The failure to establish a
re-insurance system is taking heavy toll
By SYED M.
May 20 -June 02, 2002
Insurance companies in Pakistan are heavily
dependent on foreign re-insurers to minimize their risks in case of
any eventuality. In the post-September-11 world this heavy dependence,
made necessary due primarily to the failure to establish a
re-insurance company in the country, is not only taking a heavy toll
on the trade and industry in terms of increased cost of shipping but
has also eroded the sense of security as foreign insurers are no more
including Terrorism cover, which used to be a part and parcel of the
re-insurance treaties previously.
The imposition of war risk cover in October last
year has pushed the shipment cost of all import and export bound
cargoes the cost of which is absorbed by the industry and trade. This
in turn pushes the cost of all sea and airborne freights as it also
pushes the value of the freight, the basis for calculating the marine
and hull insurance. Since the beginning of this year, the foreign
re-insurers have refused to provide Terrorism cover to the local
insurance companies 'at any price' thus making all cargoes vulnerable.
It may be mentioned that the levy of war risk cover
on all imports and exports to and from the country, both air and sea,
was increased from 2.75 per cent to 5 per cent, an increase of 82 per
cent. In addition, the hull insurance, insurance on the body of the
ship was also increased anywhere between 20-50 per cent.
Since the shipping lines buy the hull insurance,
they increased the freight rates which ultimately increased the costs
of all imports and exports entering in or shipped out of the country.
As insurance is an inbuilt cost of all imports as well exports this
meant that landed costs of all imports and exports to and from the
country were, and still remain, increased the first resulting in
increased prices locally and the second rendering the exports a bit
incompetitive in the international markets. However, a strong
performance of the rupee against the dollar has helped keep the
situation under control.
The war risk cover was levied in October last year
at the rate of $ 185 for a 20-foot container and $ 370 for a 40-foot
container on all import and export cargoes from and to Pakistan. This,
in turn, pushed the landed costs of all imports entering the country
and all exports shipped from it.
The imposition of the heavy war risk surcharge by
the London-based Joint War Committee of Underwriters (JWCU) which
still keeps on putting a heavy pressure on the national economy was
also discriminatory to Pakistan. It was imposed on all ships servicing
six countries; Pakistan, Sri Lanka, UAE, Syria, Yemen and Egypt but
only Pakistan and Sri Lanka were subjected to the highest rate of
increase while India was excluded from it altogether.
While the foreign re-insurers have stopped issuing
the terrorism cover to the local insurance companies early this year,
observers say that their decision is based more on the feeling that
Pakistani market is small to offer them any incentives rather than the
pretext of September 11 that they used to stop providing the said
cover. There are others who feel that the pretext gave foreign
re-insurers the opportunity to dictate their own terms to such as to
increase the rates, tighten the capacities, reduce the covers and
lower the rates of commission to the local companies. The refusal to
provide terrorism cover was just an icing on the cake.
In other words, the gain of the foreign reinsurance
companies come from the weakening of the local insurance industry as
while the former can dictate their terms and conditions with regard to
rates the local companies would have to make do with reduction in
number of covers at lower capacities and reduced commissions.
The situation has the potential to undermine the
very foundation of the Pakistani insurance industry. Talking to PAGE,
the member of the Central Committee of the Insurance Association of
Pakistan (IAP), M.I. Ansari, said that not only the terrorism cover is
no more available but the foreign re-insurers have also reduced rates
of commission. "Five years ago a local insurance company,
depending on its size, could expect to receive between 40-50 per cent
commission which dropped by 5-15 per cent last year. Many companies
were paid as low a commission as 20 per cent last year which was not
enough to cover even the underwriting costs which costs between 40-50
per cent of the premium."
Meanwhile the foreign shipping companies neglected
Pakistan's demand to stop charging the war risk surcharge from May 18.
The government had given a 15-day deadline to the local agents of the
foreign shipping lines on the 3rd of this month to withdraw the
surcharge but the agents said that they were unable to do anything
about it as they did not receive any replies from their principals
despite informing them about the government's demand.