The Competition Commission of Pakistan (CCP) has recommended amendment in section 166 of the Insurance Ordinance, 2000, which currently bars competition in the non-life insurance market by extending exclusive rights to the National Insurance Company Limited (NICL) for public property.
The CCP has issued a policy note to the Ministry of Commerce here on Tuesday in this connection.
CCP has strongly recommended that the Federal Government may amend Section 166 of the Insurance Ordinance, 2000 to open insurance of public property for the private sector, excluding public property meant for national security, which will create a level playing field for all non-life insurers in the insurance market. This will attract new entrants, which would increase the choice of insurance products and reduce premium costs for the Federal Government. At the same time, NICL be incentivized to increase operational efficiency due to increased competition. Sectors attached to the non-life insurance would also benefit from increased competition.
According to the CCP, section 166 (3) of the Insurance Ordinance, 2000 provides that all insurance business relating to any public property, or to any risk or liability pertaining to public property, shall be placed with NICL only and shall not with any other insurer. NICL is the only state-owned company, under the administrative control of the Ministry of Commerce, which is involved in non-life insurance business.
The CCP observed that this statutory monopoly of NICL harms competition in the insurance market. In this case the government is the direct consumer and is denying itself the benefits of competition such as improved quality of service and competitive premiums.
The CCP's Policy Note further states that the monopoly position of NICL has emerged not because of business acumen but through the creation of statutory barriers that reduced competition. It is important to note that NICL has a share in total industry assets of 22 percent but its share in Gross Written Premium was only 12 percent.
Such preferential treatment for NICL creates de facto subsidies and leaves no incentive for NICL to improve efficiency. Statutory monopoly of NICL limits opportunities for potential competitors because exclusive legislative rights create barriers for the new entrants.
The choice of creating a statutory monopoly over free competition may have deleterious effects for consumers. It deprives the consumers of the benefits of competition; more choice, better quality and a competitive price. Particularly, in this scenario where NICL's statutory monopoly has been created to insure public property, the government is the direct consumer and is denying itself the benefits of competition such as improved quality of service and competitive premiums.
The Policy Note recommended the Federal Government to take measures to amend Section 166 of the Insurance Ordinance, 2000 to open insurance of public property to the private sector, excluding public property that is related to national security, which will create a level playing field for all non-life insurers in the insurance market.
The CCP said the statutory monopoly created under Section 166(3) of the Insurance Ordinance, 2000 in favour of NICL distorts the competitive process in the non-life insurance sector. Such preferential treatment creates de facto subsidies and reduces budgetary constraints on NICL leaving no incentive for NICL to maximise its efficiency.
Securities and Exchange Commission of Pakistan (SECP) has made observation in its Insurance Industry Reform Committee Report, 2014 that the law does not restrict NICL from underwriting the private sector property and risks. The NICL is registered with SECP as a non-life insurer and authorised to transact all classes of non-life insurance business. The report further goes on to state that somehow preferential treatment has led to misconception that the role of NICL is restricted solely to public property. This is the major reason that since the promulgation of the Insurance Ordinance, 2000, NICL has restricted itself to insuring public property only and that too in certain specific classes of insurance with almost stagnant market share despite having one of the largest asset and gross premium base among the non life insurers. Thus preferential treatment has emerged as a weakness of NICL with no experience in business acquisition, CCP said.
The statutory monopoly of NICL can be distinguished from situations in which a business may have achieved a monopoly position through organic growth or development as a consequence of a superior product, business acumen, or historic accident. The monopoly position of NICL has emerged not because of business acumen but the use of government power to monopolise through creation of statutory barriers to reduce competition. It is important to highlight that the total Gross Written Premium (GWP) of the non-life insurance sector in 2012 was Rs 57 billion out of which NICL had an approximate market share of 12 percent ie its GWP was Rs 6.84 billion. The total assets of the non-life insurance sector stood at Rs 159 billion with NICL having assets worth Rs 34.98 billion or a share of 22 percent. NICL therefore had a share in assets of 22 percent but its share in GWP was only 12 percent.
Market power in conjunction with statutory protection allows for far-reaching negative effects on consumers in two ways. First, monopolist undertaking may act anti-competitively in its own market, where it can restrict output or raise prices. Second, a statutory monopoly for an undertaking can create distortion in another market by anti-competitively cross-subsidising into product/service in which there is competition, CCP added.
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