Concise Notes Insurance Ordinance of Pakistan
Definition and Scope of Life Insurance Business
The following categories of contracts constitute the carrying on of life insurance business:
A contract providing payment of money upon the death of a person or a contingency dependent on the termination or continuance of human life.
A contract subject to premium payments for a term dependent on the termination or continuance of human life.
A contract providing for an annuity for a term dependent on human life continuance.
A contract providing for an annuity for a term not dependent on human life but exceeding a period of year.
A contract providing indemnity for medical expenses.
A continuous disability income contract.
An investment contract.
Any other contracts as may be prescribed.
Principal Object Rule: If the principal object of a contract is life insurance, it is classified as life insurance business even if it contains subsidiary provisions of a non-life nature.
Exceptions for Non-Life Insurers: A contract providing payment on death does not constitute life insurance business if carried out by a registered non-life insurer, provided:
The duration is not more than year.
Payment is made only in the event of death by accident.
Accident and Sickness Exception: Contracts for loss attributable to accident, sickness, or infirmity (other than death) are not life insurance if carried out by a non-life insurer for a duration of not more than year.
Residual Classification: All insurance contracts not classified as life insurance under these provisions are classified as non-life insurance contracts.
Classes of Life and Non-Life Business
Life Insurance Classes:
Class 1 (Ordinary Life Business): Life insurance contracts not included in Classes , , or .
Class 2 (Capital Redemption Business): Effecting and carrying out capital redemption contracts.
Class 3 (Pension Fund Business): Contracts for pension or retirement schemes owned by trustees.
Class 4 (Accident and Health Business): Providing fixed pecuniary benefits or indemnity against injury from accident, incapacity from accident/disease, or loss/medical expenses from sickness/infirmity.
Non-Life Insurance Classes (Direct and Facultative):
Class 1: Fire and property damage business (loss/damage to property, excluding Class ).
Class 2: Marine, aviation, and transport business (including means of transport, machinery, tackle, merchandise, baggage, third-party risks, and carrier's liability, but excluding Class or ).
Class 3: Motor third party compulsory business (liabilities under the Motor Vehicles Act, ).
Class 4: Liability business (liabilities to third parties not in Class , , or ).
Class 5: Workers’ compensation business (liabilities to workers arising from employment).
Class 6: Credit and suretyship business (insolvency of debtors, guarantee contracts, fidelity bonds, performance bonds, etc.).
Class 7: Accident and health business (duration not more than year; covering injury, death by accident, incapacity, or sickness loss).
Class 8: Agriculture insurance (including crop insurance).
Class 9: Miscellaneous business.
Non-Life Insurance Classes (Treaty Reinsurance):
Class 9: Proportional treaty business (reinsurer receives a proportion of premium and pays an identical proportion of claims).
Class 10: Non-proportional treaty business (all treaty reinsurance not in Class ).
Eligibility and Registration of Insurers
Eligible Entities: Only a public company or a body corporate incorporated in Pakistan (not a private company or its subsidiary) may start an insurance business.
Foreign Insurers: Foreign bodies corporate already registered before the Ordinance may continue for year, after which they must transfer business to a new public company in Pakistan.
Mandatory Registration: No eligible person can carry on insurance without a certificate of registration from the Commission.
Application Requirements (Life Insurance):
Statement of rates, advantages, terms, and conditions.
Investment-linked policy details: underlying investments, unit value determination frequency, and expense/mortality charge basis.
A ten-year business plan ( years) showing expected income, expenses, and results.
Mass communication materials.
Certifications from an appointed actuary and confirmation that terms are sound and workable.
Changes in Particulars: Any change in application details must be notified to the Commission within days.
Criteria for Satisfaction by the Commission:
Compliance with minimum paid-up capital and statutory deposits.
Compliance with solvency and reinsurance requirements.
Ability to meet liabilities and sound management criteria.
Appointment of a qualified auditor and an appointed actuary (for life insurers).
Restrictions: An insurer cannot carry on both life and non-life business simultaneously.
Criteria for Sound and Prudent Management
Integrity and Skill: Business must be conducted with integrity, due care, and professional skill.
Fit and Proper Person: Directors, officers, and principal officers must be "fit and proper."
Definition: Possessing appropriate experience/qualifications and acting with diligence.
Exclusions: A person without direct insurance experience cannot be Chairman or Chief Executive. Anyone whose association is detrimental to policyholders is not fit and proper.
Adequate Records: Must maintain records to enable prudent management and compliance with the Ordinance.
Control Systems: Adequate control systems must be maintained under responsible management.
