ASIAN DEVELOPMENT BANK TAR: PAK 33365

Transcription

1 ASIAN DEVELOPMENT BANK TAR: PAK TECHNICAL ASSISTANCE TO THE ISLAMIC REPUBLIC OF PAKISTAN FOR THE OPERATIONAL REVIEW OF THE STATE LIFE INSURANCE CORPORATION December 2000

2 CURRENCY EQUIVALENTS (as of 15 December 2000) Currency Unit Pakistan Rupee/s (PRe/PRs) PRe1.00 $ $1.00 PRs57.60 The exchange rate of the Pakistan rupee is determined under a system of managed float. The rate for the rupee is fixed on a daily basis in terms of US dollars. ABBREVIATIONS ADB Asian Development Bank SLIC State Life Insurance Company TA Technical Assistance NOTES (i) The fiscal year (FY) of the Government ends on 30 June. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2000 ended on 30 June In this report, "$" refers to US dollars.

3 I. INTRODUCTION 1. Following the successful implementation of the first phase of the Capital Market Development Program (CMDP), 1 the Government of Pakistan has asked the Asian Development Bank (ADB) for additional assistance to continue developing capital markets, including contractual savings and institutional investments. The Government has requested technical assistance (TA) to review the operations of the State Life Insurance Corporation (SLIC) and recommend measures to improve its mobilization of contractual savings and effectiveness as investor. SLIC is government controlled and the country s largest life insurer, with significant potential to contribute to capital markets development. An advisory TA is included in ADB s country assistance plan for Pakistan in A Fact-Finding Mission visited Pakistan from 12 to 17 April 2000 and reached an understanding with the Government on the objectives, scope, financing, and implementation arrangements of the TA. The TA framework is attached in Appendix 1. II. BACKGROUND AND RATIONALE 3. The role of life insurance is becoming increasingly important in a developing economy such as Pakistan where changing industrial structures and expanding demand for skilled human resources call for greater mobility of the workforce. In an environment of increasing urbanization, traditional methods of social protection through support from families and rural communities are difficult to maintain. The availability of life insurance means that individuals can use current cash income to provide for their retirement, or protect their dependants in the event of premature death of the breadwinner or other contingencies. 4. In Pakistan, life insurance is not yet well developed. The life insurance premium income to gross domestic product ratio stands at about 0.35 percent. This is low by international standards and compares to about 1.3 percent in India, 2.3 percent in Malaysia, between 4 to 7 percent in most European countries and the United States of America, and 9 to 10 percent in Japan and Republic of Korea. A greater participation in particular for the low income segment of the population can be achieved through more competitive pricing and management efficiency, regulatory support as well as product innovation and marketing. 5. Among the key reasons for the low participation rate in life insurance in Pakistan have been SLIC s bureaucratic structure and lack of market forces to improve performance, as well as an unfavorable regulatory environment. Life insurance business was nationalized in Pakistan in 1972, and SLIC enjoyed a monopoly until 1990 when local interests were again permitted to establish privately owned life insurance companies. Since 1994, the market has been open to foreign shareholders, but SLIC continues to dominate the market with about 90 percent of premium income. In 2000, a new insurance law was passed which encourages product innovation and quality while enhancing prudential regulation and rights of policy holders. These changes are posing a significant challenge to SLIC. An overview of SLIC operations is presented in Appendix In addition to providing a means of saving for retirement and protecting dependants, the development of life insurance is important for growth of the capital market. Provided that life insurance entities are run with high standards of governance, they can act as major, responsible 1 Loan 1576-PAK: Capital Market Development Program, for $250 million, approved on 6 November 1997; the second tranche was released on 22 June The TA was first listed in ADB Business Opportunities in February 2000.

