ISLAMABAD, Dec 31: Ministry of Finance has opposed the proposal of the Ministry of Commerce to set up a separate regulatory authority for insurance industry as being unfeasible , harmful to national interest and inconsistent with international best practices, according to a reliable source.

At present, the Securities and Exchange Commission of Pakistan (SECP), like the rest of the non-bank financial sector, is the regulator of insurance industry as provided in the Insurance Ordinance 2000.

In its comments on the proposal before the Federal Cabinet, the Finance Ministry recalled that the proposal to set up the Pakistan Insurance Regulators Authority (PIRA) had been mooted even earlier and was discarded.

The decision has followed extensive consultations with stakeholders including the Ministry of Commerce, the industry and the Asian Development Bank with whose loan corporate sector reforms were undertaken in Pakistan. The idea was fraught with cost and capacity constraints, they had agreed.

It was also in conflict with the principles of good governance, which required separation of regulator from the owners (Commerce Ministry). Instead of establishing a separate entity, the responsibility was, therefore, transferred to the Securities and Exchange Commission of Pakistan.

The insurance industry is an important source of contractual savings and supply of long-term funds to the capital market, as well as of social security and risk diversification. Its sound and orderly development was thus an integral component of the financial sector growth and development, it was stressed.

Without naming the Ministry of Commerce, Finance Ministry recalled that the previous regulation of insurance industry was weak, fragmented and lacked proper management.

Moreover, the capital adequacy requirements for general insurance companies were inadequate; solvency margin was too low, the private sector insurance industry was fragmented, inefficient and lacked professionalism as well as ethical standards.

Rebutting the argument that the role of SECP as regulator of insurance industry was provisional, the Finance Ministry argued that the amendments in the SECP Act and enactment of Insurance Ordinance were of substantive nature.

One of the important considerations in these decisions was the fact that the SECP has developed a formidable capacity in regulation of NBFCs. Indeed, within a short period of time, it already plays an effective role in regulating the insurance sector.

The Finance Ministry also contested the argument that SECP was concerned only with the interests of shareholders. On the otherhand, it was regulating the entire corporate sector, capital markets, insurance, investment banks, leasing, modarabas and all NBFCs and thus protecting the interests of shareholders, depositors/investors as well as insurance policyholders.

There was, moreover, a logical nexus between the corporate sector, capital markets and NBFCs with the insurance industry, it argued. Under the NBFC Rules, SECP regulates these companies while at the same time protecting the depositors' interests.

The insurance industry, it is further argued, is similar in nature to that of other financial sector components, demanding comparable regulations, i.e. investment of funds, accounting policies, capital and solvency regulations, etc.

Besides, all insurance companies are also subject to the provisions of Companies Ordinance 1984. It is much more practicable for a single regulatory body to administer both the laws than a separate entity to enforce the insurance law alone. This would raise a host of coordination problems, the Finance Ministry cautioned.

The Securities and Exchange Commission of Pakistan, as the regulator of insurance industry, is particularly relevant in the context of WTO and in a much better position to deal with the new foreign insurance companies entering into Pakistani market as compared to any other body like Pakistan Insurance Regulators Authority.