ISLAMABAD, Dec 18: The Asian Development Bank (ADB) has approved a grant of $150,000 to assist Pakistan in designing a ‘Political Risk Guarantee Facility’ (PRGF) and implementing mechanisms to ensure continued availability of comprehensive insurance cover for investments following the terrorist events Sept 11, 2001.

The PRGF has been included in the proposed ADB-assisted Financial (Non-bank) Markets and Governance (FMG) Programme, which is included in ADB’s lending portfolio of 2002 for Pakistan.

According to a local ADB office, the Sept 11 events have accelerated the hardening of insurance and re-insurance markets worldwide and caused a major reduction in, and in some cases complete disappearance of, international insurance and re-insurance capacity for property, causality and other forms of insurance in developing countries.

The difficulty is exacerbated by the low capitalisation of insurers in many of these countries, which magnifies their dependence on the international re-insurance markets. Without re-insurance cover, primary insurance companies are unable to offer comprehensive insurance for risks in the developing countries, or can do so only very sparingly.

Specifically, airlines and infrastructure project sponsors are now finding it difficult to obtain or renew insurance cover for a variety of political and other risks. Cover for terrorism and sabotage risks are among the hardest to get.

In Pakistan, the exposed investments include the national airline, and a number of vital existing infrastructure projects currently supported by multilateral and bilateral institutions.

In addition, affordable investment capital from both domestic and foreign sources for the new high-profile strategic projects and the privatization of certain government owned enterprises in Pakistan may be in jeopardy unless primary insurers are willing and capable of offering comprehensive and reasonably priced insurance.

It is this background that the government has requested the ADB to assist it to address key industry concerns and ensure continued access by Pakistani companies to comprehensive insurance and re-insurance, and a revolving PRGF to cover political violence risks, including terrorism, with government counter guarantee has been incorporated in the design of the proposed FMG plan.

Explaining objectives of the technical assistance, M. Ali Shah, Country Director ADB, stated that in assisting the design of the PRGF facility, the assistance would seek to ensure that the political violence risks that were counter guaranteed by the government were clearly spelled out in line with industry definitions and market needed to avoid ambiguity in case of a claim event.

He said the assistance would also propose adequate structures for risk layering to ensure that only risk that could not be offset in the market were covered under the PRGF and ultimately underwritten by the government.

The assistance would also clarify the contractual arrangements for the PRG Facility and the individual PRGs to be issued under the facility in line with industry definitions and market needs, taking into account the particularities of Pakistan’s insurance and re-insurance industry.

The Ministry of Finance will be the executing agency for the assistance.