The general account supports contractual obligations for guaranteed, fixed-dollar benefit payments, such as life insurance policies. The separate account supports liabilities associated with investment risk pass-through products or lines of business life - - Assets
Channels Largest Europe Highlights 7 7 Most diversified Channel Mix Bancassurance Malta (92%) Poland 32% Direct and Banca each Brokers UK (78%) Croatia 39% Direct Agents Slovakia (6) Sweden 44% Others Direct Selling Croatia (39%) Lex 46% Agents Other intermediaries Sweden (44%) Germany 48% Agents Persistency: Financial Services Authority 2011 Survey (UK) Reasons why consumers let their policies lapse Suitability and affordability Product performance Changes in personal circumstances 8 Changes in product design Sales Channel Economic environment life - - Assets
Europe Highlights Persistency: Financial Services Authority 2011 Survey (UK) Persistency (Average 1993-2010) After Years (%) Company representatives Independent financial advisers Direct offer advertisements 1 year 2 years 3 years 4 years 1 year 2 years 3 years 4 years 1 year 2 years 3 years 4 years Regular premium Endowment 92.2 86.1 80.2 73.7 95.1 90.0 84.4 78.6 93.9 88.7 83.8 79.1 Whole life 90.9 82.5 74.5 67.6 94.2 89.0 83.8 79.4 88.3 83.7 80.8 78.6 Other 87.1 74.8 62.6 53.1 91.4 82.6 74.6 67.5 - - - - Single premium 9 All others 98.1 94.8 90.6 85.9 98.4 95.9 92.5 88.1 - - - - Germany 10 Key take aways from Claims Experience 6 56% 5 Other Operating Expenses ratio: 2.4% Commission Ratio: 1 4 3 2 1 41% 14% 4% 4% 2 21% 16% 2010 2011 Death maturity surrender Others life - - Assets
11 India neighbor Liberalized in early 2000s one state owned Corporation (LIC) still dominates the market LIC dominates the market with ~7 market share top five private sector market share 5 Product mix shifting to non-linked plans as indicated by first year premium Private sector makes use of relatively diverse mix of distribution channels 12 Distribution Channels Premium (%) individual agents banks corporate agents brokers direct selling LIC 97 3 - - - Private sector 44 39 8 5 4 India Premium Mix Group, 17% India - Premium Mix 10 9 8 7 6 5 4 3 2 1 India - Premium Mix 36% 59% 76% 72% 45% 3% 21% 16% 8% 18% 24% 2 Linked Non-Linked Linked Non-Linked Private LIC Individuals, 83% Single Premium First Year Renewal life - - Assets
FY11 FY12 India neighbor (.continued) India - Policyholders Account 13 Operating Ratio Total -1% -31% 54% 6% 1 55% 94% LIC -3% -42% 59% 7% 7% 65% 94% Priva te sector -6% 42% 5% 18% 31% 3% 93% Total -2% -41% 49% 6% 11% 72% 96% LIC-2% -47% 55% 7% 8% 75% 96% Priva te sector -1% -28% 35% 6% 18% 66% 96% -5-25% 25% 5 75% 10 125% 15 Benefit ra tio Commission Ra tio Opera ting Expenses ra tio Reserve ra tio Investment Income Other income/expense ra tio life - - Assets
India neighbor India - Asset Allocatio (policyholders) 14 10 9 8 4% 6% 32% 7 6 5 4 3 2 1 8% 18% 39% Tra ditiona l Products 94% ULIPs Funds * Central Government Securities Infrastructure Investments Other Investments State Government & Other Approved Securities Approved Investments * Unit Linked Funds life - - Assets
In Pakistan 15 life - - Assets
PKR bln GPW Growth Pakistan sector Liberalized in early 90s only state owned insurer is State Corporation (SLIC) SLIC dominates the market with ~63% market share private sector concentrated in two companies (market share end-dec12: 73%) Structure and growth 9 Number of partcipants 100,000 90,000 3% 5 45% 8 80,000 4 7 70,000 2% 33% 35% 6 5 60,000 1% 33% 3 4 50,000 25% 3 2 1 0 CY06 CY07 CY08 CY09 CY10 CY11 CY12 Public (SLIC) Private Non-takaful * Private Takaful 40,000 30,000 20,000 10,000 28% 72% 31% 69% 34% 66% 32% 68% 31% 68% 65% 63% 2 15% 1 5% *Excluding Asia Care - CY06 CY07 CY08 CY09 CY10 CY11 CY12E Private Takaful 1 130 516 1,532 2,523 Private Non-takaful 6,149 8,389 11,505 13,227 16,589 22,497 30,439 Public (SLIC) 15,992 18,717 22,695 28,367 35,639 44,812 55,733 Nominal GPW Growth 2 22% 27% 23% 28% 29% 28% life - - Assets
