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| . | Insurance and
Socio-economic Considerations
By Shah Nawaz Khan Retired Executive Director of State Life Insurance Corporation Although life insurance companies in Pakistan advertise the figures of increase in new business and premium income every year, the sad fact is that at the industry level total number of individual policyholders has dropped from nearly 3 Million in 1995 to about 2.20 Million in 2003. Out of nearly 400, 000 new policies issued every year almost 50% policies lapse due to nonpayment of second premium. Another 2 to 3 Lacs old policies go out of books due to surrenders, deaths and automatic forfeiture because of non-payment of renewal premiums and policy loans. The decrease in number of policies continued from 1996 to 2000. That was the period when the foreign debts had mounted to over 54% of national GDP and almost 70% of the revenues of the Government were going in debt servicing. The increased reliance on deficit financing by the Government had created new problems for people and industry. The financial equilibrium of the families in the middle and lower classes was seriously disturbed in late 90s and disposable income shrunk drastically forcing many policyholders to surrender their polices or allow that to lapse or be forfeited due to non-payment of premium or policy loans. The value of US dollar had gone from RS. 40 to almost RS. 69. Economic conditions started to improve after Pakistan’s participation in the war against terrorism when economic sanctions imposed by the West were eased. The overall business of the industry in terms of premium and investment income had dropped significantly in the years 1996 and 1997 but there after the premium income has continued to grow thanks to inflation. The average premium per policy in 2003
is estimated to be RS. 5250 whereas in 1995 in which year the industry
had the largest number of life policies in force it was bare than RS. 3700/-.
It is interesting to note that experience of past several years indicated
that the average life premium devolves around 20 % of per capita income
but the overall life premium happens to be insignificant proportion of
GDP.
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| . | nsurance is not Haram
The decline in number of policies in late 1990s and the present slow growth cannot be attributed to rise in fundamentalism in Pakistan. It is mainly due to economic conditions. Ever since the insurance companies were established in India early in 20th century a section of orthodox Muslims regarded insurance as haram as they thought that elements of interest and wager are involved in it. But enlightened Muslims like Sir Syed Ahmed Khan, Sir Agha Khan and Allama Iqbal have regarded insurance as beneficial to the society. .Hakeemul Ummat Allama Iqbal was among the founders of Muslim Insurance Company in Lahore. Fatwa of JameAzhar of Cairo in favor of insurance was issued over 80 years ago. Quite a few ulema have given fatwas that Insurance is not prohibited or haram. But there are fatwas declaring insurance as haram and all of them are based on faulty understanding of insurance.
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| Insurable Interest.
The main objection to insurance as raised by some Ulema is that it contains elements of wager and interest and generates avarice and foul play. They are obviously not aware of the concept of insurable interest. One cannot insure anybody or anything. You must have financial interest in the property and there must be a risk of a loss occurring by accident or chance. Few people realize that insurance is in fact contractual arrangement in which an insurer compensates an insured party for loss resulting fortuitously. There is greater misconception about life
insurance Though people know that life insurance guarantees a specific
sum of money to a designated beneficiary upon the death of the insured
or to the insured if he or she lives beyond a certain age, few know that
one cannot insure anybody for an amount larger than that can be justified
by loss of income and other losses resulting from death of proposed insured
and the beneficiary and policyholder must have financial interest in the
life to be insured by virtue of blood or business or legally acceptable
relationship i.e. he must be in a position of loss due to death of the
person to be insured.
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| . | Dependents face the risk of cessation
of support or income due to the death of breadwinner of the family. A creditor
or business partner has financial interest in the life of debtor to the
extent of the amount of debt or partner's share. Parents and children are
supposed to have financial interest in each other based on their income
or earning capacity. Unlike loss in insurance on property, the element
of uncertainty in life insurance is not if death will occur, but when.
Life insurance covers loss of dying too
soon. Life annuity policies provide life time income covering the risk of living too long. A question often agitates the minds of the students of insurance if the father or husband can insure the life of his child and/or wife whose death would not cause any financial loss to the policyholder. It is now well settled that modest insurance on the life of minor child and/or can be underwritten safely to cover the risk of hospital bills and funeral expenses etc. Parents usually insure the life of their children in order to save money for their higher education or marriage or to give them start in business in future Companies allow such policies on children and housewives even though the best arrangement would be to insure the life of the breadwinner and designate the minor child or housewife as nominee i.e., beneficiary. A policy can be assigned irrevocably or irrevocably in favor of wife or child/ren so that the creditors of the policyholder would not be able recover anything from the policies on the life of their creditor in case of bankruptcy or any other litigation. Life insurance saves widows and orphans from becoming dependents and burden on distant relatives or living on charity. Life insurance enables the money to be saved for higher education or marriage of children or insured's own retirement. The benefits of group insurance both in Life, Accident and Health insurance provide additional security to the employees and other forms of insurance are useful for society. For instance Mortgage Insurance can take care of installments to be paid on car or house to the creditors other wise that burden would be too great for the dependents. Much needed Un-employment Insurance has not yet been properly introduced in Pakistan as it cannot be implemented here without State support in a developing country like Pakistan. The main objection
Despite their objections the bigots are not able to suggest a suitable alternatives for providing the benefits that are available to the individual and institutions under insurance policies. However they feel it is the State's responsibility to cater for such benefits which has not been possible during the last several centuries. Even in rich countries the social security benefits provided by the Government are considered inadequate. Some Ulema feel that insurance should be allowed only as a cooperative movement and not as a business. However their thinking is based on misconceptions about insurance and economics. I |