Life insurance industry in Pakistan: An in-depth overview

Life insurance is a financial product that provides a lump-sum payment, known as a death benefit, to beneficiaries upon the death of the insured individual. This product is pivotal for financial security, ensuring that dependents are financially protected in the event of the policyholder’s death. Various types of life insurance include term life insurance, whole life insurance, universal life insurance, endowment plans, and pension plans. Term life insurance provides coverage for a specific period, such as 10, 20, or 30 years. If the insured person dies within the term, the beneficiaries receive the death benefit. Whole life insurance offers lifetime coverage and includes an investment component known as the cash value, which grows over time. Universal life insurance is similar to whole life insurance but offers more flexibility in terms of premium payments and death benefits. The cash value grows based on interest rates set by the insurer. Endowment plans provide a lump sum after a specific term or upon the insured person’s death and are often used as a savings tool. Pension plans are designed to provide a regular income stream post-retirement.

The life insurance industry in Pakistan has a rich history dating back to the pre-independence era. The first life insurance company in the subcontinent, Oriental Life Insurance Company, was established in 1818 in Calcutta (now Kolkata). After Pakistan gained independence in 1947, the life insurance sector began to develop, with several local and foreign companies operating in the market. In 1972, the Government of Pakistan nationalised the life insurance industry, merging all companies into the State Life Insurance Corporation of Pakistan (SLIC), which became the sole provider of life insurance services. The 1990s marked a significant shift in the sector with the liberalisation of the economy. The government allowed private and foreign players to enter the market, breaking SLIC’s monopoly. Key regulatory reforms were introduced to encourage competition and protect policyholders.

Today, the life insurance industry in Pakistan is a dynamic and evolving sector. The market comprises both public and private insurers, with SLIC still holding a substantial share. According to The Pakistan Credit Rating Agency Limited (PACRA), the ‘Financial and Insurance Activities’ sector contributed approximately 1.7% to Pakistan’s Gross Domestic Product (GDP) during the fiscal year 2023. The industry has been growing at a compound annual growth rate of around 10% over the past five years. However, penetration rates remain low compared to global standards, with only about 5% of the population covered by life insurance policies.

Life insurance provides numerous benefits, making it an essential financial tool for individuals and families in Pakistan. It ensures that dependents are financially protected in the event of the policyholder’s death, covering expenses such as mortgages, education, and daily living costs. Life insurance also mitigates the financial risks associated with premature death, disability, or critical illness. Certain products, like wholelife and ULIPs, offer investment avenues, allowing policyholders to build wealth over time. Additionally, policyholders can avail of tax deductions on premiums paid, making life insurance an attractive tax-saving instrument.

Despite its growth, the life insurance industry in Pakistan faces several challenges. A significant portion of the population remains unaware of the benefits and importance of life insurance, resulting in low penetration rates. Historical issues with claim settlements and mis-selling have led to a general mistrust among the public. The regulatory framework, while evolving, still faces gaps in enforcement and oversight, affecting market stability and consumer confidence. Economic instability and low disposable incomes hinder the ability of individuals to invest in life insurance products. The future of the life insurance industry in Pakistan appears promising, driven by several factors. The adoption of digital technologies is transforming the insurance landscape. Online platforms, mobile apps, and digital marketing are enhancing customer experience and accessibility. There is a growing demand for Shariah-compliant insurance products. Takaful, an Islamic insurance model, is gaining popularity and presents a significant growth opportunity. Government’s efforts to promote financial inclusion and insurance awareness are expected to boost the industry. Initiatives such as microinsurance schemes for low-income groups can significantly increase coverage. The introduction of new and innovative products tailored to the specific needs of different demographic segments will drive market expansion.

The life insurance industry in Pakistan is on a growth trajectory, with immense potential to contribute to the country’s economic stability and individual financial security. Addressing the challenges of low awareness, mistrust, and regulatory gaps will be crucial in realising this potential. With continued innovation, digitalisation, and supportive government policies, the industry is poised to make significant strides in the coming years, ensuring that more Pakistanis can benefit from the financial protection and investment opportunities that life insurance offers.