4 institutional investors. The newly admitted foreign companies, in particular, have created new products for sale in Pakistan, including equity linked savings products. Life insurers are also major customers of long-term debt securities issued by governments and corporations. The large amount of funds that they manage, and their ability to employ sophisticated techniques to watch the markets and to react to market changes, generate turnover in the capital markets (both equity and debt), thereby enhancing prospects for market stability and orderly growth. Their size enables larger insurers to provide long-term capital for development needs, e.g., for infrastructure development. It also allows for investment in new ventures by including, in balanced portfolios, a level of risky stock that small investors, more vulnerable to volatility in individual market stocks, could not emulate. At the same time, life insurer s equity can be in high-quality and low-risk investments, forming a part of a balanced portfolio. Small investors in particular may see life insurers as stable investments promising long-term performance. 7. ADB has been providing assistance for the development of capital markets and the insurance industry under the first Capital Markets Development Program, including the strengthening of the legislative and regulatory framework for the industry. As a part of this program, ADB also performed a review of the Pakistan Insurance Corporation and the National Insurance Corporation, 3 and an action plan was developed for converting those corporations into limited liability companies under the Companies Ordinance. SLIC was not included in this process based on the expectation that a review, supported by the World Bank, would be performed. However, this review did not take place as the World Bank subsequently suggested such review be taken up more appropriately under ADB assistance, given ADB s substantive involvement in the sector. 8. The Government has asked ADB to provide follow-up assistance for capital market development, including institutional investments. As the countries largest life insurance company, SLIC has a major role to play. It has been identified both as an institutional investor and as a potential blue chip investment for other investors. In particular, flotation of SLIC on the stock market would be in line with the Government s privatization strategy. To fulfil this role, SLIC s internal processes and decision-making procedures need to be efficient, and SLIC must meet standards of corporate governance appropriate to a repository of public investment. 9. The position of a life insurer as both investor in a market and subject of investment is constrained when, as in Pakistan, the life insurance industry is predominantly under Government ownership. As a general rule, the private sector has a wider interface with commercial and business decision makers than a centralized government agency. An effective monopoly, whether private or public, is less efficient in providing funds than an industry with a number of major players who are able to compete. Government control of life insurers also increases the risk that funds will be applied in pursuit of policy objectives other than the interests of policyholders, which is not only potentially inefficient but is generally accepted to be contrary to principles of fiduciary management. Given the significance of SLIC for the insurance industry and capital market development, strategic options for SLIC must be evaluated based on a sound analytical framework. 2 III. THE TECHNICAL ASSISTANCE A. Objective 10. The objective of the TA is to identify financial and operational issues and recommend short-term and medium-term initiatives to improve SLIC s operational performance and 3 TA 2866-PAK: Reform of the Insurance Industry, for $700,000, approved on 15 September 1997.

5 governance. The TA will provide a reliable indication of SLIC s financial position through an international quality audit, and enable assessment of its financial profile and exposure to risks. It also will provide, through an actuarial investigation, a realistic estimate of SLIC s policy holder liabilities, and value the corporation in various scenarios. This complements the financial reporting and risk assessment already undertaken on a routine basis by SLIC. Moreover, the TA will enable the Government to evaluate various governance models and assess the potential and options for SLIC to enhance its impact on capital market development as well as policyholders. In addition, the study will assist SLIC in looking at means and options for expanding its business operations, with particular attention to the needs of the poorer population and in rural areas which so far had limited access to life insurance products. The outputs of the TA will facilitate decision making on the Government s strategy for SLIC, including the possibility of privatizing SLIC through the stock market or other divestment models. The proposed study will also provide a road map for implementing the selected strategy. B. Scope 11. The TA will cover two phases: financial and operational diagnostic and evaluation of strategic options; as well as preparation of an implementable action plan for development, restructuring, or divestment of SLIC as agreed with the Government. This will take account of international experiences and best practices, and complement the information and studies internally generated by SLIC. The first phase will include an operational, financial, and actuarial review of SLIC as well as an options study, including (i) review of management information systems, internal controls, corporate governance, and human resources including the agency workforce; an international-quality audit of the balance sheet of SLIC to provide a reliable indication of the financial position, and to enable assessment of its financial profile and exposure to risks; (iii) an actuarial investigation to provide a realistic estimate of the policyholder liabilities of the corporation, as well as valuation of the corporation, including estimation of the fair values of assets and liabilities, and of embedded and appraisal values of the business; (iv) evaluation of business potential and strategies for SLIC in developing new markets, in particular for the poorer segment of the population and in rural areas; and (v) the evaluation of various governance models and strategic options, such as mutualization, corporatization, or divestment, with a view to maximizing impact on capital market development while ensuring best governance for policyholders. 12. The second phase will prepare a detailed action plan to implement the recommended strategic option and evaluation of implications. The divestment options to be considered should include floating SLIC as a company in Pakistan, trade sale or partial sale, joint venture with a foreign partner, and breakup into a number of entities for separate divestment. The findings will be presented in a report to the Government and ADB. 3

