2 DISCLAIMER This is a general guide booklet developed by the Securities and Exchange Commission of Pakistan, mainly focusing on the most common insurance products available in the market. Nothing in this booklet is intended to be, or should be construed as an invitation, offer or inducement to any person to enter into an insurance contract or an advice on the merits of or a recommendation in relation to, any particular product or service provider. The purpose of this guide book is to help policyholders and the end users identify and address basic insurance issues with a better understanding of the subject. The guide book complements the SECP's Methodology tools for policyholder s education and financial literacy. This guide book is not intended as a comprehensive reference work on the subject of insurance. Nor is it a substitute for the individualized advice that may be provided by qualified business and legal professionals. Rather, we intend it to be a concise and practical description of essential Insurance components together with suggested approaches to understanding the products. Further details on the topics covered by this guide book can be found in the extensive literature that exists on this subject. Any questions or comments on the content of this guide book should be addressed to: Insurance Division Securities and Exchange Commission of Pakistan 4th Floor, State Life Building No.2 Wallace Road, I. I. Chundrigar Road 74000, PAKISTAN. Page 2 of 47
3 TABLE OF CONTENTS INTRODUCTION...5 INDUSTRY OUTLOOK...6 THE ROLE OF SECP UNDERSTANDING INSURANCE HOW INSURANCE WORKS INSURANCE BASICS INSURANCE INTERMEDIARIES TYPES OF INSURANCE INTERMEDIARIES INSURANCE SURVEYORS REINSURANCE METHODS OF REINSURANCE BENEFITS OF REINSURANCE REGULATION OF REINSURANCE REGULATION OF THE INSURANCE SECTOR COMPLAINTS AND GRIEVANCES FEDERAL INSURANCE OMBUDSMAN JURISDICTION, FUNCTIONS AND POWER PROCEDURE FOR MAKING COMPLAINTS INSURANCE TRIBUNALS INSURANCE TRIBUNALS IN PAKISTAN POWERS OF THE INSURANCE TRIBUNAL APPEAL AGAINST THE INSURANCE TRIBUNAL GUIDE TO THE COMMON INSURANCE PRODUCTS AUTO INSURANCE...22 Page 3 of 47
4 8.2 FIRE INSURANCE MARINE INSRURANCE MISCELLANEOUS INSURANCE HEALTH INSURANCE LIFE INSURANCE LIST OF ACTIVE INSURANCE/REINSURANCE COMPANIES GLOSSORY OF INSURANCE TERMS...36 Page 4 of 47
5 INTRODUCTION The insurance sector in Pakistan, until end of year 2000, was under the regulatory purview of the Federal Ministry of Commerce, Government of Pakistan. Empirical results show that during that period, the private sector insurance industry was fragmented and suffered operational inefficiencies due to lower Paid up Capital and Equity requirements, while the public sector insurance companies enjoyed their privileged status due to captive business. During the regulatory regime of the former law, the archaic Insurance Act, 1938, the insurance industry was infested with various issues. Capital adequacy requirements for general insurance companies were grossly inadequate, registration and supervision fees for insurers were modest, and the statutory solvency margins were based on outmoded principles. A new insurance law was introduced in 2000 when the Insurance Act, 1938 was repealed and replaced with the Insurance Ordinance, The new law primarily aimed to ensure the protection of insurance policyholders interest and to promote sound development of the insurance industry. In the year 2001, the regulatory and supervisory responsibilities of the insurance sector were shifted from the Ministry of Commerce to the Securities and Exchange Commission of Pakistan (SECP). Page 5 of 47
6 INDUSTRY OUTLOOK As of October 20, 2010 forty nine (49) insurance and takaful companies are transacting insurance business in Pakistan along with one government owned reinsurance company PRCL. Non life (general) Insurance Companies Out of the total, Thirty seven (37) companies are transacting non life (general) insurance business, including the government owned National Insurance Company Limited and the government owned reinsurance company, Pakistan Reinsurance Company Limited (PRCL). Life Insurance Companies Six (6) insurance companies are transacting life insurance business, including the government owned State Life Insurance Corporation of Pakistan. Health Insurance Companies Two (2) Insurance companies (one life and one non life insurance company) are dedicatedly providing health insurance services. Takaful Operators Five (5) Takaful operators are currently providing Islamic Insurance to the masses of which 2 operators are transacting family (life) takaful business and 3 are transacting non life (general) takaful business. Reinsurance Company There is one reinsurance company operating in Pakistan, the government owned Pakistan Reinsurance Company Limited (PRCL). The total premium underwritten by the insurance industry in 2009, amounts to Rs. 87 billion. Non life (general), life and Health insurance companies contributed Rs billion, Rs billion and Rs. 1.2 billion respectively. The premium underwritten by takaful operators (family and General) amounted to Rs. 1.4 billion. The statistics shows that the country s total insurance premium remains at 0.7% of total economic output (Insurance Penetration), with per head expenditure on insurance at US$6 Page 6 of 47
