A 2004 Financial System Stability Assessment (FSSA) for Pakistan conducted by the International Monetary Fund (IMF) finds that the insurance sector suffers from a diffused and ineffective legal and regulatory framework. Despite considerable reforms in the country resulting in a more efficient financial system, the insurance sector has lagged behind. The FSSA, therefore, calls for further liberalization and consolidation of the insurance sector and development of the regulatory framework governing insurance supervision. Although the Insurance Ordinance of 2000 ushered in some reforms, the supervision of the insurance sector still does not follow the modern risk-based model. The FSSA recommends further clarification of the legal roles of the Securities and Exchange Commission of Pakistan (SECP), the insurance supervisor of Pakistan and the Ministry of Commerce, the oversight body for state-owned insurance enterprises. Also, greater capacity needs to be provided to the SECP to conduct on-site inspections and take prompt corrective action. A gradual dilution of the government ownership of public sector insurance and reinsurance companies is also advised by the FSSA. The 2007 Article IV consultation report of the IMF for Pakistan mentions a technical assistance project sponsored by the Monetary and Capital Markets Department of the IMF in March/April 2005 to develop the insurance sector in Pakistan. However, no updates on the implementation of the project could be found.

General Overview

A Financial System Stability Assessment (FSSA) for Pakistan conducted by the International Monetary Fund (IMF) in 2004 comments on considerable reforms in the financial sector and observes that they have resulted in "a sounder and more efficient financial system" (p. iii). However, it also notes that these reforms have not equally impacted the insurance sector, so that the "legal and regulatory authority for insurance and pensions is diffused and, in some respects, ineffective" (p. iii). The FSSA, therefore, calls for further liberalization and consolidation of the insurance sector and development of the regulatory framework governing insurance supervision. The FSSA notes that the Insurance Ordinance of 2000 "has introduced a number of laudable reforms, but has also omitted a number of elements that are key to a modern risk-based supervisory regime" (p. 17). Therefore, the legal roles of the Securities and Exchange Commission of Pakistan (SECP) and the Ministry of Commerce (MoC) still need clarification and the SECP needs to be provided the capacity to conduct on-site inspection and take prompt corrective action. The FSSA sees a consensus to retain the SECP as the overall regulator and supervisor of the insurance industry and the MoC as the oversight body for the state-owned insurance enterprises. The role of the state-owned insurance companies is also brought into question and the FSSA calls for equal treatment of the public sector State Life Insurance Corporation of Pakistan (SLIC) and the other insurance companies. A more desirable strategy, per the FSSA, would be for the government to withdraw from the three public sector insurers, especially the National Insurance Company Limited (NICL) and also to limit its exposure to the Pakistan Reinsurance Company Limited by seeking private sector partnership. The 2007 IMF Article IV consultation report mentions a technical assistance project aimed at developing the insurance sector sponsored by the Monetary and Capital Markets Department of the IMF in March/April 2005. However, no updates on the actualization of the project could be found.

The SECP website mentions that the Insurance Division, housed within the SECP and responsible for insurance sector supervision and development in Pakistan, is headed by an Executive Director. The scope of its supervision includes life insurance companies, non-life companies, takaful (an Islamic concept of mutual insurance following the rules and regulations of Islamic law) insurers, insurance intermediaries, and other bodies associated with this sector, including the Insurance Association of Pakistan, Pakistan Insurance Institute and Pakistan Society of Actuaries. The SECP was created by the 1997 Securities and Exchange Commission of Pakistan Act to beneficially regulate the capital markets, and supervise and control the entities therein, the 2006-2007 annual report of the SECP states. Over time, the SECP was vested with the responsibility of regulating and supervising the insurance sector, Voluntary Pension Scheme, and the non-banking finance company (NBFC) sector to enable consolidated supervision of all these sectors. The SECP, per its annual report, "plays a fundamental role in maintaining the integrity and vitality of the capital markets, corporate, NBFC and insurance sectors and protecting the interests of investors" (p. 11). The SECP is listed as a member on the International Association of Insurance Supervisors website.

The SECP website further notes that the Insurance Division is comprised of the Life Insurance Wing, the General Insurance (Non-life) Wing, the Registration Wing, and the Research and Development Wing. The life and non-life wings supervise the respective sectors and monitor the supervised entities' compliance with the Insurance Ordinance, accounting and actuarial standards, and other regulatory and capital/solvency requirements. As the website mentions, the Life Insurance Wing "is initiating various reforms such as minimum actuarial valuation basis, market conduct, group insurance business, auditing standards and reinsurance criteria" in consultation with the industry.

