EFFECTS OF 11TH SEPTEMBER 2001 ON INSURANCE INDUSTRY
It is inevitable to strengthen reinsurance capability and reduce dependence on foreign reinsurers
By ATIQUE AHMED CHISTI
May 06 -12, 2002
The terrorist attack in America on September 11, 2001 is the one of its kind in the human history. This has affected all the communities not only in USA but also has presented the world with new challenges.
The insurance industry is one of the most affected sectors following the incident. Invaluable loss of lives and destruction of properties in the terrorist attacks have forced to review terms and conditions for transaction of insurance business. The world's largest reinsurers have refused providing terrorism cover and reduced commission rates causing difficulties for the insurance companies to renew their reinsurance treaties. Shipping companies have suspended their operations for the area under war, increased freight and imposed charges of war risk premium. Exporters have been facing cancellation of orders. As a result a big dent has appeared in the marine insurance business. The world economy has considerably slowdown, shrinking business to other lines of insurance.
The incident has created multidimensional problems for the insurance industry. This has given rise to the biggest and most complex legal case. Insurers have declared record levels of losses. Smaller underwriters have been forced away from the market due to insufficient funds to pay losses. Some insurers have withdrawn the offers made for new contracts before the attacks. Increasing premium rates has become the order of the day.
One of the adverse effects of the event on the insurance industry is that the terrorist attacks have made terrorism uninsurable. The international reinsurers have excluded cover of loss caused by terrorist activities. This situation has forced governments and associations all over the world to be active for creation of pool and arrangement of funds enabling the insurance industry to overcome the growing difficulties.
Pakistan insurance industry is facing the same difficulties. The changes following l1th September have put the industry under tremendous hardship. The local insurance companies are unable to make reinsurance arrangements due to withdrawal of terrorism cover. They are afraid of being isolated by the international reinsurance market.
Realizing gravity of the situation the government has extended help to the insurance industry. Both private and public sectors have started joint struggle to cope with the situation. The task force, constituted by Securities and Exchange Commission of Pakistan earlier in the first meeting, has also submitted its report to set up a reinsurance pool with Rs. 500 million contribution from the government Rs. 250 million from the insurance industry. It has also been proposed to approach the World Bank, Asian Development Bank and IFC for funding in the pool.
The reinsurance pool was expected to start functioning from 1st January 2002. Thus the pool would provide reinsurance cover to insurance companies for terrorism, riot, strike, and civil commotion. Now a considerable time has lapsed since the task force was formed. The date set for the operation of reinsurance pool has also passed. But no final decision has been taken as yet. Whatever the factors are responsible for delay in finalizing the matter of reinsurance pool, but there is something to be noted that terrorism is a threat to all. It can take place anywhere and anytime. The present situation already alarming can be more harmful than ever for the insurance industry. The difficulties being faced by the industry is due to the crises falling worldwide. This seems to have far reaching effects on the insurance industry. It is also worth noting that even before the incident of 11th September, the international reinsurance market has been witnessing restrictions imposed by the reinsurers in setting terms and low commission rates on the acceptance of some risks.
In view of the continuous hardening situation, it is inevitable to strengthen reinsurance capability in the country and reduce dependence on foreign reinsurers. The time has come to take steps towards concrete actions by setting up the reinsurance pool. In this connection the task force has already submitted its report. Now the need is to make a quick decision by removing the obstacles standing in the way of setting up the reinsurance pool. Initiating towards the reinsurance pool will lead the insurance industry to self-reliance. This will not only support the insurance industry to overcome the difficulties but will also stop the flow of foreign exchange out of the country.