Country ProFILe – Pakistan

Booming bancassurance
The Securities and Exchange Commission of Pakistan, the
insurance regulator of the country, has recently issued Guidelines
for Bancassurance for the insurance sector. Mr Mohammed Ali
Ahmed, Deputy General Manager, Actuarial, Strategic Planning &
Bancassurance, EFU Life Assurance Ltd – Pakistan, gives us highlights
of these Guidelines and a quick look at the bancassurance market in
the past and today.

P
akistan is now amongst a very few countries which
have some form of guidance available from the Regu-
lator to conduct and manage bancassurance business
in the country.
The Guidelines, issued by the Securities and Exchange
Commission of Pakistan, focus mainly on life insurance
as this sector is most active in bancassurance as compared
to the non-life sector.
As a discussion of these guidelines would be incomplete
without a look first at the life insurance industry, evolution
of bancassurance in Pakistan, its current state and future
prospects, we take a quick snapshot of the bancassurance
scenario in the country.
The life insurance market
The Pakistani life insurance market was nationalised for a
period of 20 years from 1972 to 1992. After the opening up
of the sector for private companies, four companies started
operations mainly during the period 1992 to 1995. These
are EFU Life, NJI Life (formerly Commercial Union), ALICO
and East West Life (formerly known as Metropolitan life).
The latest entrant, Adamjee Life, started business in 2009.
The public sector corporation, State Life, continues to be
the largest life insurance entity, mainly due to the 20-year
monopoly in the business and a significantly large renewal
premium base. The private sector players have, over the last
few years, managed to grab over 30% market share from
State Life. In the private sector, EFU Life, is the largest player.
It is estimated that the gross premium of the life sector
during 2009 will be close to PKR 40 billion (US$475 million),
recording a growth of about 20% over 2008. Individual life
new business is expected to touch PKR 11 billion (US$ 130
million), registering an impressive growth of 35% over 2008.
These figures are estimates as the final industry figures are
expected to be released by end March 2010.
Pakistan Post offices also market life insurance policies
through Postal Life Insurance. However the business perfor-
mance is largely unknown as the results are not published
and it remains largely out of the insurance regulatory
framework of the country.
In the last three years, two family takaful companies
– Pak Qatar Family Takaful and Dawood Family Takaful
– have also started operations. Both companies are also
exploring bancassurance, however it is early days for them.
Evolution of bancassurance
The history of life bancassurance in Pakistan essentially
starts from the late 1990s, with the main impetus starting
from 2005 onwards. The evolution has been spearheaded
by the private life sector companies and has been gradual
starting with credit life products on credit cards covering
events such as death and disabilities, to one-year personal
accident and term life products with limited sums assured,
and finally reaching a stage where medium to long-term
unit linked and savings products are being marketing to
bank customers.
At present unit-linked savings bancassurance products
have a significant share in the individual life new business
of some private companies, with one company having close
to 70% share from bancassurance. Thus, this distribution
channel is now driving the future business strategies of the
private sector companies resulting in a significant positive
impact on their market position and long term profitability.
For the year 2009, it is estimated that close to 20% of
the individual life new business in the industry emanated
through the bancassurance channel. This is all driven by
the private sector companies. Analysing the private sector
alone shows that this figure is as high as 50% and expected
to grow even further in the next three years.
The public sector, SLIC, has not yet started bancassurance,
however it is expected that it may do so during 2010 with
a large public sector bank.
Bancassurance distribution models
Simpler products such as credit life and personal accident
have been distributed successfully by banks through the
telemarketing model. It is the unit-linked savings products
which have gained popularity over the last five years and
where the two main models have been tried, with both
being equally successful.
These are the (i) direct sales model, where a trained bank
employee is responsible for sales, and (ii) referral model,
where the bank employee passes a lead to an insurance
consultant who is an employee of the insurer stationed in
the bank branch.
Products
The current popularity of bancassurance and the boom in
this distribution channel, is due to the medium to long-
term unit-linked savings plans. The marketing focus of
these products is on the concept of financial planning for
children (thus focusing on education and marriage), savings
and retirement.
The child financial planning products are a hit with
bank customers mainly due to their emotional appeal. Cur-
rently all banks have one or more child financial planning

