What are the limitations preventing marine insurance from reaching its underlying potential?
Pakistan recorded imports of $60.8 billion and exports of $23.3 billion in FY 2017-2018 (source: Pakistan Bureau of Statistics). As per the State Bank of Pakistan’s (SBP) regulations, it is mandatory that all imports and exports have marine insurance cover – defined as coverage against loss of or damage to a ship as well as in-transit cargo loss or damage over waterways.
At the moment, the share of marine insurance within the insurance segment stands at a mere five percent and according to the Insurance Association of Pakistan (IAP), marine insurance is valued at Rs 7.5 billion as of 2017, with EFU as the major shareholder (25%), followed by Jubilee Insurance (15%) and Adamjee Insurance (10%).
“Although the sector recorded a growth of 10% last year, this growth could have been as high as 20%, had it not been for the price declines that hit the sector,” says Farhan Ali Khan, GM Technical, Adamjee Insurance.
Several factors resulted in the downward trend of premiums in marine insurance – the most important one being the influx of new entrants in the form of commercial banks operating through their insurance windows. SBP recently allowed banks to sell insurance products through their bancassurance operations and although most banks stuck to selling personal (consumer) insurance products, a few, such as UBL and Bank Alfalah, have been very competitive in offering marine insurance (as that enables banks to take on greater risks at lower rates, thus bringing the market premium down).
Another reason for the downward trend is the lack of claims (losses) made in previous years. When risk factors subside due to a better law and order situation or the absence of natural calamities, the demand for insurance reduces. As Mahmood Lotia, Senior Deputy MD, EFU General, puts it: “Demand for marine insurance directly affects premiums as the sector has a purely market-driven pricing structure. Hence, it is when people face higher risks that prices start to climb.”
International oil prices were another factor that affected marine insurance rates. Due to the price hikes in the last fiscal year, the government imposed a cap on the import of furnace oil. Given that oil is a major import, the cap resulted in a decline in business volume for marine insurers. A further impact of the hike in oil prices comes indirectly in the form of corporate clients demanding a decrease in premiums. According to Mohammad Sohail Nazir, Deputy ED, Marine and Aviation, EFU General, “fuel prices are non-negotiable; therefore, when corporate clients have to bear higher fuel costs, they demand an adjustment in rates. As a part of retaining clients and maintaining good business relations, we often have to bear the brunt of such oil price hikes.”
Speaking about the need-driven nature of marine insurance, Amna Sarfraz Khan, GM Marine, Adamjee Insurance, opines that “internationally, insurance is a basic commodity. Unfortunately in Pakistan, customers do not opt for insurance voluntarily. They only buy insurance on a need basis; for example, when a transaction has to go through a formal banking channel, traders open an LC and get marine insurance.”
In short, marine insurers only get business when there is a mandatory insurance requirement. Furthermore, as SBP regulations are not strictly enforced, importers have also started to circumvent these regulations by dealing on a cash basis or by taking a personal bank loan rather than open an LC. The result is that imports do not reflect marine insurance business volumes.
Owing to the B2B nature of marine insurance products, not much marketing is undertaken.
Other than buying directly from the insurance companies, insurance is also bought through brokers and according to Sarfraz, “brokers hired by corporate clients obtain rates from various companies, looking out for the lowest possible rates and this has affected premiums. Internationally, marine insurance premiums are determined on the basis of risk factors such as distance and how perishable the goods are; these factors have lesser relevance for local customers on the lookout for competitive rates. Furthermore, the figures provided by IAP only take into account private sector marine insurance and as Nazir points out, an important chunk of the marine insurance business comes from public sector enterprises and public sector imports cannot be insured by private sector insurance companies.
Yet, despite these challenges, Khan believes that CPEC has the potential to turn marine insurance into one of the most lucrative insurance segments. The Government of Pakistan aims to boost exports by 28 to 30% in the next few years and it is on this basis that it is anticipated that marine insurance will start generating larger business volumes. However, Lotia advises caution: “The projects undertaken under the CPEC umbrella required the import of massive and bulky machinery, thus bringing a significant volume of business to marine insurance; however, the same may not apply to Gwadar port activities (which will operate as a separate economic zone) because SBP’s mandatory requirement of obtaining marine insurance at destination (Pakistan) would not be applicable as is the case in the Export Processing Zone (EPZ) in Karachi.”