December 24, 2001	Monday	Shawwal 8, 1422

Notwithstanding a conceptional approval by the finance minister a fortnight ago, the proposed Rs750 million “Reinsurance Pool” would not be operational for at least some time. Reason: The commerce ministry has not gone through it so far and wanted “to examine it in detail”.

As a result, Pakistani companies will have to pay even higher cost for insurance cover when their existing treaties with foreign reinsurers expire on December 31, 2001.

The post-September 11 events in the United States have resulted in exclusion of terrorism risk, steep increase in rates and reduced capacity. And the foreign underwriters have informed that they would not provide beyond this date the reinsurance cover to Pakistani insurance companies in case of loss caused on account of terrorist activities, riots and strikes. During the year 2000, market fire premium amounted to Rs3.286 billion. Due to government level efforts even if some of the foreign reinsurers agree to renew insurance cover the terms would be much stricter and commission rates lower. The commerce minister Abdul Razak Dawood did not attend the meeting in which the report of the task force on insurance was examined and got the conceptional approval accorded by the finance minister Shaukat Aziz. The four-member task force constituted by SECP comprising Kamal Afsar, M. A. Lodhi, Moin M. Fudda and Basit Hassan Syed was asked to primarily look into problems arising out of reluctance from the international reinsurers to extend their treaties beyond December 31, 2001.

The task force noted that reinsurance market had already started hardening even before the events of September 11. But then the premium rates soared very high, about 4 to 5 times for the insurance in Pakistan, with much higher deductibles and limited scope of cover. The team agreed that these challenges would be met only through long term solutions by enhancing the retention and reinsurance capacities in the domestic insurance sector.

A number of measures suggested by the task force and some already taken in hand by the SECP indicate that insurance sector should undergo large scale restructuring through mergers, acquisitions and closures in view of emerging market conditions and increased capital and solvency requirements.Under the Insurance Ordinance 2000 promulgated last year and now being implemented by the Securities and Exchange Commission of Pakistan (SECP) required a strong, financially viable and professionally run insurance sector in the country.

Professionals in the public and private sector insurance companies believed that weak companies were already under the threat of being wiped out under the Insurance Ordinance but the recent developments in the post-September 11 situation have accelerated this process. The task force in its recent called for long term solutions through enhanced retention and reinsurance capacities of the domestic insurance sector.

The report said: “With the increased capital and solvency requirements laid down for the companies, bigger and stronger companies will remain in the market. Mergers and acquisitions will take place and the companies which will not be able to fulfil the requirements, will cease to operate”. Hence, the SECP directed local insurance companies to raise their paid up capital to a minimum of Rs50 million by December 31, 2002 and to Rs80 million by 2004. Mandatory credit rating of the local insurance companies is another step towards that end.

Of the total around 52 insurance companies, about 35 insurance companies were currently maintaining paid up capital of below Rs50 million. About 10 per cent companies in the local insurance industry are underwriting over 80 per cent of total business in Pakistan. Under Insurance Ordinance 2000 promulgated last year, the paid up capital is required to be raised upto Rs200 million in a phased manner. The move was part of a detailed action plan in collaboration with Insurance Association of Pakistan (IAP) and Institute of Chartered Accountants of Pakistan (ICAP) to facilitate these 35 companies to comply with statutory provisions. This would ensure maximum insurance payments to genuine insurers and reduce complaints received from the general public against non-payment of claims by the insurance companies. It was observed that insurance companies were usually unwilling for claim payouts mainly because of their weak financial position despite mushroom growth of new companies.

Due to government level efforts even if some of them agreed to renew insurance cover like previous years the terms would be much stricter and commission rates lower. The commerce minister Abdul Razak Dawood did not attend the meeting in which the report of the task force on insurance was examined and got the conceptional approval accorded by the finance minister Shaukat Aziz. The task force recommended the government should contribute to the Reinsurance Pool an initial amount of Rs500 million. The Asian Development Bank (ADB) is expected to provide $50 to 100 million which would increase this amount further. Another Rs250 million would be contributed to the pool by the insurance companies out of the premium they earn on account of the insurance cover provided for terrorism, riot strike damage (RSD) etc.

