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The failure to establish a re-insurance system is taking heavy toll

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.