TEXT: Insurance Week is observed in Pakistan each year to raise the awareness of Insurance at national level. By celebrating Insurance Week, the industry aims to spread the message of insurance among general public highlighting the important role this industry plays in mitigating risks, supporting individuals and businesses in their hour of need and the overall economic development of the country.
This year, IAP celebrates its eighth “Insurance & Takaful Week” from 7th to 11th February 2022 with 9th February 2022 marked as the “Insurance & Takaful Day”. The Day will commence with the publication of special supplements on insurance & Takaful in the leading newspapers of the country followed by various events throughout the week. TV and radio shows, a radio ad campaign on leading radio stations for awareness among general public and an Essay Competition are some of the prominent activities. With prevalent COVID-19 risks we have limited our activities this year, events such as IAP’s Cricket Tournament, Elocution Contest, Family Carnival, Table Tennis competition etc. will not be held this year.
Insurance & Takaful industry's contribution: Industry's contribution in terms of revenue generation, claim and benefit payments to policyholders, contribution of taxes in Government exchequer and provision of employment for the last five years are as under:
IAP strives to provide and advocates for a nurturing business environment to allow Pakistani insurance sector to grow from its sub 1 percent insurance & takaful penetration to match those of our regional peers. IAP actively engages the Government, Ministry of Finance, Ministry of Commerce, FBR, SECP, provincial tax authorities and other stakeholders for the promotion and development of Insurance and Takaful in the country.
Some of the factors impeding the insurance / takaful industry’s growth are listed below:
Withdrawal of Federal Insurance Fee on Insurance Premium / Takaful Contribution & Insurance / Takaful Awareness Programs
With low insurance penetration in Pakistan where vast majority of the public is not aware of insurance as a risk mitigating tool, the insurance industry itself can only reach out to major 20 cities whereas a large portion of people living in small towns and villages remain unprotected.
In 1989 a levy was imposed as Federal Insurance Fee (FIF) @ 1% on all non-life premium in order to generate a fund which could be used for education and for creation of awareness in the masses. Unfortunately, the levy so collected has not been used for any awareness efforts. Conservative estimates indicate that an amount of Rs10.9 billion has been collected and retained by the Government.
As a first step, the government should release these funds to Insurance Association of Pakistan who can then develop plans for education and creating awareness among the public about benefits of insurance as a system. Moreover, for future this fee should be withdrawn.
Withdrawal of Sales Tax on Health Insurance
Health insurance provides a modicum of social security to citizens and its penetration as a percentage of GDP should be encouraged by all possible means so that this relief may be availed by a broad spectrum of our population. Currently, health services are not taxed when availed directly whereas Health insurance has been brought in the ambit of sales tax as the provinces have inserted health insurance in the schedule for taxable services in the provincial tax laws.
It has temporarily been exempted from application of sales tax for a fixed period via notifications and zero rate mechanism (exempted until 30th June 2022 in Sindh). However, this temporary exemption may be withdrawn at any time posing a challenge for policyholders and the insurance sector making health insurance unviable. This is even more troublesome in the wake of the devastating effects of Covid-19.
Sales tax on health insurance must immediately be withdrawn across the country.
Life Insurance should be permanently exempted from the levy of sales tax
Life insurance is a vital savings tool for people across the globe however the provincial sales tax levy on life insurance is discouraging life insurance policies in Pakistan, making it expensive for policyholders. Life insurance should be permanently exempted from sales tax across the country.
Withdrawal of Sales Tax on Reinsurance
The Government of Sindh has levied Sindh Sales Tax on reinsurance, though reinsurance is neither a service nor a separate activity from the original insurance contract. Further, levy of Sindh Sales Tax on reinsurance activity is also against the fundamental principle of value addition tax regime across the globe. Reinsurance is part of the main insurance contract as certain portion of the risk assured in the insurance contract is hedged.
