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Emerging reinsurance opportunities in the real estate sector

When insurance progressed considerably, insurance companies found themselves committed to huge sums having been insured. They realized that in case of a catastrophic 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. For example, suppose an insurance company insures a factory for one hundred million rupees. In case of total loss, it will be beyond the capacity of the insurance company to pay this loss. The insurance company feels that it can retain only one or half percent. i.e. one million or five hundred thousand rupees on its own account; so, it cedes the rest of the surplus by way of reinsurance. The re-insurers also do not retain all the business which they receive from direct insurance companies but reinsure with other re-insurers. Thus, through a criss-cross of reinsurance, the risk is spread over many companies operating in several countries, and in case of a catastrophic loss there is no danger of any one going bankrupt. In case of a claim, all re-insurers pay according to their shares. Thus, reinsurance is the backbone of insurance.

In Pakistan, Pakistan Reinsurance Company is the sole reinsurer but it is too conservative and lethargic to respond to market’s needs. Certain dynamic companies wish to expand their business base in Pakistan but they find the insurance policy framework stifling. Another issue is that many Pakistani companies are local just in name. They are actually functioning as front offices for global players, who are reluctant to open their own offices in Pakistan. Under the arrangement, a local company fulfils legal requirements and books business locally but transfers premium funds to the foreign patron in return for 5% of the proceeds.

 

Many conventional reinsurance lines are under extreme pricing pressure, prompting reinsurers to look to new classes to find profitable, diversifying business. One such line is Real Estate Investment Trust (REIT). Real Estate Investment Trust (REITs) is a mutual fund that invests in a pool of properties/mortgages bundled together and offered as a security in the form of unit investment trusts. These units can then be traded on stock markets. Each unit in a REIT represents a proportionate fraction of ownership in each of the underlying properties/mortgages providing its holders a simple way to invest in real estate without the cost or illiquidity associated with owning a property directly. There are two main types of REITs: equity REITs and mortgage REITs (mREITs). Equity REITs invest in real estate by acquiring properties and developing or renting them. Mortgage REITs invest in the debt required to finance real estate, including mortgage loans and Mortgage Backed Securities (MBS).

Islamic re-insurance

The Re-Takaful (Islamic reinsurance) sector has proven its growth with increasing capacity and well-rated securities. The sustained and improving double-digit growth in the Takaful market, along with the strong take-up of Islamic financing in both the retail and commercial grounds, provides opportunities for Re-Takaful operators. However, no one can safely claim that Re-Takaful have enough capacity to support Takaful growth across all lines of business. The industry has not had a smooth ride as it struggles to step out of the shadows of their reinsurance counterparts. Unfortunately, the fact is that not all Takaful companies have Re-Takaful as their default option, with management still preferring to deal with the conventional reinsurers that they have had long-standing relationships with.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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