INSURANCE ORDINANCE 2000

By SARAH PERVAIZ
Aug 12 - 18, 2002

The insurance sector that was being regulated under Insurance Act, 1938, witnessed a major change in the regulatory regime as the Insurance Act was replaced by the Insurance Ordinance, 2000, promulgated in August 2000. The Insurance Ordinance aims to protect the interest of the policyholders and to develop the insurance market by raising the standards (particularly the share capital base) and strengthening the solvency of the insure. The new legislature also provides for redress of the policyholders grievances arising out of non-settlement of claims by insurers.

The new Insurance Law i.e. Insurance Ordinance, 2000 promulgated in August, 2000, as a result of insurance sector reforms undertaken in collaboration with the Asian Development Bank empowered the SEC to regulate insurance business in the country. The new law, has been introduced to regulate the business of the insurance industry, with the prime objective of ensuring the protection of the interest of the policyholders.

In this connection, an important area is the complaints received from the general public in the Commission against non-payment of claims by the some insurance companies. Generally, on investigations, it is observed that company's unwillingness or inability to pay the claim has been due to lack of sufficient/sound reinsurance arrangements. In some cases even the treaties obtained by some companies were found fake issued by the re-insurers who do not exist. Incidentally these insurance companies are causing distortions in the insurance market by accepting insurance business at a very low rates of premium with their intention not to pay the claim as and when loss is caused to the insurance policyholders.

In order to watch and protect the interest of the insured/policyholders in the country, efforts are made by the SEC to enhance the capacity of the local insurance industry to honour the claims made on it. The SEC, therefore, issued a directive to all insurance companies operating in Pakistan to make sound reinsurance arrangements, through international re-insurers, atleast rated "A" class, by the reputable international rating agencies. The commission is conscious of the fact that without credible reinsurance arrangements an insurance company's first line of defense, reinsurance is incomplete on a risk coverage mechanism.

Under the new Insurance Law, insurance companies are required to furnish necessary details in respect of the reinsurance arrangements made by them to the Commission annually. These arrangements are other than the compulsory reinsurance arrangements which all general insurance companies are required to make, up to 15% and in addition to this, 35% of their business under "surplus offer" to Pakistan Reinsurance Company Limited (PRCL). These compulsory cessions/offers are in any case to be made to the PRCL, which does not require any rating by the international rating agencies and therefore not fall within the latest directive issued by the SEC.

Out of 48 insurance companies operating in Pakistan, 27 have fulfilled the requirement. These companies have succeeded in making reinsurance arrangements with international re-insurers who are rated "A" and above. Almost 87% of the insurance business in the country is with these companies and the Commission feels that these can largely and satisfactorily serve the interest of the clients in Pakistan. The remaining 21 insurance companies, which are mostly smaller have failed to obtain/make reinsurance arrangements with the re-insurers who are neither of sound financial standing nor have they been awarded any rating by the international rating agencies.

As an alternate, the Commission decided to ask these insurance companies to get their Claims Paying Ability/ Financial Strength rated by recognized rating agencies operating in the country. Accordingly, these companies were directed to comply with this requirement.

So far, 17 (out of 21) companies have taken steps to comply with the SEC's directive, whereas 4 insurance companies have done nothing in compliance with the commission directive. This confirm that majority of the insurance companies confirm the position that their CPA Rating was really required and the commission was fully justified/empowered to ask them to so.