KARACHI, July 24: Five out of 12 insurance companies have entered into agreement with either of the two rating companies — Pacra and JCVR — in Pakistan for getting their claims paying ability and financial strength assessed in compliance of the directive of the Securities and Exchange Commission of Pakistan (SECP).

“We are waiting for a response from the remaining seven companies till Friday (July 26) when the deadline set by the SECP will expire,” a well-placed source in Islamabad based SECP informed Dawn by telephone on Wednesday.

The source said the SECP as a regulator was all set to take appropriate action against the defaulting companies. He recalled that the preamble of the Insurance Ordinance 2000 sets two objectives. One is to create an enabling environment of insurance market and the second is to protect the interest of policyholders.

The punitive action of the SECP against 12 insurance companies stem from the second objective spelt out in the preamble of the Insurance Ordinance, he asserted. These companies include five in Karachi, five in Lahore and two in Islamabad.

At least two Lahore based insurance companies are approaching provincial High Court to seek redressal against the show-cause notices issued to them this month, insurance business sources say.

The SECP issued show-cause notices to a dozen insurance companies early this month over their inability to get their claims paid and financial strength assessed by a rating company.

Under the Insurance Ordinance, the SECP as a regulator is authorized to receive the annual accounts of the insurance companies and scrutinize and assess the solvency of every company. In case, the solvency of any insurance company is found doubtful, the regulator has authority to cancel business licence and order the company to suspend insurance business.

According to insurance operators, the SECP circumvented this operational clause of the Ordinance and instead asked the insurance companies to seek reinsurance treaties with ‘A’ Category reinsurers and also to get their claims paid and financial strength assessed by the rating company.

Under the ordinance, all general insurance companies are bound to raise their capital base to a minimum of Rs50 million by end December this year, and to Rs80 million by end 2004.

“Now that hardly 25 to 26 weeks have left for expiry of the year 2002, we preferred to go for capital adequacy by way of mergers and injection of fresh capital or to suspend the business altogether rather than getting ourselves rated,” a senior executive of an insurance company said.

“The point is well taken,” responded the well-placed source in the SECP, who reminded this correspondent of the objective of the Insurance Ordinance to protect the interest of the policyholders.

A list of 39 insurance companies shows that 16 companies have a capital base lower than Rs50 million and only 13 have paid up capital of Rs50 million and above. A few companies have a capital base as low as Rs5 million.

“A recently incorporated foreign insurance company has started business with only Rs20 million capital base,” an executive of a private Pakistani company said, who pointed out that it was a glaring violation of the Insurance Ordinance, which clearly stipulates that fresh incorporation of an insurance company could be done with a minimum capital base of Rs50 million.

Sources in the SECP said that they had received many complaints from the policyholders against the insurance companies for failing to make payment of insurance claims. “In such an event, the SECP should come out with details of the complaint,” an insurance operator retorted, who demanded that instead of putting entire insurance industry in spot the regulator should tell general public who is the complainant and the details of the claim and the name of company which is refusing to make payment.

The Insurance Association of Pakistan (IAP) is holding its meeting on July 31 at Lahore to take up a nine point agenda. One of the point is insurance companies tussle with the SECP.