Policyholder Interests: Business must be conducted with due regard to the interests of policyholders and potential policyholders.
Life Insurance Statutory Funds
Mandatory Maintenance: Life insurers must maintain at least one statutory fund. Specific funds must be maintained for:
Investment-linked business.
Capital redemption business.
Pension fund business.
Accident and health business.
Business carried on outside Pakistan.
Any other class prescribed by the Commission.
Shareholders' Fund: Insurers with share capital must maintain a shareholders' fund; those without must maintain a permanent capital fund.
Policy Referral: Every policy must be referable to a specific statutory fund. Non-investment-linked policies usually refer to only one fund.
Fund Assets and Liabilities: All assets, revenues, and expenses must be attributed to a specific fund. Shared expenses must be apportioned on a fair and equitable basis with actuary advice.
Prohibition of Reinsurance: Reinsurance between statutory funds of the same insurer is prohibited.
Capital Payments: An insurer may make capital payments to a statutory fund, recorded as capital contributed.
Distribution of Capital: Capital may only be distributed (to shareholders' fund, another statutory fund, or as bonuses) if actuary advice confirms it won't affect solvency.
Allocation of Surplus and Distribution of Dividends
Accounting Records for Participating Business:
A Account: Retained earnings attributable to participating policyholders.
B Account: Retained earnings attributable to shareholders but not distributable.
C Account: Retained earnings distributable to shareholders.
D Account: Retained earnings for non-participating business.
Surplus Allocation Rule: At least of surplus from participating contracts must be allocated to the A Account (policyholders).
Surplus Adjustment: Calculations involve management expenses versus prescribed percentages, involving a compound interest rate (the higher of the investment earning rate or the average base rate).
Bonus Allocation: Bonuses to policyholders are drawn from the A Account or capital distribution. Shareholders receive payments only from the shareholders' fund or C/D Accounts.
Statutory Supervision Fee: Due by January th annually. The fee is the greater of:
Rs. .
rupee per thousand of gross direct premium written in Pakistan.
Other prescribed amounts.
Requirements for Capital and Statutory Deposits
Minimum Paid-Up Capital:
Life Insurance: Rs. million (graduated from Rs. million by Dec to Rs. million by Dec ).
Non-Life Insurance: Rs. million (graduated from Rs. million by Dec to Rs. million by Dec ).
Statutory Deposits: Insurers must deposit with the State Bank of Pakistan (SBP) the higher of Rs. million or of paid-up capital.
Deposits can be cash or approved securities at market value.
Deposits are part of assets but cannot be encumbered or used for liabilities other than insurance policy debts.
Valuation: SBP's decision on the market value of securities is final.
Solvency and Admissible Assets
Admissible Assets: Government securities, SBP deposits, and others not specifically excluded.
Inadmissible Assets (Partial List):
Loans to directors, shareholders (over ), or employees (unless secured by property).
Intangible assets like goodwill or brand names.
Deferred tax assets.
Unpaid share capital.
Balances due from related bodies/directors.
Premiums unpaid for more than months.
Immovable property, shares, or loans exceeding prescribed concentration percentages of total investments.
Office equipment, vehicles, and fixtures.
Definition of "Related": Common control, ownership interest over , or members of the same family.
Valuation Rules:
Assets valued at no more than transfer price in an orderly market between willing parties.
Liabilities (non-policyholder) valued at no less than settlement cost.
Non-Life Liabilities: Outstanding claims must include settlement expenses and provision for adverse development.
Unexpired Risk: Sum of unearned premium reserve and premium deficiency reserve.
Minimum Solvency Requirement (Non-Life): The greatest of:
Prescribed minimum amount.
of earned premium revenue (net of reinsurance, max deduction ).
of unexpired risk and outstanding claims (net of reinsurance).
Reinsurance Arrangements
Mandatory Reinsurance: Insurers must maintain adequate reinsurance as determined by directors to ensure solvency.
Pakistan Reinsurance Company Limited (PRCL):
Known as "the Company."
Federal Government may direct insurers to offer a proportion of direct non-life business to PRCL.
Contravention of cession rules carries a fine up to Rs. plus Rs. per day.
Default on premium payments to PRCL incurs a penalty at the prevailing base rate.
Commission Oversight: Insurers must submit features of treaty reinsurance arrangements to the Commission at least one month ( month) prior to effectiveness.
Accounts, Audit, and Actuarial Reports
Books and Records: Must maintain registers of policies and claims in English or Urdu in Pakistan. Records may be electronic if reproducible in writing.
Annual Statutory Accounts: Must be audited and submitted within months of year-end (extended to months until end of ).
