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Creation of reinsurance pool is a good idea but it would need proper implementation

Dec 31, 2001 - Jan 06 , 2002

Pakistani insurance industry will not be celebrating happy new-year this year as foreign reinsurers will no more be issuing the terrorism cover from January 1. Industry insiders blame the insurance itself for providing the reinsurers to use the post-September 11 scenario as a pretext to stop issuing the terrorism cover.

A highly placed source in the industry, who asked PAGE not to mention his name, attributed the decision of the reinsurers on their growth in size for Pakistani market. The growth has made them look at Pakistani market as too small, and thus less attractive. They also feel that the presence of large number of players out for the same business in a market, where insurance expense is seen more as an obligation than necessity, has resulted in massive undercutting in all classes of business. They feel that the rampant unethical practice heavily undermines their interest.

"The industry managers who turn a blind eye to the unethical practice failed to realize that international reinsurers would ultimately be disappointed. The events of September, 11 gave them the opportunity they were looking for to dictate their own terms. They used the pretext to increase the rates, tighten the capacities, reduce the covers and lower the rates of commission rates which they pay to local insurance companies for giving the business. And most of all, they have refused to provide terrorism cover beginning next week which is 'just not available.'

This means that the reinsurance costs for the local companies would go up while they would be able to get lesser covers at lower capacities and receive commissions way below the cost of unwriting it. Needless to say, companies facing cash flow problems would be worst hit by the diktat of the foreign reinsurers. It would not be surprising if a number of insurance companies go out of business altogether.

"The situation poses many opportunities for exploitation and the people buying insurance, particular Fire, are better advised to ask the insurer the proof of reinsurance on the basis on which the terrorism cover is underwritten. This has been happening all around but in the present situation it makes more sense to be safe than sorry."

Talking about the institution of the Rs 750 million reinsurance pool proposed by the seven-member Task Force proposed by securities Exchange Commission (SECP) the source expressed many apprehensions. "There is a concern among many insurance companies that the maximum amount of payable loss guaranteed by the pool, 25 per cent of the sum insured or Rs 100 million whichever is less, is insufficient. However, there are many others who say that the pool should at least be initiated. This is actually blessing in disguise for the insurance industry but bad news for insurees. The former has been having a joyride due to unhealthy practices which should not have existed in the first place. For the insurees the honeymoon of paying lower insurance prices is also over but for many honest clients it mean an undeserving increase in insurance costs."

M.I. Ansari, a member of the Central Committee of the Insurance Association of Pakistan (IAP) told PAGE that terrorism cover is just not available, particularly to the smaller companies. "While the foreign reinsurers have seen it fit to push their terms they have also reduced rates of commission to the local insurance companies. Till five years ago it was possible for the individual insurance companies to receive 40-50 per cent commission on the business reinsured but this year it has dropped by 5-15 per cent from company to company. Some of the smaller companies have received as low a commission as 20 per cent this year. It costs the insurance business between 40-50 per cent of the premium to underwrite a business and the reduced commission renders it all uneconomical.

"This leaves only a number of options for the insurance companies, none of them good. They can either close down their operations, resort to fraudulent practices such as false claims, refuse to provide terrorism cover or provide it from their own resources which can be as risky as gambling. I am afraid that most of the companies would opt for the last drastic option."

Ansari said that the rampant undercutting is not going to evaporate over night. "It would continue till the few companies would go out of the business, either voluntarily due to their inability to meet the financial challenges or forced by the SECP due to their inability to meet the conditions required."

Calling the pool idea as good he said that it would need proper implementation. "It leaves the entire responsibility on the insurance companies which is actually good as the scheme encourages self-reliance. Though I have been against the fixed compulsory reinsurance with the state-owned Pakistan Insurance Corporation, I have always wished that the maximum reinsurance business should be retained within the country inspite of going to the foreign reinsurers. Both the PIC and the industry itself are responsible for failing to do anything to increase the retention within the country to avoid the diktat of the foreign reinsurers."