Feb 8 - 14, 2010

With the rise in bomb blasts and escalating risks to lives and properties of people living in Pakistan, is the need of risk sharing not increasing? Perhaps, it is with no precedence. Insurance that is a method of sharing risks of people is becoming important day by day for individuals as well for businesses to lessen the economic hardships arising out of any mishap, which looms large over the head of every Pakistani amid the rising incidences of acts of terrorism as well as hooliganism.

The latter is becoming common with people appearing all of a sudden from nowhere minutes following bomb blasts and engaging in loot and plunders unabatedly of private properties. Two such events have surfaced in Karachi at different points of time. One occurred last month after the bomb blast on a religious procession, and second two years back following assassination of former premier Benazir Bhutto. The commonality in two incidents was of looting and damaging of private properties.

The need of insurance of both lives and properties is increasing as such incidents are spreading nationwide and leaving horrifying impacts on the economic and social activities of central cities of the country. Terrorism is emerging an international phenomenon posing a threat to nations directly or indirectly involved in the war against terrorists. Countries under immediate danger of terrorism have formulated laws to transfer risk of their citizens to insurance agencies. For example, former US president George W. Bush had inculcated changes in the insurance law by signing terrorism risk insurance programme reauthorization Act 2007 ensuring the terrorism risk coverage of high-risk areas. Present Obama administration planned to shift more responsibilities of insuring against terror attacks to insurers proposing higher deductibles and copayments.

Terrorism risk insurance is not a new concept in Pakistan too. However, its exclusivity was not maintained to differentiate it from other categories of general insurance. It is often commercially unviable for insurance agency to underwrite terrorism risk because of difficulty of estimating the losses beforehand. Terrorism insurance covers damages caused by disaster, nuclear attacks, bomb blasts, etc. Only few big insurance companies underwrite terrorism risk insurance. They are also not active in giving comprehensive coverage to all risks involved. Needless to mention, insurers are wary of their ability to oblige unlimited liabilities in case of terror attacks.

Experts of insurance sector see root of constrained operation in ineffective regulatory environment. They have been demanding of well-built regulatory framework to meet the growing demands of policyholders for terrorism insurance. There are certain problems in reinsurance of terrorism insurance that hamstring participation of all insurers in covering such risks, an expert said. Insurance companies plunged in to the financial tragedies when they found exclusion of terrorism reinsurance after riots of 27 December, which generated historically giant claims from policyholders. Left alone by reinsurance, insurers went on to say bluntly that they would not defray such huge payments again.

Insurance sector of Pakistan is underdeveloped because of the low penetration of insurance services in the society. One estimate says insurance penetration will touch one percent in 2010. Insurance premiums are not over one percent of gross development product. There are four insurance products broadly offered by non-life insurance companies in Pakistan: property insurance (fire and engineering), marine and aviation insurance, motor insurance, miscellaneous insurance. Gross premium of motor insurance line is highest amongst four. There is no separate category of terrorism insurance, rather losses are covered in comprehensive insurance or fire and engineering.

Under high risk of terror attacks, some countries are broadening scope of terrorism insurance so that private insurers can halve the burden of damage losses on government's treasury, considering it a backstop to government's financial healing of terror-struck entities. Terrorists' strikes are playing havocs with lives and private properties in Pakistan, one after another attacking busy markets in some major cities. While no compensation is enough to bring back lost lives, yet loss of properties is recoverable. This recovery is important to prevent economic hardships of deceased families stemming from manmade disasters. The bomb blast in Karachi one month ago triggered riots in the trade arteries of the city causing billion of rupees losses of commercial properties. Mainly, small and large wholesale and retail shops were gutted and ransacked. Most of these shops were not insured. Certainly, insurance coverage of shops affected with arson and looting would have limited the burden on national kitty of over Rs3 billion compensation that is being disbursed to affectees. It is likely that businesspersons are thinking of this dimension of insurance as pre-emptive investment to insulate against future loses. As has been said, a significant number of people are reluctant to get insurance cover for their businesses or families on religious grounds. Even introduction of Takaful that is insurance based on injunctions of Islam has not made people think other way round because of economic reasons. They especially several businesspersons while avoiding conventional coverage compare Sharia-compliant insurance services with conventional substitutes in terms of tariff competitiveness and find its tariff rates high. Takaful is not suitable for us since its premium is high, observed a businessperson having information of negligible insurance coverage of shops damaged by looting and fire. A very small number of shops were insured, below one percent, he told this scribe following the incident last month. Takaful rate of premium is too high to attract customers, said he.

Insurance of properties and lives is need of the time. Government should help stakeholders of insurance sector to reach a framework that can ensure widespread insurance coverage, especially of people besieged with potential risk of terrorism.