7 (Insurance Density) since the year 2001, one of the lowest in the world, mainly due to lesser awareness about the insurance in the masses. THE ROLE OF SECP The SECP, being the apex regulator of the insurance industry, has a strategic priority and commitment to strengthen and maintain an effective regulatory environment in which insurance and takaful business can flourish and prosper. To strengthen SECP s role as an effective facilitator for sound development of the insurance and takaful industry and to achieve the underlying objective of raising the insurance penetration level, the following key areas have been in focus of SECP s efforts: Protection of the interest of insurance policyholders; Amendments in the regulatory framework to strengthen SECP s role as an apex insurance regulator; Enhancement of regulatory framework for Takaful Insurance; Availability of insurance protection to less privileged segment of the society (Microinsurance); Insurance Awareness Programs; Enhanced public image of the insurance industry. The SECP is cognizant of its responsibilities for developing the insurance industry and is now making efforts to make the general public understand the importance and mechanics of insurance. This "Insurance Guide" booklet is one of the steps that it is taking to educate the general public about Insurance and various products available in the market in a simplified manner. Page 7 of 47
8 1. UNDERSTANDING INSURANCE Insurance can be defined in many different ways, from many different points of view. For example, from an economic viewpoint, insurance is a system for reducing financial risk by transferring it from a policy owner to an insurer. The social aspect of insurance involves the collective bearing of losses through contributions by all members of a group to pay for losses suffered by a few group members. From a business viewpoint, insurance achieves the sharing of risk by transferring risks from individuals and businesses to financial institutions specializing in risk. The insurer is not in fact paying for the loss. The insurer writes the claim check, but is actually transferring funds from individuals who as part of a pool, paid premiums that created the fund from which the claims are paid. Lastly, from a legal standpoint, an insurance contract or the policy, transfers a risk, for a premium or consideration, from one party to another party. The party bearing the risk is known as the 'insurer' or 'assurer' and the party whose risk is covered is known as the 'insured' or 'assured'. 1.1 HOW INSURANCE WORKS Insurance is based on a mechanism called risk pooling, or a group sharing of losses. People exposed to a risk agree to share losses on an equitable basis. They transfer the economic risk of loss to an insurance company. Insurance collects and pools the premiums of thousands of people, spreading the risk of losses across the entire pool. By carefully calculating the probability of losses that will be sustained by the members of the pool, insurance companies can equitably spread the cost of the losses to all the members. The risk of loss is transferred from one to many and shared by all people who are insured in the pool. Each person pays a premium that is measured to be fair to them and to all based on the risk they impose on the company and the pool. Let s take some examples to understand how insurance actually works: QUICK FACTS The law of large numbers states that as the size of the sample (insured population) increases, the actual loss experience will more and more closely approximate the true underlying probability. Page 8 of 47
9 Example 1 Example 2 SUPPOSE a. Houses in a village = 1000 b. Value of 1 House = Rs. 40,000/- c. Houses burning in a year = 5 d. Total annual loss due to fire = Rs. 200,000/- e. Contribution of each house owner = Rs. 300/- a. Number of Persons = 5000 b. Age and Physical condition = 50 years & Healthy c. Number of persons dying in a year = 50 d. Economic value of loss suffered by family of each dying person = Rs. 100,000/- e. Total annual loss due to deaths = Rs. 5,000,000/- f. Contribution per person = Rs. 1,200/- UNDERLYING ASSUMPTION All 1000 house owners are exposed to a common risk, i.e. fire All 5000 persons are exposed to common risk, i.e. death PROCEDURE All owners contribute Rs. 300/- each as premium to the pool of funds Total value of the fund = Rs. 3,00,000 (i.e houses x Rs. 300) Everybody contributes Rs. 1200/- each as premium to the pool of funds Total value of the fund = Rs. 60,00,000 (i.e persons x Rs. 1,200) 5 houses get burnt during the year 50 persons die in a year on an average Insurance company pays Rs. 40,000/- per head out of the pool to all 5 house owners whose house got burnt Insurance company pays Rs. 100,000/- out of the pool to each family of all 50 persons dying in a year EFFECT OF INSURANCE Risk of 5 house owners is spread over 1000 house owners in the village, thus reducing the burden on any one of the owners. Risk of 50 persons is spread over 5000 people, thus reducing the burden on any one person. Page 9 of 47
