The Securities and Exchange Commission of Pakistan (SECP) has made amendments to the solvency regime for the insurance companies to strengthen their financial position and reduce the risk of volatility in the prices of certain assets.
Talking to media here on Thursday, Muhammad Ali, Chairman, SECP said that the Policy Board of the SECP has approved the Solvency requirements for insurance companies, which would improve the liquidity position of the insurance companies and eventually protect the interest of policy holders.
The solvency is the ability of a business to have enough assets over its liabilities, and the amendments call for insurance companies to manage their assets with different priority. He said that the management of money will be changed and the admissible assets have to be more than the inadmissible assets so that the insurance companies have the capacity to pay the policyholders in case of emergency. The changes in the solvency regime call for non-life insurance companies to increase the value of their admissible assets in a phase-wise manner.
The SECP Chairman further said that the insurance companies would be required to invest, reorganise and even make partnerships but that is needed to cater for the growth of the sector and ensure protection of the policyholders' claims. Under the current rules the Life insurance companies need to have admissible assets of Rs 75 million, however after the amendments the companies would be required to have more admissible assets in 2012, which would be further increased in 2013 and 2014.
The SECP Chairman said that as the policyholders come to know more about the financial strength of insurance companies their trust in insurance sector would increase. With higher capacity the companies would be looking for opportunities to expand businesses.
He said that the history of clearing the claims is important for expanding the clientele base. Muhammad Ali pointed out that the SECP has been actively focusing on micro insurance, health insurance and terrorism insurance. The SECP is also planning to work on crop insurance in the next few months. The SECP officials from Karachi said that after the amendments the priority of investments will be changed, many assets are worthless for the policyholders like furniture, office establishments, etc.
The SECP officials said that currently the total insurance base in the country is worth Rs 107 billion but the non-life segment was dominating at Rs 59 billion. During the media briefing, the SECP officials admitted that insurance sector has not witnessed growth, keeping in view potentials in the country.
The SECP officials further said that the insurance sector would significantly improve after the conventional insurance companies are allowed to open Takaful windows, this permission is expected in 6-8 weeks. They said that the solvency regime for the insurance industry was introduced in the year 2002 through SEC (Insurance) Rules, 2002. It was felt that the Rules then published had certain limitations such as a detailed solvency regime for life insurance companies as envisaged by the Insurance Ordinance, 2000 and the admissibility of assets introduced in 2002 had awfully high limits for certain assets in the case of non-life insurers, while other assets commonly invested in, were not covered at all.
Considering these issues, in year 2006 a group of experts from relevant stakeholders including Insurance Association of Pakistan, Pakistan Society of Actuaries, Pakistan Banks Association and SECP as the regulator, engaged in an exercise to analyse the provisions relating to solvency requirements for both life and non-life insurance companies. The mandate of this Committee was not only to recommend the rational solvency requirements, but also to examine the existing practices and policies of insurers with respect to the investment of their funds, officials maintained.
The SECP officials stated that the committee presented its recommendation relating to admissibility of assets, valuation of assets and liabilities, solvency requirements of life insurers, solvency requirements of non-life insurers, minimum valuation basis for life insurance, reporting on solvency by insurers and investment guidelines. These recommendations were approved by the Commission earlier in 2010 for publishing in the official gazette and eliciting public opinion to be received in subsequent 30 days. The SECP thoroughly reviewed the comments received on the draft amendments and the suggestions found to be consistent with the regulatory framework and the enabling provisions of the law, without prejudicing the rights and duties of any stakeholder, were suggested to be accommodated.
It has been noted with satisfaction that while preparing these new provisions of Solvency, the SECP complied with the due process ie taking into consideration the stakeholders' comments, engaging industry experts in the deliberations and seeking advice from the Legal experts. Accordingly, the amendments in the SEC (Insurance) Rules, 2002 related to Solvency provisions were presented in the SEC Policy Board meeting and the same was approved by the Board for final promulgation.
It is expected that the new solvency regime for the insurance companies will further strengthen the financial position of insurers over time and reduce the risk of volatility in the prices of certain assets, such as equities and properties, which threaten their solvency. The more substantive changes are to be implemented in a phased manner so as to allow the industry to implement these changes at a reasonable pace.
The new regime is therefore not anticipated to cause any material difficulties to insurers, although the increases in absolute amounts and the introduction of life insurance solvency regime is likely to result in increasing the capital base by some new companies. There is, however, adequate time allowed for this increment, SECP officials added.