KARACHI: The State Bank of Pakistan (SBP) has allowed resident insurance companies to issue dollar-denominated insurance policies on a notional basis to meet the condition of foreign lenders and foreign projects undertaken in Pakistan.

The SBP issued on Wednesday a circular addressing all banks and financial institutions to follow the instructions regarding new insurance policies.

“It has now been decided to allow resident insurance companies, rated at least as ‘A’ by any approved rating agency of Pakistan, to issue dollar-denominated insurance policies on a notional basis to meet the condition of foreign lenders for foreign currency loans or for the projects undertaken in Pakistan as part of bilateral agreements between the government of Pakistan and a foreign country or multilateral agency,” said the SBP circular.

Analysts believe the resident insurance companies will benefit from the new policy because only foreign insurances companies were insuring foreign projects in Pakistan.

The circular said the insurance company intending to issue a dollar-denominated insurance policy will submit an application for prior approval to the director of the SBP’s Exchange Policy Department through an authorised dealer along with an explicit recommendation letter from the Securities and Exchange Commission of Pakistan (SECP) for each proposal.

As per the circular, insurance companies will receive premiums from applicants only in equivalent rupees.

The payment of claim to the resident company will be made in equivalent rupees, wherever applicable, and the insurance company will have the option to get reinsurance from any foreign reinsurer up to 99 per cent of the sum assured.

The SBP said the payment of reinsurance premium by the insurance company will be subject to observance of all applicable rules and regulations defined under Chapter 15 of the Foreign Exchange Manual and those issued from time to time.

The reinsurance claims to the extent of outstanding liability related to foreign loans may be paid directly to the foreign lenders by reinsurers. The remaining amount of reinsurance claim will, however, be repatriated into Pakistan and paid to the claimant in equivalent rupees.

The insurance policy document issued by the resident insurance company to the client concerned must disclose above-mentioned clauses, said the SBP.

Published in Dawn, November 2nd, 2017