Executive Committee’s Message: On the Ninth Insurance & Takaful Week 2024

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 the 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 ninth “Insurance & Takaful Week” from 6th to 10th May 2024 with 6th May 2024 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 i.e. insurance awareness discussions on TV and radio, including social media campaigns.

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:

IAP strives to provide and advocate for a nurturing business environment to allow the 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:

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                       2022   2021   2020   2019   2018   Total
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Premium/Takaful
Written (PKRbillion)   550    438    391    349    315    2,043
Claims paid
(PKR billion)          277    179    160    138    127      881
Tax contributions to
government exchequer
(PKR billion)          31     25     22     21     16       115
Number of employees in
Insurance companies    20,470 20,385 20,194 18,321 18,926     –
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Withdrawal of Federal Insurance Fee on Insurance Premium / Takaful Contribution & Insurance / Takaful Awareness Programs

With low insurance penetration in Pakistan where the vast majority of the public is not aware of insurance as a risk mitigating tool.

In 1989 a levy was imposed as Federal Insurance Fee (FIF) @ 1% on all non-life premiums 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 Rs 14 billion has been collected as FIF and retained by the Government.

As a first step, the government should release these funds to the Insurance Association of Pakistan who can then develop plans for education and create awareness among the public about benefits of insurance as a system. Moreover, for future this fee should be withdrawn as the funds are not being used for their purported purpose.

Life/Health insurance premium be exempted for income tax purpose or income tax benefit

Life/Health insurance premium be exempted for income tax purpose or income tax benefit be restored against life/health insurance premium payment to encourage its penetration.

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.

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 a 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 Commission earned by Insurance Agents

From 1st July 2019 the services of agents and brokers in the insurance industry have been added in a 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, more than 200,000 insurance agents in the industry play a vital role in increasing insurance penetration. Most of these agents are lower middle-class individuals supplementing their incomes with meager 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 and 8% for corporate agents and brokers. Imposition of sales tax on agent commission has made this activity unviable for many.

Stamp Duty in Punjab to be rolled back

The insurance Stamp duties in Punjab have been revised upwards through the Punjab Finance Act 2018, whereby the duties have been increased by 230%. It should be rolled back to the original levels and the basis of computing stamps should be 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 has been 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 plying on the roads 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

The Workmen’s Compensation Act is hardly adhered to by employers thereby exposing the vulnerable section of the population to industrial injuries/fatalities. Compulsory workmen compensation insurance has the potential to alleviate some of the difficulties faced by 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 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. Improvements in this area will greatly help in improving the penetration and acceptability of insurance/takaful in the country.

Copyright Business Recorder, 2024