6 4 C. Cost Estimates and Financing Plan 13. The TA is estimated to cost $825,000 equivalent, comprising $496,000 in foreign exchange costs and $329,000 equivalent in local currency costs. The Government has requested ADB to finance $660,000 equivalent, comprising the entire foreign exchange cost and $164,000 equivalent of local currency cost, mainly for domestic consultants. The TA will be financed on a grant basis from the ADB-funded TA program. The Government will finance $165,000 equivalent of the balance of the local currency requirements, including provision of suitable counterpart staff, office space, administrative and clerical services, and physical facilities. The details of the cost estimates are provided in Appendix 3. D. Implementation Arrangements 14. The Ministry of Commerce will be the Executing Agency and will provide the necessary support for the team of consultants, including office accommodation, a liaison officer, and other counterpart staff, and logistic support for the international consultants. 15. Resource requirements are estimated at 32 person-months of consulting services, including 12 person-months for international consultants (including team leadership), and 20 person-months for domestic consultants. The proposed study will require expertise in life insurance, financial management, property valuation, auditing, accountancy, privatization, and sociology/micro insurance. A significant proportion of the work will be actuarial in nature. Outline terms of reference for the consultants are listed in Appendix 4. The team of international and domestic consultants will be recruited through a consulting firm in accordance with ADB s Guidelines on the Use of Consultants and other arrangements satisfactory to ADB s for the engagement of domestic consultants. The simplified technical proposal will be used to select the consultants. 16. The TA will be implemented in two phases from March 2001 to October An inception report will be submitted after one month of implementation (i) providing a detailed work program, including a time-bound plan for the conduct of the actuarial and operational study of SLIC; and identifying issues to be addressed. A midterm report will be submitted after five months, including the key findings related to the operational and financial review carried out under the first phase. A tripartite meeting will be held to determine future strategy, and a detailed implementation plan will be formulated under the second phase during the remaining TA period. A draft final report covering findings and recommendations to the Government will be submitted one month prior to the TA completion, and a final report at the conclusion of the consulting services. All reports will be submitted to the Ministry of Commerce and ADB. IV. THE PRESIDENT'S DECISION 17. The President, acting under the authority delegated by the Board, has approved the provision of technical assistance, on a grant basis, to the Government of the Islamic Republic of Pakistan in an amount not exceeding the equivalent of $660,000 for the purpose of Operational Review of the State Life Insurance Corporation, and hereby reports such action to the Board.

7 5 TECHNICAL ASSISTANCE FRAMEWORK Appendix 1, page 1 A. Goal To develop State Life Insurance Corporation (SLIC) as a major contributor to the development of capital markets, both as an institutional investor and as an investment for other investors -Increasing amount of investment by SLIC in securities and debt markets in Pakistan - Increasing capacity of assets management of SLIC -Technical assistance (TA) completion report -Market performance reports on securities and debt markets in Pakistan -Annual report of SLIC - Ministry of Commerce (MOC) and SLIC staff will be sufficiently motivated - Consultants will be well perceived by SLIC staff B. Purpose To conduct a diagnostic review on SLIC, and identify issues on business, financial, and operational aspects with shortand medium-term recommendations for operational improvements, and prepare for restructuring and possible divestment C. Outputs 1. An evaluation report on SLIC s financial performance, condition and sustainability, including on technical solvency and capital adequacy for planned level of operation computation of policy holder liabilities on statutory and realistic bases acquisition and maintenance costs compared with mature life insurance business in other jurisdictions past profits or losses and validity of assumptions made in pricing and reserving product terms including surrender provisions, nonforfeiture provisions and entitlements to surplus product profitability lapse experience and management policies supported by lapse experience past bonus performance and estimation of policy holders expectations embedded and appraisal value of SLIC business preparation of an adjusted balance sheet at fair value after review work preparation of financial projection for next five years -International experience and best practices on management standard of life insurance companies by incorporating Pakistan markets characteristics -Inception and midterm performance reports -Inception and midterm review missions -Proper access to necessary information will be provided to consultants by the Government counterparts (Reference in text: page 1, para. 2)