Pakistan sector 98% of investment linked premium pertains to unit linked life schemes At end-mar13, the product slate comprises ~152 insurance plans, including lately influxed bancassurance schemes (~84) premium from endowment plans fetches more than 33% of the total industry s premium (in CY11). life sector has tide knots with more than 17-20 commercial banks, fetching approximately 68% of the private sector premium Bank deposits grew by CAGR 1-11% (since CY07) the health insurance growing rapidly, however, general insurance sector is working with relatively more vigor and zest. Individuals - Health and Pension 3% Individuals - Health and Pension Public sector (SLIC) Group 14% Individuals - Conventional 83% Private Group 13% Individuals - Investment Linked 84% Individuals - Conventional 3% life - - Assets
of the Suppliers Reinsurer Risk sharing High cost if not reinsured Distribution Channel Agents Banca SECP (in the shoes of regulator) License Product design approval Low Power Low dependence of life insurer low cession level Moderate Power Commission structure is higher in Pakistan higher commission ratio than India Moderate Power When Compared with India s IRDA and SBP for banks Moderate to low Risk life - Profitability - Assets
of the Customers and Demand Dynamics Individuals Accepts premium rates quoted by Actuary/ company Can substitute life schemes with those of other saving schemes offered by banks and mutual funds, etc Group Corporate, FIs and banks Negotiates rates Often switch companies low persistency High concentration risk Low Demand and few players Moderate Risk life - Profitability - Assets
of the Barriers to Entry RISK BARRIERS TO ENTRY High Moderate Low High Operational Legal Moderate Regulatory Low 9-10yrs break even Strong IT infrastructure requirements SECP puts limit on expenses High capital injections in initial years Less lengthy licensing procedures than banks and AMCs Commence operations 0.5-1year after incorporation PKR 500mln (4% of avg premium) Vs. India Rs. 1,000mln (0.8%) Solvency requirements Private sector allowed in 90s Conventional insurers allowed Takaful window case in court Composite not allowed life - Profitability - Assets
Premium Mix and Growth Growth pattern of Public sector premium has remained more stable than the private sector Private sector first year premium is majorly driven by unit-linked products, reflecting changing trend in product mix Influx of Single Premium products unit linked 4 35% 3 25% 2 15% 1 5% Premium Growth CY07 CY08 CY09 CY10 CY11 CY12E Private sector Public sector Total Nominal Growth 4 35% 3 25% 2 15% 1 5% 10 9 8 7 6 5 4 3 2 1 Private - Individual Premium Mix 2% 1% 1% 5% 9% 14% 37% 47% 38% 56% 37% 35% 26% 21% 22% 2 19% 2 35% 31% 24% 36% 34% 31% CY10 CY11 CY12 CY10 CY11 CY12 10 9 8 7 6 5 4 3 2 1 Public sector - Individual Premium Mix 5 5 53% 19% 21% 16% 3 3 31% CY10 CY11 9M12 E Conventional Conventional Unit-linked First Year Premium second Year renewal First Year Premium Second Year Premium Subsequent renewals Single Subsequent Renewals General - Profitability - Assets
Claims Experience 8 7 6 5 4 3 2 1 Private - Claims Experince 22% 26% 27% 44% 42% 4 12% 12% 14% 19% 1 2% 2% 16% 5% 8% 1% 5% 5% 2% 2% 2% CY10 CY11 CY12 CY10 CY11 CY12 CY10 CY11 CY12 12 10 8 6 4 2 Public - Claims Experience 11% 94% 12% 86% 25% 2 6% 5% CY10 CY11 CY10 CY11 6% 4% Conventional Unit-linked Group Death Maturity Surrenders Others* * includes experience refund Conventional Death Maturity Surrenders Others Group General - Profitability - Assets
CY10 CY11 CY12 Profitability Statutory Funds Operating ratio Private sector -31% 22% 21% 11% 7 92% Total -54% 37% 25% 14% 73% 95% SLIC -69% 43% 25% 14% 83% 96% Private sector -2 23% 24% 12% 53% 92% Total -6 41% 26% 14% 75% 97% SLIC -77% 48% 26% 15% 87% 99% Private sector -21% 26% 26% 13% 49% 93% -10-75% -5-25% 25% 5 75% 10 125% 15 175% 20 Claims ratio Commission Ratio Operating Expenses ratio Reserve ratio Investment Income Other income/expense ratio General - Profitability - Assets