10 1.2 INSURANCE BASICS Following are the basic essentials or requirements of insurance, irrespective of the type of insurance involved. Principle of Utmost good faith It is the name of a legal doctrine which governs insurance contracts. This means that all parties to an insurance contract must deal in good faith, making a full declaration of all material facts in the insurance proposal. A material fact is a fact which would influence the mind of a prudent underwriter in deciding whether to accept a risk for insurance and on what terms. Thus, the insured must reveal the exact nature and type of the risks that he / she passes on to the insurer, while at the same time the insurer must make sure that the underlying contract fits the needs of, and benefits the insured. QUICK ADVICE To avoid repudiation of your claim, cooperate with your insurer by disclosing all the material facts associated with the risk to be insured, as and when required by the insurer. Where either the Insurer or the Insured fails to follow the principle of utmost good faith, the insurance contract is deemed null and void. Principle of Insurable Interest The law states that in order for an insurance policy to be valid, the policyholder must have a sufficient interest in the subject matter of the insurance. Broadly speaking, the doctrine requires that a policyholder must gain a benefit from the preservation of the subject matter of the insurance or suffer a disadvantage should it be lost. People who are policyholders but not the owners of the insured substances, from deliberately causing loss to the substances in order to claim compensation and deriving undue benefits from insurance business.. Principle of Indemnity Indemnity is monetary compensation that aims to return the insured to the same financial position he enjoyed before the loss occurred. Life insurance and personal QUICK FACT With contracts of indemnity, a claim must not exceed the actual loss. Even further to that, a claim cannot exceed the extent of your insurable interest in the insured asset. accident policy are therefore not contracts of indemnity. A monetary value cannot be easily placed on life and limb. However, the idea behind Page 10 of 47
11 indemnity is used for financial underwriting where life insurance is concerned. As such life insurers limit the amount of coverage you can have, based on your income. Principle of Subrogation Simply stated, the right of subrogation is the right to pursue someone else's claim. If you are subrogated to someone's claim, it sounds as though you are somehow subordinated to it but that's not what it means. It means that you may pursue it as though it were your own. It can arise by the express agreement of the parties, or automatically by operation of law. QUICK EXAMPLE Suppose you own a building which burns down due to the negligence of a third party. Normally you could sue the negligent third party for causing your building to burn down. If your fire insurance company pays off your claim, however, the insurance company is then subrogated to your claim against the negligent third party. This means your claim against the negligent third party is treated as having been assigned to the insurance company, which may sue him to recover, the amount it paid you on account of the fire loss. Principle of Proximate Cause Proximate cause is an act from which an Injury or a property loss results as a natural, direct and uninterrupted consequence and without which the injury or loss would not have occurred. QUICK FACT Proximate Cause is also known as Legal Cause. Proximate cause is the primary cause of an injury or loss. It is not necessarily the closest cause in time or space, or the first event that sets in motion a sequence of events leading to an injury or loss. Proximate cause produces a particular consequence without the intervention of any independent or outside force. Principle of unforeseen event The insured events causing the losses should not be speculative, predicted or expected but they must be sudden, unanticipated and out of the blue. QUICK FACT The principles of subrogation and contribution are not essential to bring in the knowledge of a common man. Page 11 of 47