Quarterly Statements: Statements of assets and liabilities due within weeks of the end of March, June, September, and December.
Auditor Qualifications: Must be approved by the Commission and authorized under the Companies Ordinance to audit public companies.
Actuarial Investigation: Life insurers must have an annual investigation into financial condition by an appointed actuary. Non-life insurers may be required to conduct investigations for specific classes.
Special Audit: The Commission may appoint a separate auditor to investigate an insurer’s accounts at the insurer's expense.
Investigation and Commission Directives
Power to Investigate: Triggered if an insurer is likely to be unable to meet liabilities or has contravened the Ordinance.
On-site Inspection: Commission can enter premises, search, and seize records. Requires weeks' notice unless destruction of records is feared.
Directives: Commission may issue directions to protect policyholders, require a rectification plan, or direct an insurer to cease entering new contracts.
Power to Remove Officers: If a Chief Executive, Chairman, or director is not a "fit and proper person" or has contravened the law, the Commission can order their removal. For public sector insurance companies, the Commission makes recommendations to the Federal Government.
Expense Limits: Commission can make rules limiting acquisition costs and management expenses (power expires after years).
Market Conduct and Policyholder Protection
Utmost Good Faith: Implied in every insurance contract. Parties cannot rely on provisions if doing so violates good faith.
Misleading Conduct: Insurers must not engage in deceptive conduct. Including "unusual terms" without express acknowledgment is considered misleading.
Ambiguities: Any ambiguity in a contract is construed in favor of the policyholder.
Plain Language: Insurers must make reasonable efforts to use plain language in documentation.
Non-Disclosure/Misrepresentation:
Insurers cannot avoid a contract for non-fraudulent misrepresentation if they would have entered the contract regardless.
Life policies cannot be questioned after years except for fraudulent statements on material matters.
Statutory Rights: Policyholders have the right to receive payment and sue in Pakistan; Pakistan law applies (except for marine insurance).
Surrender, Lapse, and Forfeiture
Surrender Value: A life policy in force for at least years must have a surrender value.
Lapse Notice: For policies where premiums are unpaid, insurers must give written notice within to days of the grace period expiry, explaining options.
Non-Forfeiture Options: If a policy has a surrender value, it cannot be forfeited for non-payment. Options include:
Applying surrender value to pay premiums.
Converting to a paid-up policy.
Term insurance.
Interim Bonuses: Life insurers may declare interim bonuses for policies maturing between actuarial investigations.
Intermediaries: Agents, Brokers, and Surveyors
Agent Liability: Insurers are absolutely liable for the acts/omissions of their agents upon which a policyholder relied in good faith.
Agent Qualifications: Must be of age, sound mind, and have no criminal record for fraud/theft within years. Commission may prescribe educational/experience requirements.
Insurance Brokers: Must be a company with a license. Must maintain professional indemnity insurance and statutory deposits. Ownership linkages between brokers and insurers are prohibited.
Insurance Surveyors: Must be a licensed company. Survey reports must be signed by registered "authorised surveying officers." Natural persons/firms may only act as surveyors for years post-Ordinance before corporate requirement is absolute.
Winding Up and Insolvency
Grounds for Winding Up: Insolvency, failure to comply with Ordinance for months after notice, or if continuance is prejudicial to policyholders.
Petitioners: Can be shareholders ( total), policyholders (with million sum insured), or the Commission.
Life Business Continuation: A liquidator may carry on life business to transfer it as a going concern to another insurer.
Priority of Claims: Assets of a statutory fund are applied first to preferential payments (under Companies Ordinance), then to policy liabilities of that specific fund.
Offences and Penalties
General Default: Fine up to Rs. million, plus Rs. per day for continuing defaults.
Transactional Breaches: Carrying on business without registration or capital compliance carries a fine up to Rs. million.
False Statements: Wilful false statements in reports/returns carry a fine up to Rs. million.
Wrongful Possession: Misapplying insurer property can lead to a fine of Rs. million and up to years imprisonment.
Restoration of Property: The Tribunal can compel directors/officers to compensate the insurer for misfeasance or breach of trust.
Miscellaneous Provisions
Service of Notice: Sufficient if sent to the registered person/address with the Commission.
Public Property: All insurance for public property (government-owned or projects with external aid until production) must be placed with National Insurance Company Limited (NICL).
Rule-Making Power: Federal Government makes rules; the Commission may make rules on delegated matters.
Repeal: The Insurance Act, is repealed. Existing investigations and legal proceedings are protected under savings clauses until Tribunals are established.