8 6 Appendix 1, page 2 2. A report on SLIC s operational performance and efficiency, including on management processes and structure Same as C-1 -Inception and midterm performance reports -Inception and midterm review missions -Proper access to necessary information will be provided to consultants by the Government counterparts performance of the SLIC s agency workforce and the effectiveness of company control distribution systems risk management process, with respect to risk acceptance, asset/liability matching, currency matching and other exposures accepted by SLIC reinsurance arrangements investment management process of SLIC 3. Evaluation of business potential and recommend strategies for SLIC in developing new markets, in particular for the poorer segment of the population and in rural areas Same as C-1 Workshops and stakeholder consultation. 4. Evaluation of strategic options and action plan for restructuring and divestment Same as C-1 D. Activities Inputs 1. A diagnostic review of SLIC s operational, financial, and actuarial process including management information systems, internal controls, corporate governance, and human resources, including the agency workforce -Recruitment of consultants (for a total of 32 persons months) -Inception and midterm reports -Inception and review missions -No delays in consultant recruitment and commencemet 2. An audit of SLIC s balance sheet 3. Estimation of fair values of the assets and liabilities of SLIC 4. Estimation of embedded and appraisal values of SLIC business 5. Evaluation of options for restructuring

9 7 Appendix 2, page 1 BACKGROUND INFORMATION ON STATE LIFE INSURANCE CORPORATION 1. Life insurance in Pakistan has a long history. The industry was nationalized under the Life Insurance (Nationalization) Ordinance (LINO), 1972, thereby effectively creating the State Life Insurance Corporation (SLIC). Private sector companies were permitted to operate again from the mid-1990s. In addition to the nationalized SLIC, four private sector companies are now operating in the sector, although SLIC continues to dominate the market with a share of more than 90 percent. A new Insurance Ordinance was approved in 2000, providing for a level playing field and prudential regulation, although SLIC continues to be covered by its own statutory legislation under the LINO. SLIC has about 2 million individual policies in force as well as group insurance contracts that cover nearly 5 million insured. About 25 percent of all Pakistani families are estimated to be protected in some form by either individual or group life insurance; and the ratio of life insurance in force to gross domestic product is probably in the region of 35 to 40 percent, taking into account all death benefits insured. Financial Performance 2. The most recent available SLIC financial statements at the date of writing this paper are those for the financial year ending 31 December Those financial statements show a decline in life insurance new business premium income over the previous year (for the third consecutive year), and sustained high expense ratios. In contrast, statutory actuarial valuations have been carried out by qualified actuaries every two years since 1974, and all have shown growing surpluses. The result of the 1998 valuation, reported in the 1998 annual teport, was a surplus generated in the previous two years of PRs 6.23 billion (the cumulative surplus not allocated to policyholders is not stated). In an environment of inflation, these developments and the long-term prospects of the corporation require further analysis. 3. The financial statements disclose a balance on the life insurance fund of SLIC of about PRs 55 billion, and capital and reserves of PRs 511 million. However, the net worth of neither the company nor its book of life insurance business can be determined from these financial statements as the extent of the adequacy of the fund to meet the policyholder liabilities of SLIC cannot be assessed from the financial statements. While industry comment generally suggests that SLIC is financially very strong, due to conservative past bonus allocation policies, the value of the company and of its business must be determined in order to safeguard that value and to allow the development of a strategy on a meaningful basis. 4. As of 31 December 1998, SLIC had a total of 2.03 million individual life policies in force, with a sum assured (including bonuses) of PRs billion. Both figures are slightly down on the previous year. SLIC also had group life policies insuring 4.46 million lives, with a sum insured of PRs 409 billion. Group life showed a 6 percent increase in terms of lives covered and 16 percent in terms of sums assured, although group life premium income fell. The total sum assured including group and individual life and bonuses amounts to PRs billion. 5. SLIC s growth of premium income over the past few years has been weak, and actually declined in 1997 and In 1998, SLIC had premium income of PRs 6.96 billion, a reduction of 4.2 percent on the previous year (which was itself down 5.1 percent on 1996). Group life premium (PRs 1.24 billion) was down 11.9 percent on the prior year, reversing the previous year s gains, while first year premium on individual and annuity premiums (PRs 1.31 billion) fell by more than 12 percent for the third successive year. Renewal premium (PRs 4.41 billion) (Reference in text: page 1, para. 5)