12 Principle of Contribution It is based on the premise that no one should gain from a loss, since an insurable risk is a pure risk. Contribution is essentially "the right of an insurer to call upon others similarly, but not necessarily equally, liable to the same insured to share the cost of an indemnity payment." Following is the simple way to calculate the contribution amount. Contribution Amount for A = Sum Insured by A x Loss Amount Total Sum Insured Contribution Amount for B = Sum Insured by B x Loss Amount Total Sum Insured QUICK FACT According to the principle of indemnity, the loss should not exceed the replacement value. QUICK EXAMPLE Let's say a building is insured for Rs. 1,000,000. It is insured for the same amount with two different insurers. The entire sum insured is therefore Rs. 2,000,000. A loss occurs that is estimated at Rs. 600,000. According to the principle of contribution, each insurer is liable for half of the damage (1 million/ 2 million). This would amount to an indemnity payment of Rs. 300,000 by each insurer. If one insurer pays the full claim, that insurer can make a subsequent claim on the other insurer to address the imbalance. Contribution thus ensures that the principle of indemnity is enforced. The amount it paid you on account of the fire loss. Page 12 of 47
13 2. INSURANCE INTERMEDIARIES Insurance intermediaries form the feeding line for the insurance companies. They are essentially matchmakers who match the insurance needs of policyholders with the insurers who have the capability of meeting those needs. Their services include record keeping and modeling for insurers, providing advice to clients on selecting insurers, and assisting with claims settlement. They play a key role in providing underwriting information to insurers. QUICK FACT The working of all Insurance companies and intermediaries is governed by the Insurance Ordinance, The intermediaries play a vital role in soliciting quotations for complex risks and in helping clients make comparisons on the basis of price, coverage, service and the financial strength of the insurer. Moreover, the intermediary ensures increased price and quality competitiveness, by providing the insured access to a wider range of possible insurers. 2.1 TYPES OF INSURANCE INTERMEDIARIES Generally, there are three types of insurance intermediaries; Insurance Broker Insurance brokers facilitate prospective clients in placing insurance business with an insurance company. They assess the terms and negotiate on behalf of their clients. QUICK ADVICE Always pay your insurance related payments to your Insurance Agents, through crossed checks, in favor of the Insurance Company. Insurance Agent An insurance agent is a representative of an insurance company who solicits, negotiates or effects contracts of insurance and provides service to the policyholders. 3. INSURANCE SURVEYORS Insurance surveyors are appointed specialists who assess loss, verify compliance of terms and conditions as mentioned in the policy and accordingly assess the claim. In case of an insured event the insurance company can nominate one or more surveyors (depending on the size of a claim), who are required to visit the site of loss in order to analyze the extent of damage, the compliance of terms and conditions and assess the quantum of loss as well as to inspect the property and report on the causes of the accident. QUICK FACT Insurance surveyor is a qualified professional in one or more fields and is licensed by the Insurance Division of Securities and Exchange Commission of Pakistan. Page 13 of 47
14 4. REINSURANCE Reinsurance is insurance that is purchased by an insurance company (insurer) from a reinsurer as a means of risk transfer, that is, transfer of risk from the insurer to the reinsurer. QUICK EXAMPLE Assume an insurer sells one thousand policies, each with a Rs. 1 million policy limit. Theoretically, the insurer could lose Rs. 1 million on each policy totaling to Rs. 1 billion. It may be better to pass some potential risk to a reinsurance company (reinsurer) as this will minimize the insurer's risk. The reinsurer and the insurer enter into a reinsurance agreement which details the conditions upon which the reinsurer would pay the insurer's losses. The reinsurer is paid a reinsurance premium by the insurer in return for taking the stake. 4.1 METHODS OF REINSURANCE There are two basic methods of reinsurance: Facultative Reinsurance This is a specific reinsurance covering a single risk. The reinsurer is reinsuring one risk insured on a specific reinsurance policy. Each facultative risk is submitted separately by the insurer to the reinsurer. Treaty Reinsurance This is a method of reinsurance requiring the insurer and the reinsurer to formulate and execute a reinsurance contract. The reinsurer then covers all the insurance policies coming within the scope of that contract. There are two basic types of treaty reinsurance: Proportional, and Non proportional 4.2 BENEFITS OF REINSURANCE QUICK FACT Almost all insurance companies have a reinsurance program. Risk transfer With reinsurance, the insurer can issue policies with higher limits than it would otherwise be allowed, therefore, being permitted to take on more risk because some of that risk is now transferred to the reinsurer. Page 14 of 47