Accordingly, premium is passed to the reinsurer on which tax has already been paid. The reinsurance and insurance companies (being retrocessionaires) are effectively partners in sharing risk of the policy holders as per requirements of section 42 of the Insurance Ordinance, 2000. Therefore, sales tax on reinsurance must be withdrawn.
Withdrawal of Sales Tax on Insurance Agents Commission
From 1st July 2019 the services of agents and brokers in insurance industry have been added in second schedule to the Sindh Sales Tax on Services Act, thereby levying an additional tax of 5% of their sales commission. Punjab has also imposed this sales tax from 1st July 2021.
An important reason for low insurance penetration in Pakistan is lack of developed delivery channels, including limited access to technology. Under these circumstances, about 200,000 insurance agents in the industry play a vital role in increasing the insurance penetration. Most of these agents are lower middle-class individuals supplementing their incomes with meagre insurance commissions. It is worth noting that insurance companies fall under the highly regulated sectors of the economy and all payments of commission made are already subject to income tax withholding for individuals at 12% for filer and 24% for non-filer& 8% for corporate agents and brokers. Imposition of sales tax on agent commission has made this activity unviable for them.
Stamp Duty in Punjab to be rolled back
The insurance Stamp duties in Punjab have been revised upwards through the Punjab Finance Act 2018, the duties have been increased by 230% which are going to be detrimental to the industry. It should be rolled back to the original levels with the basis of computing stamp made easier, instead of sum insured it should be charged on premium. Presently, in many instances stamp duty calculation works out to be more than the premium charged.
Compulsory Motor Third Party Insurance
Motor third party insurance is compulsory in every country of the world including Pakistan via Motor Vehicle Act 1939 however its effective implementation is lacking for the past several years. Enforcement of this one type of insurance can alone protect people from on road risks and create an interface between 15-20 million people with the insurance industry. Currently due to lack of implementation there are thousands of uninsured vehicles and in the event of major accidents there is no effective recourse of financial support for the victims and the Government has to finance the compensations. In addition to providing adequate financial support it will create substantial tax income for the Government in the form of taxes on insurance premiums.
Compulsory Corporate Health Insurance
The SECP can make it mandatory for companies/employers to purchase health insurance for all their employees reducing the burden on government provided free health services.
In order to encourage corporate health insurance, the government should also provide attractive incentives such as tax breaks to employers who choose to purchase health insurance for their staff. It will take away the load from state health institutions which can cater to those who cannot afford to purchase health insurance or who do not fall within the social health initiatives of the Government.
Compulsory Workmen Compensation/ Employers Liability Insurance
It goes without saying that the Workmen’s Compensation Act is hardly adhered to thereby, exposing the vulnerable section of population to industrial injuries/fatalities. Compulsory workmen compensation insurance has the potential to alleviate the difficulties of the industrial and commercial workers.
Education & Capacity Building Initiatives
The Government must create Insurance Education Institutes and strengthen the Pakistan Insurance Institute. The industry needs capacity building initiatives to improve skills of the existing workforce and ensure a steady supply of insurance qualified staff for industry expansion.
Consistent and Stable Regulatory Environment
With frequent changes in tax policy and regulatory requirements for the insurance industry, the sector is facing uncertainty and allied challenges in attracting investment for growth and expansion.
For the past several years the industry is unclear on sales tax application on life insurance, health insurance, reinsurance and agent commission in provinces. The industry cannot effectively sell and market these products without their real price determination for customers.
On the regulatory side the Corporate Insurance Agents Regulations 2020 have been notified this year, followed by proposed changes in the existing Unit Linked Framework, ongoing IFRS-17 implementation and AML/CFT requirements. All of which signal that the regulatory environment is becoming a source of instability and uncertainty that looks to impact both revenue growth and operating margins of the private sector.
The policy makers are not paying enough attention to the broader issue of the burden associated with quick and successive waves of regulatory changes. There is considerable amount of money and resources required to implement any change in regulations. The Regulators should develop a cost-benefit analysis with every change of regulation.
Copyright Business Recorder, 2022
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