The creation of reinsurance pool

As a matter of fact, insurance is incomplete without reinsurance cover

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.