Providing statistics on the insurance sector in Pakistan, the 2006-2007 annual report of the SECP states that as of June 2007, there were 50 insurance companies, of which 46 were non-life and 4 were life insurance companies. In addition, there were 2 general takaful companies. The largest insurance company is still the state-owned SLIC with 70 percent of the life insurance market; however, it is losing its share over the years. The NICL is also a state-owned corporation and it has the exclusive right to insure all public property and interests. The report further notes that insurance density and penetration in Pakistan is considerably lower than in other countries of the region, including India, Sri Lanka and Iran. In 2006, insurance density stood at USD5.65, while insurance penetration was 0.73 percent. The annual report enumerates the reasons behind this situation. They include "lack of awareness, low literacy rate; lack of importance the individuals give to insurance and the belief amongst substantive portion of the population that insurance is un-Islamic" (p. 106). However, the report does note that the industry has achieved remarkable growth in the previous few years (almost 26 percent in 2005 and 21 percent in 2006).

The Principles

ICP 1 Conditions for effective insurance supervision

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

ICP 2 Supervisory objectives

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The Insurance Division of the SECP states its objective on the SECP website as follows: "to ensure protection of the interests of insurance policyholders and to promote sound development of the insurance industry." The 2004 IMF FSSA also notes that the SECP - as the joint securities and insurance supervisor of Pakistan - has clear and objectively stated regulatory responsibilities, set out in the law. Nevertheless, there is insufficient information publicly available as to Pakistan's compliance with this principle.

ICP 3 Supervisory authority

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There is insufficient information publicly available as to Pakistan's compliance with this principle. The SECP is the insurance regulator and supervisor of Pakistan. As the 2004 IMF FSSA finds, the SECP has "extensive powers to monitor market institutions and market practice" (p. 37) and these powers are adequate to effectively discharge its functions. However, the FSSA could not determine whether its resources and capacity were adequate to fully discharge its responsibilities. Nevertheless, the SECP is operationally independent and accountable in the exercise of its powers and responsibilities. The SECP's power to conduct on-site inspections of supervised entities was called into question by the FSSA, which noted that such inspections are only conducted when there are indications of malpractice. As such, the FSSA advises the SECP to undertake a formal review of its capacity to conduct regular on-site inspections, chalk out a formal plan for its monitoring and surveillance work, allocate appropriate staff for the function, and assess its performance on an annual basis.

ICP 4 Supervisory process

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There is insufficient information publicly available as to Pakistan's compliance with this principle. As the 2004 IMF FSSA observes, broadly speaking, the SECP "adopts clear and consistent regulatory processes" (p. 37). However, there is room for improvement and the FSSA recommends the SECP to review its regulatory processes to make them clearer and more consistent, as also to issue useful guidance notes and policy statements to assist market participants in their interaction with the SECP.

ICP 5 Supervisory cooperation and information sharing

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There is insufficient information publicly available as to Pakistan's compliance with this principle. The SECP "has wide powers to share both public and non-public information in its possession with domestic and foreign counterparts" (p. 38), notes the 2004 IMF FSSA. However, it has not yet set up formal mechanisms to share non-public information, especially with foreign regulators. Also, the SECP does not have the authority to conduct specific inspections to gather information requested by its foreign counterparts, though it can share information in its possession from regular inspections. The FSSA, therefore, advises the SECP to formalize its information sharing arrangements with foreign regulators at the earliest, and also gain the necessary legal power to conduct inspections and investigations at the request of its foreign counterparts. The 2006-2007 annual report of the SECP mentions that the SECP has signed Memoranda of Understanding (MoUs) with other domestic and foreign regulators for mutual cooperation. They include the State Bank of Pakistan (SBP) domestically, and among foreign regulators, they include the Australian Securities and Investments Commission, Maldives Monetary Authority, Securities and Exchange Commission of Sri Lanka, Royal Monetary Authority of Bhutan, and also with the International Finance Corporation on launching a corporate governance project.

ICP 6 Licensing

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There is insufficient information publicly available as to Pakistan's compliance with this principle. The SECP website states that the Registration Wing within the Insurance Division of the SECP is responsible for registering new insurance companies, insurance brokers and surveyors and collecting annual supervision fees from them.