The membership of the pool would be open to all companies. The pool would be attached with Pakistan Reinsurance Company Limited (PRCL) and National Insurance Company Limited (NICL) and would be supervised by a technical committee comprising professionals from public and private sector. The task force proposed to expand the scope of pool to include Riot Strike Damage (RSD) cover. Civil Common Cover will be excluded. For the present IAP’s tariff endorsement wording of RSD (Riot Strike Damage), MD (Malicious Damage) and explosion and terrorism may be accepted. Presently, premium rate for RSD is 1.20 per mille, MD 0.24 per mille, Explosion 0.10 mille and terrorism 0.20 mille. The premium rates applicable to risks ceded to the pool would be determined by the technical to the pool. The rate will vary on the basis of relevant factors of the risk i.e occupancy, construction and size etc. The rates determined by the committee would be revised from time to time as deemed necessary. The cession to the pool would be made quarterly by all members on quota share or surplus basis including the deductibles to be agreed. A suitable commission would be allowed to the reinsured to meet the procurement costs and management expenses.

The maximum amount of loss payable through the pool would be 25 per cent of sum insured or Rs100 million whichever is less. 50 per cent of this amount will be provided by the Pool and the remaining 50 per cent to be arranged under the “excess of loss (XOL)”, protection arrangement made by the Pool with international reinsurers.

The pool would seek XOL protection or stop loss arrangement from specialized reinsurers failing which the government would come forward with such protection. The proposed XOL would be as follows: (all figures in million rupees)

Market NICL PRCL Total Sum Insured (Fire) 584750 125750 106575 817075 Fire Premium @2.5 Per million 1462 314 266 2042

Terrorism Sum Insured (25 per cent of fire 146188 31437 26644 204219 Terrorism @ 0.174 Percent 254 55 46 355

Estimated Premium To Pool 191 41 42 274 75% 75% 90%

E.P.I. Rs274 Priority.Deductible per risk/per event Rs50

CAT. EXCESS OF LOSS TREATY Layer 1 Rs200 million XS Rs50 million Layer 2 Rs250 million XS Rs250 million Six Reinstatements (first two free and the remaining 4 at 100 per cent additional premium pro rata as to the amount only)

In case XOL was not available at affordable prices, the pool would arrange through international reinsurers a Stop Loss arrangement up to an additional Rs500 million.

Quarterly reports and accounts of the pool on annual basis will be submitted to the SECP. Based on results, recommendations will be made to SECP for disbursement of surplus or meeting of deficit. For this purpose, the present capital base of PRCL, the only reinsurance company in Pakistan should be increased through capitalization of reserves. Additionally, leading insurance companies in Pakistan including NICL would be offered to join in. Leading foreign insurers and the World Bank, ADB and IFC are being approached to pool in the equity of PRCL.

A new reinsurance company with the participation of the leading local and foreign insurance companies, the World Bank, ADB and IFC would be established as a medium term solution to similar risks in future. It could be opened to the general public for subscription. The commission on its part would now be concentrating on complaints received from the general public against non-payment of claims by the insurance companies.

Officials of commerce ministry believe that it may not be advisable to put all the eggs in one basket i.e. Pakistan Reinsurance Company Limited (PRCL). It also wanted to see whether a technical committee as proposed by the task force would be sufficient or a new authority should be put in place to regulate these operations and whether or not establishment of new reinsurance company was a practical answer. Some in the SECP however believed that commerce ministry has not yet realized that insurance sector was no more in its administrative jurisdiction. The IAP is already in touch with foreign insurers to stick to the definition of terrorism as “the use of violence for political ends and includes any use of violence for the purpose of putting the public or any section of the public in fear” with some adjustments. A workable solution it believed could be to exclude the term “target high risk occupations (THRO)” risks for cover against terrorism from an automatic proportional treaty and reinsurers may develop and agree with each reinsured on commercial basis in respect of THRO, an arrangement by limiting their exposure to terrorism risk. They have also asked lead insurers like Munich Re and Swiss Re to come forward with a helping hand to enable Pakistan’s industry to continue writing of terrorism cover. The response is still awaited. (ends)