15 Income smoothing Reinsurance can help to make an insurance company s results more predictable by absorbing larger losses and reducing the amount of capital needed to provide coverage. Surplus relief An insurance company's underwriting liabilities are limited by its balance sheet (this test is also known as the solvency margin). When such limit is reached, an insurer can do one of the following: stop underwriting new business, or increase its capital, or buy "surplus relief" reinsurance. Buying reinsurance is an efficient way of not having to turn clients away or raise additional capital. Reinsurer's expertise The insurance company may want to avail of the expertise of a reinsurer in regard to a specific (specialized) risk or want to avail of their rating ability in such risks. Creating a manageable and profitable portfolio of insured risks By choosing a particular type of reinsurance method, the insurance company may be able to create a more balanced and homogenous portfolio of insured risks. This would lend greater predictability to the portfolio results on net basis (after reinsurance) and would be reflected in income smoothing. 4.3 REGULATION OF REINSURANCE The reinsurance requirements chalked out by SECP for the sector are very stringent. A minimum of 80% treaty reinsurers must be A rated by internationally reputable rating agencies and only 20% can be BBB rated. In addition, non life Insurance Companies are required to offer a government owned reinsurer, Pakistan Reinsurance Company Limited, up to 35% share in the treaties. Page 15 of 47
16 5. REGULATION OF THE INSURANCE SECTOR The Securities and Exchange Commission of Pakistan has been regulating the Insurance industry, since January 2001 after it took over from the Controller of Insurance operating under Ministry of Commerce, Government of Pakistan. The SECP regulates and monitors the Insurance Sector in the country through powers vested in the Insurance Ordinance, 2000 and the Companies Ordinance, COMPLAINTS AND GRIEVANCES The SECP plays a facilitating role by taking up complaints with the respective insurers. Following points should be taken into account before lodging a complaint with the SECP. Policyholders who have complaints against insurers are required to first approach the Grievance/ Claims/ Complaints Cell of the concerned insurer. If they do not receive a response from insurer within a reasonable period of time or are dissatisfied with the response of the company, they may then approach the SECP for the resolution. The complaints need to be forwarded to the address given below: The Executive Director, Insurance Division, Securities & Exchange Commission of Pakistan 4th Floor, State Life Building No.2, Wallace Road, off I.I. Chundrigar Road,, Pakistan. Or alternatively, they may be ed to Only cases of delay/non response regarding matters relating to policies and claims are taken up by the SECP with the insurers for speedy disposal. As claims/policy contracts in dispute require adjudication and the SECP does not carry out any adjudication, the insurance policyholders are advised to approach the available quasi judicial or judicial channels i.e. the Insurance Ombudsman, Consumer Protection Forum or the Civil courts for such complaints. The details regarding Insurance Ombudsmen are provided in the following section of this guide booklet. Only complaints from the insurance policyholders themselves are entertained. The SECP does not entertain complaints written on behalf of policyholders by advocates or agents or any third parties. Page 16 of 47
17 Where complaints are being sent through e mail, complainants are requested to submit complete details of the complaint with history of correspondences with the insurer and their outcome, without which the SECP will not be in a position to take up the complaint with the insurer. Page 17 of 47
18 6. FEDERAL INSURANCE OMBUDSMAN The appointment of the Insurance Ombudsman by the Federal Government is required under section 125 of the Insurance Ordinance, 2000 with the purpose of quick disposal of the grievances of the insured. This office is of great importance and relevance for the protection of interests of policy holders and also in building their confidence in the system. The office of the Insurance Ombudsman is an autonomous national dispute resolution body which independently and impartially resolves insurance disputes, between insurance policyholders and participating companies, absolutely free of cost. The office of the Insurance Ombudsman is fully operational since May JURISDICTION, FUNCTIONS AND POWER The Section 127, of the Insurance Ordinance, 2000 formulates operational parameters of the Office of the Insurance Ombudsman. The jurisdiction, functions and powers of the Insurance Ombudsman are summarized as under: On request/ complaint of the aggrieved