THE Pakistan Reinsurance Company Limited has managed to dodge the chief regulator in its attempts to coax the company into writing insurance policies covering ‘terrorism’. The lack of enthusiasm on the part of the firm, the only reinsurance company in the country, is, however, understandable. The risks are enormous.

The Securities and Exchange Commission of Pakistan (SECP) has been pursuing an alternative. For over three years now, the chief regulator has been urging insurance companies to set up a ‘Terrorism Insurance Pool,’ possibly to spread risk thin among all insurance companies.

The regulator’s concern is that foreign reinsurance companies are filling up the vacuum created by the lack of local reinsurers, consequently whisking away over Rs2 billion in reinsurance premiums. Several persons associated with the industry named ‘Hannover Re’, the third largest reinsurer in the world, as taking the major slice of the pie.

“Due to the high-risk, high-reward nature of the business and the constant uncertainty, foreign reinsurers keep ‘loading’ on premiums, making it unfeasible for all but the few corporate giants to get their businesses underwritten,” said the head of a private insurance company. He added that Lloyd’s of London is the major reinsurance underwriter in the global market.

Due to absence of large-scale global terrorism-related incidents prior to 9/11, terrorism coverage was thought to be of little consequence, and was offered as part of the general ‘all risk’ property insurance.

But the events of 9/11 shook the insurance industry, which was crushed under losses that stood at the tall order of approximately $40 billion, the highest in the history of the industry. That explains the reluctance of both insurance companies to cover terrorism-related losses and reinsurers to underwrite the incalculable sum it could have to pay in claims.

Mohammad Asif Arif, Commissioner (Insurance) at SECP, told Dawn that the claims in Pakistan in respect of ‘terrorism’ cover was no more than 5pc. Yet, to allay fears of insurance companies, the Terrorism Insurance Pool (TIP) is the best option.

He affirmed that the previous chairperson of the Pakistan Reinsurance Company, Ms Rukhsana Saleem, was receptive to the idea, but after her departure, things barely moved.

And the Terrorism Insurance Pool is not a home-grown theory. In the aftermath of 9/11, TIPs were set up in many countries around the world, such as the UK, US, France, Germany, India, Nepal and Sri Lanka etc.

Under the TIP, the premium for covering terrorism risks are transferred to a major corpus of fund set up especially for the purpose. With such obvious advantages, what prevents the creation of a TIP in Pakistan?

The chief executive officer of one of the big four insurance companies, who asked not to be named, explained that the matter had been a subject of debate at several meetings of the Insurance Association of Pakistan (IAP), the umbrella organisation of insurance companies.

“One of the daunting questions raised was: Who would manage the pool or the fund,” he said, and added that insurance companies were reluctant to offer that role to the government as the custodian of last resort.

According to industry sources, at the moment, about a dozen companies offer terrorism-related policies, and the reinsurance premium was ceded to foreign underwriters. The regulator believes that the TIP would greatly enhance coverage.

Several years ago, Swiss Re, the leading global reinsurer, had also suggested setting up the Pakistan Terror Pool (PTP) to which it proposed “all terrorism risks of all exposed lines are ceded”. The Swiss Re proposal emphasised the need to “ensure that all stakeholders, i.e. insured, insurer, reinsurer and government participate in the pooled risk”.

While the TIP still remains a distant dream, some insurance companies do offer cover for ‘kidnapping and ransom’, ‘riots and civil commotion,’ and even for ‘terrorism’ losses — but only to financially healthy individuals and corporate clients.

Many insurance companies agree to cover such risks for corporates as package deals, if the clients also cede the less risky business of marine, fire, motor and general insurance.

Veterans would recall that several years ago, when theft of vehicles was the bane of business for insurance companies, they would cover ‘motor’ losses only if the companies ceded other business as well. The premiums and claims ensured also differ for different clients.

“The maximum sum of claims is a well-guarded secret, especially in case of kidnapping and ransom, for obvious reasons,” says a person related to the industry. When pressed further, he figured out that it could, on average, amount to Rs20 million.