A market in search of customers
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.”