When insurance accelerate considerably, insurance companies find themselves-committed to huge sums having been insured. They realized that in case of a huge loss, they would go bankrupt. Therefore, the need of reinsurance was felt very keenly, and it came into existence and specialist reinsurance companies were established. Every insurance company now has to arrange for reinsurance before starting business and taking on big commitments. In case of total loss, it will be beyond the capacity of the insurance company to pay this loss.
The re-insurers also do not retain all the business which they receive from direct insurance companies but reinsure with other re-insurers. Thus the risk is spread over a large number of companies operating in many countries, and in case of a huge loss there is no danger of any one going bankrupt. In case of a claim, all re-insurers pay according to their shares.
Reinsurance is the mainstay of insurance. In Pakistan, insurance companies operate under the Insurance Act, 1938, and before getting a licence to commence business or obtain renewal of licence, they have to satisfy the Controller of Insurance now Executive of Insurance in Securities and Exchange Commission of Pakistan, regarding their reinsurance arrangements.
More than three decades ago five native insurance companies could not get their licences renewed because their reinsurance arrangements were not adequate. This requirement is imposed by the Government of Pakistan to protect the interest of policy holders.
Pakistan is losing 95 percent of insurance premium funds to reinsurance entities overseas. Non-life insurance in Pakistan business is the lowest in the region and is declining. The economy is unwarranted by the insurance industry.
Prominent insurers’ points out that the ‘Draft Insurance Bill 2016’ aims on best practices. It ignores the core issue of the low insurance penetration ratio and foreign exchange flow from the sector because of the constrained base of the country’s reinsurance sector. The only reinsurer, Pakistan Reinsurance Company, is very much traditional and sluggish to respond to the market’s call.
According to a global insurance information service, AXCO, the non-life retention ratio in Pakistan has declined from 55 percent in 2010 to 49 percent in 2014 against 81 percent in India, 57 percent in Bangladesh, 59 percent in Indonesia and 73 percent in Turkey.
Many Pakistani companies are actually functioning as forefront offices for global players, who are unwilling to open their own offices in Pakistan. Some insurance left while others are thinking relocating their business to Dubai, Singapore or elsewhere.
The government is offering liberal incentives to lure new foreign investors in this sector. The Securities and Exchange Commission of Pakistan (SECP) defended its role. It indirectly confirms the huge outflow of foreign exchange for reinsurance purposes every year. Lately the Securities and Exchange Commission of Pakistan (SECP) has approved the draft Insurance Bill 2017, which has been sent to the Ministry of Finance for its submission to the Ministry of Commerce to initiate the necessary legislative process
Salient proposed reforms include introduction of dedicated micro-insurers, enabling provision for introduction of risk-based supervision framework (risk-based capital and risk-based solvency margin), provisions for regulation of takaful and re-takaful, regulation of local and foreign reinsurance business for enhancement of local capacity, regulation of reinsurance brokers, flexibility for introduction of new intermediaries, introduction of concept of web aggregators, insurance repository, requirement of “appointed actuary” and product filing for non-life insurance.
The proposed bill aims to create friendly regulatory environment to encourage market development, strengthen the regulatory framework to ensure alignment with the Insurance Core Principles (ICP) of the International Association of Insurance Supervisors (IAIS), address entity specific and systemic risks by phased shift towards risk-based supervision regime and to address the regulatory gaps in existing law.
Pakistan Reinsurance Corporation Limited is retained within the country. The non-life sector is growing consistently and there is only one reinsurer to absorb the reinsurance risk. In the absence of adequate reinsurance risk absorption capacity in Pakistan, insurers are compelled to obtain reinsurance abroad.
Reinsurance is a global business, the insurers in Pakistan are also willing to, and are capable of, accepting reinsurance risks from abroad. The SECP has taken up the matter with the State Bank of Pakistan (SBP) so as to allow insurers to issue dollar denominated policies. This will enable insurers to accept inward facultative reinsurance from abroad. The SBP had been restricting such policies due to concerns related to foreign exchange reserves.
Leading insurance companies in Pakistan have stressed the need to address anomalies and strengthen the reinsurance segment. They felt the need more reinsurance companies to start operating.