As a matter of fact, insurance is incomplete without
reinsurance cover
From SHAMIM AHMED
RIZVI
Islamabad
Dec 17 - 30, 2001
The Finance Minister Mr. Shaukat Aziz has supported
the proposal to create a Rs. 750 million reinsurance pool to offer the
much needed cover to Pakistani companies against terrorist related risks
as well as to cover riots and other civil disturbances. The proposal
formed the main recommendation of the report of the task force which was
earlier appointed by the Securities and Exchange Commission of Pakistan
(SEC), to draw up a workable plan of action, in case the international
reinsurers stopped providing this cover.
The Finance Minister expressed his supportive view in
the meeting held in his office to discuss the report of the task force.
The meeting which had been convened at the request of SEC however
remained inconclusive as the Commerce Minister could not attend. The
Finance Minister decided that the final meeting would now be held after
the finalization of the technical details of the proposal in which
Government of Pakistan was expected to contribute Rs. 500 million.
The task force on Insurance, in its report to the
Commission has recommended the creation of a Reinsurance Pool with the
initial grant of a minimum of Rs. 500 million from the government to
meet the reinsurance needs of the Pakistan insurance industry, in case
the international reinsurers stopped providing cover for risk related to
terrorism, civil commotion and riots, from January 01, 2002, when the
existing agreements fall due for renewal or extension.
In order to overcome the difficulties faced by the
insurance industry (after the September 11, events in the United States)
on account of the international reinsurers' decision not to provide
reinsurance cover to the insurance companies in case of loss/losses,
caused on account of terrorist activities, riots and strikes, SEC
constituted a Committee/Task Force to draw up a "plan of
action" to mitigate the impact of the move by international
reinsurers/recommend measures to address problems of the insurance
industry. The Task Force held a number of meetings and discussed the
insurance scenario in detail and finally submitted the report to the SEC
Chairman on Thursday.
Reinsurance cover is a necessity for insurers all
over the world. As a matter of fact, insurance is incomplete without
reinsurance cover. It is a kind of insurance of the insurer. Even the
financially most sound company cannot afford to take the entire risk
cover single-handedly. Normally, 50 to 70 per cent risk is covered by
the reinsurers.
The task force headed by Mr. Kamal Asfar, Chairman,
Pakistan Reinsurance Company was of the view that most likely the
international reinsurance companies, despite their reduced capacity,
will review the contract with the Pakistani reinsurance companies in
view of long standing business relations with their Pakistani business
partners. The terms, however, will be much harsher, which Pakistani
companies may find difficult to digest. At the same time, however, the
task force felt it necessary to prepare and keep an alternate plan of
action ready which could be implemented immediately, in case the
international reinsurance companies failed to provide the desired cover.
"The Committee, therefore, feels that Government
of Pakistan should come to the help of the insurance industry as
terrorism is a man-made catastrophe and the quantum of risk cannot be
calculated — essentially it is a "political risk". The
immediate problem for the Pakistan insurance industry is the likely
exclusion of Terrorism & Riot Strike Damage (RSD) cover by the
foreign reinsurers. The Task Force has extensively gone into various
possibilities to overcome the problem. In this connection, the Committee
examined Pool Re arrangement of the UK in some depth and considered if
an arrangement on the same lines is suitable to Pakistan insurance
industry's need at the present time. The Task Force notes that
"Pool Reinsurance Co. Ltd. is a "mutual" reinsurance
company with a large membership having adequate financial resources to
underwrite the Terrorism Risk. The Pakistan insurance industry has less
than 10 companies underwriting over 80% of total business. A mutual
reinsurance company with such a small number of members pooling to the
resources is therefore not a practicable solution. The Task Force does
not therefore recommend a "Mutual Reinsurance Company"
arrangement at this stage.
After considering all aspects and having detail
deliberations, the Task Force is .of the view that a "Reinsurance
Pool" arrangement is the answer. Basic outlines of a Reinsurance
Pool to provide the Terrorism & Riot Strike Damage (RSD) Cover to
insurance companies operating in Pakistan are as follows:
i) An amount of Rs. 500 million to be
initially contributed to the Pool by Government of Pakistan. This could
be increased if Asian Development Bank or any other agency come forward
to join in;
ii) The insurance companies will also
contribute Rs. 250 million to the Pool out of the premium they earn on
account of the insurance cover provided for terrorism, RSD, etc.;
iii) The membership of the Pool will be open
to all companies;
iv) The Pool/Fund will be attached with PRCL/NICL.
It will be supervised by a Technical Committee, mainly consisting of
professionals from public/private sectors; and
v) The maximum amount of loss payable through
the pool would be 25% of sum insured or Rs. 100 million whichever is
less. 50% of this amount will be provided by the Pool and the remaining
50% to be arranged under the "excess of loss", protection
arrangement made by the Pool with international reinsurers.
The Task Force/Committee is of the view that beside
making available the terrorism cover in the country it is also necessary
to increase the domestic retention and reinsurance capacities, in order
to reduce dependence on foreign reinsurers. In this connection, the
Committee feels that the following steps are required to be taken :
a) The present capital base of PRCL, the only
reinsurance company in Pakistan should be increased through
capitalization of reserves;
b) Additionally, leading insurance companies
in Pakistan including NICL may be offered to join in. Leading foreign
reinsurers and World Bank, ADB, and IFC may also be approached to pool
in the equity of PRCL; and
c) Formation of a new reinsurance company with
the participation of the aforementioned companies/institutions can also
provide a solution.
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