ICP 7 Suitability of persons

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

ICP 8 Changes in control and portfolio transfers

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

ICP 9 Corporate governance

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

ICP 10 Internal control

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

ICP 11 Market analysis

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

ICP 12 Reporting to supervisors and off-site monitoring

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There is insufficient information publicly available as to Pakistan's compliance with this principle. Per the 2004 IMF FSSA, "accounting and auditing standards are of a high and internationally acceptable quality" (p. 38). According to a 2007 Institute of Chartered Accountants of Pakistan (ICAP) presentation, accounting standards adopted by the ICAP would be applicable in accordance with the three tiers of corporate entities. Tier one companies comprising public interest entities must comply with International Financial Reporting Standards (IFRSs) by 2009. They include listed companies and large companies that meet certain size criteria. Further, the ICAP has adopted all but IFRS 1 relating to first-time adoption of IFRSs and IFRS 4 relating to Insurance Contracts. According to the ICAP presentation, the ICAP Insurance Committee is actively deliberating on the adoption of IFRS 4. A few other international standards, although adopted, are pending approval of the SECP. Earlier, in a 2005 Report on the Observance of Standards and Codes (ROSC) on accounting and auditing in Pakistan, the World Bank commended Pakistan for making progress in aligning national accounting requirements with IFRSs. Nonetheless, the ROSC as well as the ICAP presentation identify certain hindrances to the full adoption of international standards. For instance, IAS 39 and IAS 40 have been held in abeyance by the SBP due to resistance to adoption. Other shortcomings observed by the ROSC include inadequacies in the technical capabilities of regulators, lack of implementation guidance for accounting and auditing practices, and weak professional training and education. With regard to the legal framework, the ROSC points out that the 2000 Insurance Ordinance lays down primary requirements for financial reporting of all insurance companies incorporated in Pakistan. The Ordinance mandates the SECP to monitor and enforce the accounting and auditing requirements of insurance companies. Under the Securities and Exchange Commission of Pakistan Act, the SECP also issues listing requirements that specify disclosures applicable to listed entities.

ICP 13 On-site inspection

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

ICP 14 Preventive and corrective measures

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

ICP 15 Enforcement or sanctions

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

ICP 16 Winding-up & exit from the market

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

ICP 17 Group-wide supervision

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

ICP 18 Risk assessment and management

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

ICP 19 Insurance activity

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

ICP 20 Liabilities

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

ICP 21 Investments

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

ICP 22 Derivatives and similar commitments

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

ICP 23 Capital adequacy and solvency

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

ICP 24 Intermediaries

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

ICP 25 Consumer protection

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

ICP 26 Information, disclosure & transparency towards the market

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

ICP 27 Fraud

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There is insufficient information publicly available as to Pakistan's compliance with this principle.

ICP 28 Anti-money laundering/ Combating the Financing of Terrorism

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There is insufficient information publicly available as to Pakistan's compliance with this principle. Per the 2004 IMF FSSA, there are no laws "specifically and comprehensively" (p. 31) addressing money laundering and terrorist financing. However, Pakistan is working on a draft law that promises to comprehensively define money laundering and incorporate international best practices in the areas of money/laundering and terrorist financing, avers the FSSA. On suspicious transaction reporting, the 2008 U.S. Department of State (DoS) report observes that the Anti-Money Laundering Ordinance promulgated in 2007 stipulates money laundering suspicious transaction reports (STRs). However, the report cites two key inadequacies of the Anti-Money Laundering Ordinance. For example, "the definition of what constitutes a suspicious transaction is not adequate as it does not cover cases where an individual 'suspects' or 'has reason to suspect' that funds are the proceeds of criminal activity." Also, the Anti-Money Laundering Ordinance does not require the filing of STRs concerning terrorist financing. According to the 2008 U.S. DoS report, "the Securities and Exchange Commission of Pakistan (SECP), which has regulatory oversight for non-bank financial institutions, has also applied 'know your customer' regulations to stock exchanges, trusts, and other non-bank financial institutions."

According to the 2008 U.S. DoS report, the Anti-Money Laundering Ordinance of 2007 created the Financial Monitoring Unit (FMU) to perform the typical duties of a financial intelligence unit (FIU), namely to collect, analyze and disseminate all STRs submitted by entities subject to the Anti-Money Laundering Ordinance. The report primarily attributes the relative paucity and limited utilization of STRs to Pakistan's lack of a central repository for the reporting of STRs. The U.S. DoS report notes other important weaknesses regarding Pakistan's FIU regime, primarily that the FMU's independence and effectiveness is undermined by the fact that it is subject to the oversight and control of the Pakistan's General Committee, which is comprised of Government of Pakistan cabinet secretaries (the FMU is located within the SBP). Additionally, the report notes that the FMU is not fully staffed and its investigators have yet to be sufficiently trained. In its 2007 Article IV consultation report, the IMF states that Pakistani authorities are currently working on making the FMU fully operational and more independent. As at the preparation of this report in August 2008, it is not clear what the results of these plans are. The SBP and the SECP serve as Pakistan's primary financial regulators, and both are equipped with AML units even though, according to the U.S. DoS report, these units "often lack defined jurisdiction and adequate resources to effectively supervise the financial sector on AML/CTF [anti-money laundering/combating the financing of terrorism] controls."