36 s www.asiainsurancereview.com s April 2010


products in their product suites. Apart from the investment
benefits, these products also offer a range of life insurance
cover focusing on the investment conscious to the protec-
tion oriented customer.
Standard riders are also offered, however due to the
possibility of increase in the sum at risk (and thus more
medical requirements) banks generally tend to limit the
use of riders as compared to the direct sales agents of the
insurance company.
Number of banks
Currently 17 banks, including both local and multinational
are actively engaged in marketing and distributing bancas-
surance life and takaful products. It is expected that at
least five more banks will start bancassurance during 2010.
Highlights of Guidelines for bancassurance
The guidelines have been generally received well by the in-
surance industry as it aims to put in place certain aspects of
discipline with regard to the business models both from the
insurance companies’ perspective as well as from the banks’.
The main features of the Guidelines are:
• Basis of agreement
Bank will be a corporate insurance agent of the insurer.
All bancassurance agreements will be filed with the
insurance regulator.
• Premium collection
Considered to be a key function in the relationship.
Bank has the responsibility to prove to the insurer that
its direct debit system is able to handle regular premium
collections; otherwise insurer can take over this function.
Bank has to ensure good persistency and make all efforts
to collect premium such as through its call centre, SMS,
or written communication.
This is also important, as persistency of bancassurance
individual life regular premium plans has been histori-
cally low due to the bank’s main focus on new sales
Country ProFIle – Pakistan
and commissions. In addition, experience has shown
that in some cases the bank’s computer system is unable
to handle regular premium deductions from customer’s
accounts, thus adversely impacting persistency.
• Code of conduct
Significant emphasis has been placed on the code of
conduct of the bancassurance sales staff. The main focus
is to eliminate mis-selling, and provide pre and post
sales advice to the customer.
• Remuneration of Bank
For life insurance companies, limits on banks’ remu-
neration have been prescribed bifurcated for the direct
sales and referral model. For unit-linked and savings
plans, the first year commission is limited to 55% of the
collected premium for the direct sales model, and 40%
for the referral model. These are lower than the current
prevalent commission rates which are in the range of
60% to 80% of the first year premium for the direct sales
model.
In addition an insurer spends 5% to 10% for production
bonuses and sales incentives. For the referral model
the current first year commission rates range between
35% to 55%, with a similar additional spend by insurers
on bonuses and sales incentives. Limitations have also
been prescribed on the renewal commissions, as well as
on the sales and marketing incentives and production
bonuses.
The Guidelines also cover commission limits on other
products such as Single premium Savings, Single pre-
mium term life, Annuities, Personal Accident, and Group
Term Life plans such as credit life insurance.
Remuneration of bank has been linked to the premiums
received and prohibits linking it to the premiums to be
received in future. In addition there is a limitation on
remunerating a bank in any manner other than those
prescribed in the Guidelines.
• Regular reporting to the regulator
Insurers will be required to report annually details of
all payments made to banks on account of commission,
bonuses and sales incentives. This report has to be certi-
fied by the appointed actuary and the external auditor.
Future of bancassurance
Over the last five years, bancassurance business in Pakistan
has benefited all the three parties involved - the customer,
the bank and the insurer. Customers have easy access to
insurance products, with a more variety of product features
and benefits.
The concept of insurance is now very visible in bank
branches which are effectively acting as an awareness
tool as well. Insurers have been able to increase their
market share through a successful bancassurance model,
while banks have been able to show a significant positive
impact on their bottom lines through a risk-free commis-
sion income.
There is no doubt that bancassurance is here to stay and
ready to take up even a larger chunk of the new business for
life insurers. The dynamics may even change if the public
sector life company enters bancassurance and is able to
make a success story of its model.
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