10 8 Appendix 2, page 2 increased 1.1 percent over the previous year, stabilizing after a 7.0 percent decline in the previous year. Persistency rates (the extent to which policies are renewed) are not disclosed in the financial statements but the lack of significant increase in renewal premiums suggests that persistency rates are very low. As a rough indicator, the second year premium in 1998 was 50.9 percent of the previous year s first year premium on long-term policies. 6. The yield on the life insurance fund in 1998 was 11.8 percent (compared to 13.0 percent in 1997). The 1998 figure is the lowest since 1980, although the accounts ascribe the low figure to investment provisions, which were substantially recouped following the balance date. The bonus crediting policy of SLIC is not disclosed in the financial statements although this information is available in the actuarial valuation reports. For SLIC, bonuses have been declared at differing rates as specified under the LINO1972. Certain bonuses are described as special reversionary bonuses, which are issued periodically rather than maintaining a consistent level of bonuses. 7. Expenses in 1998, not including investment expenses, were 53.6 percent of premium income (up from 43.2 percent in 1997, although the increase can be ascribed to a decision in 1998 to recognize staff entitlement liabilities not previously brought to account). The expense ratio has exceeded 30 percent throughout the life of SLIC, and 40 percent since The investment portfolio of SLIC as of 31 December 1998 was PRs billion. The major constituents of this were Government securities (74.5 percent), equity shares (9.0 percent), loans to policyholders (7.4 percent) and real estate (4.9 percent). The accounting policies adopted mean that these figures do not represent the fair value of the assets taken as a whole. Corporate Structure and Alternatives 9. SLIC is a statutory corporation established under the LINO, 1972, and not registered under the Companies Ordinance. In its structure, it resembles the joint stock corporations that have been seen in Canada and the United Kingdom. The Government has the single largest ownership share in SLIC, but it is the group of the many with profits policyholders that have the largest stake in the company on aggregate. Policyholders are entitled to the majority of the profits produced by SLIC, and the Government may thus be cautious not to consider outright sale of its stake in the corporation to a new investor without considering the interests of the other stakeholders, i.e. the policyholders in particular. 10. Given the interests of policyholders, it becomes a question of how much an independent investor would be prepared to pay for ownership of a company in which he would only receive a smaller fraction of future profits. Because of this situation, it has occasionally been suggested that SLIC be fully mutualized 1. The mutual company model has worked reasonably well in the past and some of the largest companies of the world are mutuals. However, companies that seek to develop its business that requires additional capital are increasingly finding their mutual style of ownership a handicap. As a result, all the major mutual companies in the United Kingdom and North America are engaged in a process of de-mutualization, turning themselves back into joint stock companies for listing on the stock exchange. 1 Under such a process, the surplus in the insurance funds is used to purchase and then retire all the shares in the company that are owned by the shareholder. Subsequently, the company is exclusively owned by its policyholders.

