KARACHI, Dec 15: The setting up of a Rs750 million reinsurance pool to provide terrorism cover is proving to be a non-starter as big players of the insurance industry are reported to have expressed their strong reservations on this idea and may stay out of it.

Insurance companies want the government to define terrorism through legislation as there is a view that the burden of proof of terrorism lies on the government.

A number of insurance companies have also pointed out the discrepancies in the computation of premium worked out in the report of the seven-member Task Force that has proposed the institution of a Rs750 million reinsurance pool. “The data used for calculation of these premia rates is totally incorrect,” an insurance operator pointed out.

The Task Force was formed in mid-October after insurance companies reported that their foreign reinsurers served them with a notice to cease providing them terrorism cover on their insurance business from January 1 next.

For the reasons known to the decision makers only, the report of the Task Force was not made available to the insurance industry. One of the members of the Task Force Mr Basit Hassan Syed informed a meeting of the Insurance Association of Pakistan (IAP) early this month that he was advised to treat the report confidential and hence it could not be circulated.

A big majority of the insurance industry operators learnt through newspapers only about the Task Force report and the proposal of setting up of a reinsurance pool.

The IAP had convened a meeting of the top executives of all the member insurance companies early this month in which 22 companies participated but 20 companies stayed away. “It was an affront to deny us the report that concerned our business,” a senior executive of one of the insurance company that stayed away from the IAP meeting remarked.

Earlier, the Commerce Minister Abdul Razak Dawood, too, had stayed away from a high-level meeting chaired by the Finance Minister Shaukat Aziz that gave a conceptual approval to the proposal of setting up of Rs750 million reinsurance pool fund.

According to the Task Force proposal the government will provide Rs500 million to create this fund. For the remaining Rs250 million, the pool depends on the member insurance companies. Membership is optional but once an insurance company chooses to participate, it has been made obligatory to place all relevant business into the pool.

The pool guarantees 25 per cent of the sum insured as the maximum amount of payable loss or Rs100 million whichever is less. Fifty per cent of this amount will be provided by the pool and 50 per cent would be arranged under excess of loss protection arrangements to be made by the pool managers with international reinsurers.

Big insurance operators consider maximum promised loss compensation amount of Rs100 million to be too small to tempt them into participating in the pool and place at its disposal all the relevant business.

But a decisive factor is the confidence of a few the 10 big players of the insurance industry, who share among themselves over 80 per cent of country’s insurance business, of getting a renewal for terrorism cover from their foreign reinsurance partners before the end of this month.

Big insurance companies have made it known to the Task Force as well as it was stated in the IAP meeting early this month that their experience with foreign reinsurers is that initially they (foreign reinsurers) act tough but eventually at the time of renewal they become accommodative.

Foreign reinsurers know that total capital base of the Pakistani insurance companies is hardly 60 million dollars that include equity base of less than 37 million dollars and about 23 million dollars of reserves. They know the malpractice in the industry particularly in the small companies. The Insurance Ordinance 2000 has unleashed a cut throat competition and business is being obtained at a very low premium rate.

In their relationship with Pakistani companies they found in 1999 total business was worth Rs787.6 million. Out of this Rs432.6 million was received back as claims compensation and Rs343 million as commission. Hardly Rs12 million went to the foreign reinsurers.

Two major Pakistani insurance companies provided Rs68 million and Rs46 million to the foreign reinsurers while many small companies received back the amounts as claims.

Foreign reinsurers are staying away from Pakistan only after learning that most of the companies are now vulnerable. This is a fact recognised by the Task Force which wants mergers and acquisitions of the insurance companies. “Mergers of whom,” an insurance operator said. How can two bankrupt and technically unsound companies can make a a viable concern?