KARACHI, Nov 10: All the private insurance companies are in a state of quandary after receiving an instruction from the Securities and Exchange Commission of Pakistan (SECP) to seek reinsurance cover from those reinsurers that are “of sound financial standing having good track record, duly rated ‘A‘ class by the reputable rating agencies such as Standard and Poor’s.”

Almost all the insurance operators are more than convinced that the only national reinsurer—Pakistan Insurance Corporation (PIC)—does not qualify to be ‘A’ rated on any criterion. Under the law, the private insurance companies are supposed to provide 15 per cent of their insurance business to the PIC. Of the remaining amount, the company can retain 10 per cent and may offer 35 per cent to the PIC of the residual insurance business.

Overall, the PIC enjoys a mandatory right to receive an offer of 42 per cent of the original insurance business.

“But PIC is a B category reinsurer,” a leader of the insurance business informed Dawn by telephone. He expects that the SECP would have to amend its original instructions to accommodate PIC by providing room for B rated reinsurers.

Insurance operators explained that the SECP has given this instruction of seeking reinsurance cover after noting that many private insurance companies deliberately skip the legal obligation to retain the bulk of business.

“But this is fraught with frightening consequences,” a senior executive explained who quoted example of insurance of a Lahore market September last. It was insured at Rs200 million when building and other assets were worth Rs1.5 billion plus. The assets were under valued and the insurance company did not seek any reinsurance cover as it pinned all hopes on the management of the market.

End result was that shopkeepers of the market suffered heavy losses and were not able to get adequate compensation. The insurance company got virtually bankrupt. There are many other insurance companies that prefer to skip the legal obligations and are exposed to unseen hazards.

These insurance companies have now been advised to inform the SECP by January 15 next year of their reinsurance arrangements.

“For this purpose, you shall furnish certified photo copies of all correspondences pertaining to treaties or the documentary evidence which establishes that your company have made adequate reinsurance arrangements in respect of the risks to be covered by the company whether in or outside Pakistan,” the SECP circular instructs.

The SECP has taken up the operational regulatory job of the insurance business hardly a year ago from the Commerce Ministry. Insurance remained an obligation of the Commerce Ministry for last more than 50 years. Under a capital market reforms loan from the Asian Development Bank and the World Bank, a new insurance ordinance was framed and enforced last year.

All regulatory instructions are being issued within the framework of the new insurance ordinance 2000 including that of asking the insurance companies to seek reinsurance cover from ‘A’ rated reinsurers.

While PIC does not fall in ‘A’ rated categories, the foreign reinsurers have already informed of terminating all risk cover of Pakistani insurance business from January next as according to their perception Pakistan falls in war zone.

A meeting of the Central Executive Committee of the Insurance Association of Pakistan is being held next Wednesday to consider the situation arising out of post-September 11 and October 7 situation and the steps being taken by the SECP to regulate insurance business.