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Cover Story

Private sector should also be allowed to arrest foreign exchange outflow

By AMANULLAH BASHAR
Sep 27 - Oct 03, 1999

Due to non-existence of the private sector in re-insurance business, the foreign exchange outflow on account of reinsurance comes to billions of dollars since the inception of Pakistan.

Since the vacuum is never tolerated by the nature, the gap is bridged by the foreign reinsurance companies taking away atleast 20 per cent of the total premium paid for the reinsurance cover.

Currently, the Pakistan Insurance Corporation (PIC) is the sole public sector organization operating in the re-insurance business. Under the existing insurance act, PIC has a compulsory re-insurance quota of 20 per cent which is mandatory while another 35 per cent business is also offered to PIC. The PIC has the discretion to accept this offer in accordance to its convenience. Around 40-50 per cent surplus business is however grabbed by the foreign companies.

According to informed sources, the IMF has provided guidelines to the government for framing a fresh Insurance Act to replace the existing one. It is feared that the proposed act would adversely affect not only he reinsurance sector but the current size of the government revenue generated through this business. The proposed act would provide freedom to the multinational companies to pass on the reinsurance business to foreign companies of their choice. This would consequently deprive the government of Federal Insurance Fee, 3 per cent Central Excise Duty plus other taxes on profits.

M.I. Ansari, the Managing Director of AGRO General Insurance Company, while giving his expert opinion on the proposed act, told PAGE that in order to plug the draining out of the foreign exchange on account of reinsurance, private sector in collaboration with foreign partners be allowed to enter the reinsurance business in Pakistan. The business operation of PIC be based purely on commercial system instead of operating under the cover of quota system which creates a monopoly status for PIC. Ansari was of the view that the proposed insurance act should not be allowed to disturb the existing act.

Following are the salient features of both the existing and proposed insurance acts for the benefit of the readers:

EXISTING ACT 1938

Provisions relating to reinsurance and insurances abroad.

No insurer shall reinsure outside Pakistan any insurance business or any part thereof underwritten by him in Pakistan which is in excess of its treaty re-insurance arrangement unless a certificate has been obtained from the Controller to the effect that such excess cannot be placed within Pakistan: Provided that nothing contained in this sub-section shall be deemed to prohibit reinsurance by the Pakistan Insurance Corporation (PIC).

A re-insurance arrangement shall not be deemed to be a treaty reinsurance arrangement if such arrangement operates in a casual manner and in determining whether a particular re-insurance arrangement is a treaty reinsurance arrangement or not, the decision of the Controller of Insurance shall be final.

For the purposes of this sub-section a reinsurance arrangement in respect of life insurance business entered into by an insurer domiciled elsewhere than Pakistan with his head office shall be deemed to be treaty reinsurance arrangement to the extent determined by the Controller of Insurance.

No person shall insure outside Pakistan any risk or any part thereof in respect of any property or interests in Pakistan unless a certificate has been obtained from the Controller to the effect that the risk in question cannot be insured in Pakistan.

PROPOSED ACT. 1999

Under the proposed act, an insurer shall affect and shall at all times maintain such reinsurance arrangements as are, in the opinion of the directors (or such other person or body responsible for conducting the management and business of the insurers), formed on reasonable ground, having regard to the exposures of the insurer in respect of individual contracts accepted and in respect of aggregate losses arising out of individual events, adequate to ensure continuing compliance by the insurer with the provisions of this Act relating to solvency.

Every insurer shall submit, in the prescribed manner, to Pakistan Insurance Regulatory Authority (PIRA) not less than one month prior to the coming into effect or as soon as practicable thereafter, of any treaty re-insurance arrangement entered into by the insurer as cedant, features of that reinsurance arrangement in respect of his business in Pakistan and such other information about the re-insurance treaty as may be prescribed.

PIRA may, at any time and after giving the insurer an opportunity of being heard, for reasons to be recorded in writing, direct the insurer to make such modifications in his re-insurance arrangements as PIRA may specify. For the purpose of this section "reinsurance" includes "retrocession".