11 9 Appendix 2, page The present de-mutualization models are interesting because all four of the major Canadian mutuals have decided that the best, first step to take on the process is to issue shares to all with profit policyholders, whereby the value of the equity policyholders is estimated with the help of technical experts such as actuaries, accountants and appraisers. The shares are then distributed in a manner that is proportional to the equity of each policy holder. Once shares are issued, the policyholders-turned-shareholder can offer their shares for sale in the stock market. If such a process was adopted for SLIC, the Government could retain its interest initially, but then offer it for sale either on the stock market or to a strategic investor once the de-mutualization process was complete. It may be advisable to carry out a program for operational re-structuring to make it more efficient and to introduce updated technology prior to any offering for sale. 12. In another case, a United States mutual insurance company was acquired by the AXA group of France in a transaction that saw AXA contribute a substantial amount of capital to the newly acquired company. The policy holders did not receive any shares in that transaction. However, their right for profits was sustained. If such a model was considered, perhaps a joint venture partner could be obtained for SLIC. The price that partner might be prepared to pay would be a function of the Government s stake and the estimated cost of necessary restructuring. Key Operational Concerns and Possible Action Needed Prior to Divestment 13. The operational reviews of the Pakistan Insurance Corporation and National Insurance Corporation conducted under TA 2866-PAK identified a number of institutional concerns requiring action to improve prospects for development of the insurance industry, as well as structural issues needing to be addressed before consideration can be given to divesting the corporations. Concerns are expected to exist for any Government entity considered for privatization. 14. Financial reporting. Like the other insurance corporations in Pakistan, SLIC issues financial statements that are not in accordance with international practice for financial reporting of insurance activities. The financial statements do not disclose the extent of SLIC s policyholder liabilities, or the extent of retained earnings attributable to policyholders. The carrying values of various assets and liabilities give little indication of their fair value. This is of particular relevance in the case of holdings of real property (held at cost less depreciation), for which the fair value of properties acquired many years ago may greatly exceed book value, while that of buildings constructed recently may fall short. Maturities of assets and liabilities are not disclosed. The International Accounting Standards Committee is currently developing standards for (i) financial reporting of insurance business and financial instruments. 15. The preparation of SLIC s financial statements is a very slow process, with financial statements not being available until well after six months from the balance date. Such slow accounts preparation cannot be considered adequate for a company for which divestment and listing is contemplated, and SLIC s accounting processes, management information systems, and books and records generally require reengineering. 16. Audit practices. The audit of SLIC is conducted by a panel of auditors with regional responsibilities, rather than by a single or joint auditors having responsibility for the audit of the

12 10 Appendix 2, page 4 entire financial statements. The ability of an audit performed on this basis to provide the basis for an audit opinion as generally considered to be questionable. 17. Internal Controls. The effectiveness of SLIC s internal controls is open to question. During 1999, irregularities were apparently detected that led SLIC management to recommend the appointment of consultants to undertake a complete verification of all SLIC transactions during a specified period. While the benefit of such an exercise is dubious compared with the likely cost, this matter suggests a lack of confidence by management in SLIC s internal controls. 18. Distribution. SLIC has branches throughout Pakistan, but is also operating in the United Arab Emirates, Kuwait and Saudi Arabia. SLIC s distribution system is dominated by agents, of which it has more than 100,000. A large number of SLIC s regional managers are agents rather than employees. The ability of SLIC to control such a sales force is doubtful, although its legal ability to do so is strengthened by the provisions of the proposed new Insurance Ordinance. The suitability of many agents, particularly in the context of increasing innovation in the industry, may also be doubtful. In past years, attempts to discontinue agents whose performance is unsatisfactory have led to protests against SLIC. While SLIC may now be on sounder legal grounds, the possibility of such action cannot be ruled out. 19. Due diligence and valuation. Prior to taking action to divest SLIC, a due diligence investigation of SLIC will be required. This will comprise a financial audit and actuarial financial condition investigation to be carried out to international standards. The primary purpose of this exercise will be to value SLIC, to satisfy its owners as to its solvency, to identify risk exposure (e.g., from asset-liability mismatch), and to identify other operational and institutional weaknesses in matters such as corporate governance and investment policy. 20. Following due diligence, an action plan can be developed to address concerns identified, and to maximize the value realized by divestment of the Government s investment in SLIC, while protecting the interests of its policyholders.

