Impact of Inflation on the Performance of Pakistan's General Insurance Industry

Impact of Inflation on General Insurance Industry of Pakistan

(2008-2012).

Behram Khan

Institute of Management Sciences Peshawar.

Introduction.

The economy is stabilizing and so are the concerns of many investors regarding the future prospect of the inflation. Inflation is predictable to a given extent, so the investors are able to adjust it into their decision making. Inflation becomes threat to insurance companies only when inflation rate exceeds the expected inflation rate (Hobbs, et. all, 2010). The insurance sector in the under developed countries was unaffected from the contagion effect of the GFC because of the low level of financial integration with multinational financial institutions and markets. Insurance sector of the under developed countries is highly dependent on the government for providing reinsurance and disaster or natural calamity coverage because of the under development of private insurance contractors and to lack of risk financing which raises issues relating to solvency (sbp, financial stability review 2009-2010).

In case of Pakistan the capital structure of General Insurance Industry has improved through the response regulations set forth by SECP in the last four years by setting the minimum paid up capital of Rs. 200 million and a road map is was set by SCEP to increase it by 100 million to make it Rs. 300 million till the year 2011 (sbp, financial stability review 2009-2010).

The insurance industry has for the last few years has enjoyed a sound growth due to preferable economic conditions, the entire financial sector expansion, large state owned companies privatization and investment by foreign companies. Performance of a firm can be appraised by measuring the profitability of the firm and insurers performance (Hifza Malik, 2011). Due to the nature of insurance contracts the policy of investment pricing and reserving are highly sensitive to inflation trends. While general CPI measures of inflation impacts insurance...