Assets 10 9 8 7 6 5 4 3 2 1 65% 22% Assets Allocation Investment Book 2% 11% 1 6% Shareholders Fund Statutory fund Shareholders Fund Statutory fund Private 69% 15% 29% 2% 69% SLIC 8% 9% 1% 72% 1% 9% PKR mln CY11 CY12 Investments Shareholders Funds 4,752 5,145 Statutory Funds 323,802 396,656 328,554 401,801 Total Assets Shareholders Funds 6,616 6,425 Statutory Funds 413,593 339,072 420,209 345,497 Liquid Assets/ policyholders liabilities 1.0 times 1.0 times Equities Real estate Government securities Fixed income (includes TFCs) Cash and bank loans Weighted Average Maturity Public Security CY11 CY12E Gov Sec 14.2years 12.8years Mix Mix PIBS 96% 14.2yrs 97% 12.8yrs T-bills 4% 0.0yrs 3% 0.0yrs Private CY11 CY12 1.7years 0.6years Mix Mix 41% 3.3yrs 8% 0.8yrs 59% 0.5yrs 92% 0.6yrs life - - Assets
Investments Average Yield (%) CY11 CY12 Statutory Funds investments 11.9% 12.6% Shareholders Funds Investments 10. 14. Comparison CY11 CY12 Money Market Mutual Funds 12.1% 10.3% Balanced Mutual Funds -2.2% 24.5% Asset allocation Mutual Funds -5.5% 22.9% Min Bank Deposit Rate 5% 6% KSE-100 Index -4% 49% Discount Rate 13.1% 11. life - - Assets
Key of the sector in Pakistan life - Profitability - Assets
Tremendous Growth Robust Conservative investments strategy life - Profitability - Assets
Risk life - Profitability - Assets
Risks Persistency Less efficiency with higher acquisition cost Solvency requirements catastrophic cover Transparency limited disclosures of assets under management. Takaful firms are better off. Competition with substitutes mutual funds life - Profitability - Assets
Bibliography 1. Ordinance section 3 (Division of insurance business into life and non-life) and section 4 (Classes of life and non-life business) 2. Swiss Re Sigma no. 1/2012: understanding in life insurance Figure 16 Page 21 3. based on data published by Swiss Re in Sigma 3/12 titled world insurance 2011 statistical appendix updated Jan 2013 4. Demographic based on data extracted from 2012 estimates of The Center of Intelligence, United States of America [https://www.cia.gov/library/publications/the-world-factbook/geos/uk.html] 5. The World Bank: Gross savings are calculated as gross national income less total consumption, plus net transfers 6. of American sector is based upon figures and information extracted from US Factbook 2012, issued by American Council of Insurers 7. CEA Statistics N 46 European in Figures January 2013 Table 20 Table 20: Breakdown of life insurance premiums by distribution channel 2010 Page 63 8. Financial Services Authority 2011 Survey of the persistency of and Pensions policies Section 3: Reasons why consumers let their policies lapse Page 8,9,10 9. Financial Services Authority 2011 Survey of the persistency of and Pensions policies Annexures Page 13-16 10. Statistical Yearbook of German 2012 11. Regulatory and Development Authority, India Annual Report 2001-2012 12. Regulatory and Development Authority, India Annual Report 2001-2012 Table 11.3 Page 11 13. Regulatory and Development Authority, India Annual Report 2001-2012 Statement 21 Page 162 14. Regulatory and Development Authority, India Annual Report 2001-2012 table 1.43 Page 60 15. based on PACRA s inhouse research figures compiled from annual financial statements of industry participants life - Profitability - Assets
Analysts Amara S. Gondal amara.gondal@pacra.com Abdul Hayee Abdul.hayee@pacra.com Jhangeer Hanif jhangeer@pacra.com Anam Pirzada anam@pacra.com Noman Umar Noman.umar@pacra.com Contact Number: +92 42 3586 9504 DISCLAIMER PACRA has used due care in preparation of this document. Our information has been obtained from sources we consider to be reliable but its accuracy or completeness is not guaranteed. The information in this document may be copied or otherwise reproduced, in whole or in part, provided the source is duly acknowledged. The presentation should not be relied upon as professional advice.