13 11 Appendix 3 COST ESTIMATES AND FINANCING PLAN ($'000) Foreign Local Total Item Exchange Currency Cost A. Asian Development Bank Financing 1. Consultants a. Remuneration i. International Consultants ii. Domestic Consultants b. Per Diem i. International Consultants Ii. Domestic Consultants c. Travel i. International i. Domestic Seminar Events and Materials Miscellaneous Administration and Support Services: Communication, Office Supplies, Report Production, Local Transport Contract Negotiations and other Meetings in Manila with Government Officials 5. Contingencies Subtotal (A) B. Government Financing 1. Salaries of Counterpart Staff, Office Accommodation/Supplies, Local Transport, Contingencies Subtotal (B) Total (Reference in text: page 4, para. 13)

14 12 OUTLINE TERMS OF REFERENCE FOR CONSULTING SERVICES Appendix 4, page 1 1. The objective of the technical assistance (TA) is to identify issues of a business, financial, and operational nature and recommend initiatives for the short and medium term that should be adopted to provide operational improvements to the State Life Insurance Corporation (SLIC), and prepare for its restructuring and possible divestment. 2. The study will require experts in life insurance, financial management, property valuation, auditing, accountancy, privatization and sociology. A significant proportion of the work will be actuarial in nature. The domestic actuarial profession is expected to provide some of the capacity to support the actuarial duties assigned in the study. Domestic expertise is also available in the fields of privatization, auditing, property valuation, accountancy, and financial management as well as microinsurance/sociology. 3. Three international consultants will be required: (i) an insurance specialist, experienced in the investigation of insurance operations and in financial accounting and reporting of life insurance activities (team leader); an actuary, experienced in the appraisal of life insurance operations; (iii) a property valuation specialist. The international consultants will bear overall responsibility for documenting and reporting on the results of the study, including detailed reports on the various items as outlined in the TA paper and the logical framework, and for submitting an action plan for implementation. 4. Five domestic consultants will be required: (i) an actuary, experienced in the appraisal of life insurance operations; an expert in financial systems and management; (iii) a taxation expert; (iv) a property valuation specialist; (v) a microinsurance expert/sociologist. The domestic consultants will provide support to the international consultants and will take an active role in the process review, audit, and actuarial investigation, and in preparing the reports, including any reports for which they bear individual responsibility by virtue of their professional standards. 5. Procedures will be performed and reports prepared in accordance with relevant professional standards to which individual consultants are subject. (Reference in text: page 4, para. 15)

15 13 A. International Consultants Appendix 4, page 2 1. Insurance Specialist, Team Leader (7 person-months) 6. As the team leader, this consultant will be responsible for overall management of the TA and the timely delivery of reports. The consultant is required to have knowledge of insurance management, financial accounting and reporting, as well as operational processes of insurance entities, and should be familiar with the best international practices and standards in the life insurance industry. The consultant should ideally be a member of an internationally recognized institute, association or society of accountants, actuaries or management consultants. In close collaboration with the other consultants, this consultant will (i) (iii) (iv) review the legal structure, management structure, processes, business practices, risk management, product profile, management information systems, distribution systems, and operation generally of SLIC; and provide recommendations to address noted weaknesses; oversee the preparation of an adjusted balance sheet for SLIC, carrying all identified assets and liabilities of the company; identify and assess potential strategies for divestment of the Government s interest in SLIC, with recommendations and an action plan; and prepare recommendations for reform of the structure and strategies of SLIC and an action plan for their implementation; 2. Actuarial Expert (4 person-months) 7. This consultant is required to be a fellow of an internationally recognized Institute or society of actuaries, and to have wide experience assessing life insurance operations, including experience in developing countries. This consultant will, in conjunction with the domestic actuarial expert: (i) (iii) (iv) (v) (vi) prepare and conduct an investigation into the financial condition of SLIC; prepare on the basis of the investigation a report dealing with issues identified relating to SLIC s: business underwritten; distribution system; product pricing and profitability; reinsurance arrangements; experience, both actual and expected, for mortality, expenses, lapses and product mix; management information systems; actuarial processes; assets; investment policy; and unit pricing policy (if applicable); perform a valuation of SLIC s policyholder liabilities on a statutory basis, on an embedded value basis, and on an appraisal basis; assign a net worth to the sales force of SLIC; perform a valuation of liabilities of SLIC in relation to employee benefits (gratuity, pension, medical expenses and any other entitlements); and assess if: (a) (b) (c) revenues and expenses have been equitably apportioned between the statutory life fund shareholders fund of SLIC, and between classes of policyholder within the statutory life fund; the profits attributed to participating policyholders have been determined in accordance with the statues; SLIC is solvent in terms of the requirements of the Insurance Act; and