person, the Insurance Ombudsman may undertake any investigation into any allegation of maladministration, on part of any insurance company, provided that the matter is not with the Wafaqi Mohtasib (Federal Ombudsman), court of competent jurisdiction, tribunal or board in Pakistan. Mal administration is defined by the Insurance Ordinance, 2000 as corruption, nepotism, neglect, inattention, inordinate delay, incompetence, inefficiency and ineptitude in the administration or discharge of duties and responsibilities. The complaints brought in by the Insurance Companies, which relates to the contract of reinsurance or such sort, are not accepted by the Insurance Ombudsman office for investigation. The Insurance Ombudsman office does not accept for investigation, any complaint by or on behalf of an employee of an insurance company, concerning any matter relating to the insurance company in respect of any personal grievance relating to his service with the company. For ascertaining the root causes of corrupt practices and injustice, the Insurance Ombudsman is empowered to arrange studies/ research and may recommend appropriate steps for their eradication. QUICK FACT The Insurance Ombudsman may condone the delay and entertain the complaint, if the ombudsman is convinced that there were reasonable grounds for the delay. Page 18 of 47
19 6.2 PROCEDURE FOR MAKING COMPLAINTS The procedure as laid down under Section 129 of the Insurance Ordinance, 2000 and is summarized as follows: Before making a complaint the complainant is required to intimate in writing to the concerned insurance company his intention of filing a complaint. If the insurance company either fails to respond, or makes a reply which is unsatisfactory to the complaint, within a period of one month, the complainant may file a complaint at any time after that within a further period of three months. A complaint should be made on solemn affirmation or oath in writing addressed to the Insurance Ombudsman. The complaint shall set out the full particulars of the complaint matter and the name and address of the complainant. Copy of the notice sent to the insurance company along with postal / courier receipt should also be attached with your complaint. In all cases, three (03) complete sets of complaint are required to be filed with the Ombudsman, the address and phone numbers are mentioned as under: Federal Insurance Ombudsman s Secretariat 6th Floor, State Life Building No.2, Wallace Road, Off I.I. Chundrigar Road, PAKISTAN. Phone: , Fax: QUICK FACT The Insurance Ombudsman may reject a complaint summarily or he may accept the same or pass any other order he deems fit. Page 19 of 47
20 7. INSURANCE TRIBUNALS Insurance Tribunal in the general sense is a body, constituted under the Insurance Ordinance by the Federal Government, with the authority to judge, adjudicate on, or determine claims or disputes. In essence it is a specialized court formed for the disposal of cases pertaining to the Insurance business. According to the Insurance Ordinance, 2000 the Tribunal consists of a Chairperson who is a serving or retired judge of the High Court, with two or more members having ability and integrity to enable them to discharge the duties and functions of the Tribunal. 7.1 INSURANCE TRIBUNALS IN PAKISTAN In October, 2006, the Federal Government, in consultation with the Chief Justices of Sindh High Court, Lahore High Court, Peshawar High Court and Balauchistan High Court, conferred powers in each province on the District and Session Courts to exercise territorial jurisdiction specified: S.No. Name of Sessions Court Territorial Limit 1. District & Session Judge Lahore Whole Province of Punjab 2. District & Session Judge (Central) Whole Province of Sindh 3. District & Session Judge Peshawar Whole Province of Khyber Pakhtunkhwa 4. District & Session Judge Quetta Whole Province of Balauchistan 7.2 POWERS OF THE INSURANCE TRIBUNAL The Insurance Ordinance, 2000 confers following powers to the Tribunal: The Tribunal has all the powers vested in a civil Court under the Code of Civil Procedure, In its criminal jurisdiction, the Tribunal has the same powers as are vested in the Court of Sessions under the Code of Criminal Procedure, The jurisdiction of a Tribunal shall not extend to appeals to the Appellate Bench and Courts, as mentioned in the section 33 and 34 of the SECP Act Page 20 of 47
21 7.3 APPEAL AGAINST THE INSURANCE TRIBUNAL The decision of the Tribunal on any application is final and can not be questioned in any Court or before any other authority. If the amount of the claim is not less than one hundred thousand rupees, the aggrieved may file an appeal to the High Court, within a period of thirty days from the date of such decision. An appeal is heard by a Bench of more than two judges of the High Court, having territorial jurisdiction over the relevant Tribunal. Page 21 of 47
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