16 14 Appendix 4, page 3 (d) SLIC has adequate capital to continue its business at planned levels for a period of not less than five years. 3. Property Valuation Expert (1 person-month) 8. This consultant is required to have wide-ranging experience in the planning and performance of valuations of property for business appraisal purposes. The consultant should be a member of a recognized professional body covering property valuation. Experience in developing countries will be regarded as an asset. This consultant will (i) (iii) in consultation with the domestic property valuation expert and the international team leader, draw up specifications consistent with international best practice to be adopted for the valuation of the property interests of SLIC; review the findings of the domestic property valuation expert; and determine in consultation with the domestic property valuation expert and the international team leader the amounts to be ascribed to the property interests of SLIC on the adjusted balance sheet. B. Domestic Consultants 1. Financial Accounting, Management, and Systems Expert (8 person-months) 9. The consultant is required to have expertise in financial reporting, auditing, and corporate management and restructuring, as well as familiarity with the insurance sector in Pakistan, and will ideally be a member of a recognized institute or society of accountants, actuaries, or management consultants. This consultant will, in close consultation with the international team leader and the international and domestic actuarial experts; (i) (iii) (iv) (v) review the managerial and investment processes and structures of SLIC and identify weaknesses therein; review the management information systems of SLIC and identify weaknesses therein; undertake the appraisal of assets and liabilities of SLIC, other than assets and liabilities valued by the actuarial experts or the property valuation experts; prepare the adjusted balance sheet, recognising assets and liabilities in accordance with International Accounting Standards; and assist in the preparation of corporate restructuring/divestment plans for SLIC. 2. Actuarial Expert (5 person-months) 10. This consultant is required to be a fellow of an internationally recognized institute or society of actuaries, and to have wide experience in assessing life insurance operations, including intimate knowledge of the Pakistan life insurance market. Experience of life insurance operations in other developing markets will be an advantage. This consultant will work in close consultation with the international actuarial expert on the tasks set out for the international actuarial expert.

17 15 3. Taxation Expert (2 person-months) Appendix 4, page The consultant is required to have detailed knowledge of the taxation of life insurance products in Pakistan and the taxation aspects of restructuring companies. The consultant will be a member of an appropriate professional institute. This consultant will provide expert advice to other members of the international and domestic consultant team relating to (i) (iii) determination of the values to be ascribed to tax-related assets and liabilities (both actual and contingent) of SLIC; taxation applicable to prospective earnings, for the purpose of selecting assumptions for the actuarial valuations; and potential domestic taxation implications for SLIC and for potential purchasers of restructuring options considered. 4. Property Valuation Expert (2 person-months) 12. This consultant is required to have wide-ranging experience in the planning and performance of valuations of property for business appraisal purposes, and intimate experience with the Pakistan property market. This consultant will in consultation with the international property valuation expert and the international team leader (i) (iii) (iv) (v) draw up specifications for the valuation of the property interests of SLIC; conduct the valuation of the property interests of SLIC; check the validity of the title to properties held by SLIC; report to SLIC and to the international team leader for inclusion in the team report any deficiencies noted in the title to properties of SLIC; and determine in consultation with the international property valuation expert and the international team leader the amounts to be ascribed to the property interests of SLIC in the adjusted balance sheet. 5. Micro-Insurance Expert/Sociologist (3 person-months) 13. The domestic consultant for microinsurance will do a rapid assessment in both urban and rural areas and will undertake the following: (i) carry out a needs assessment for developing microinsurance schemes for informal sector workers. This will include workshops in the field with low-income people to find out the existing practice of economic and social protection when dealing with premature death or disability of the family breadwinner, and identification of constraints for them to participate in life insurance or savings schemes that would provide protection during economic distress of the families; conduct a workshop with non-government organizations, informal sector employers, private sector institutions and potential suppliers/promoters to assess approaches for developing microinsurance schemes, and possible delivery mechanisms and tools for outreach activities; and assess and recommend appropriate microlevel insurance schemes/savings schemes, and a potential role on a non-subsidized basis for formal insurance companies such as SLIC, that would provide economic protection to low-income families working in the informal sector. Involvement of a qualified NGO in this activity is encouraged.