BREAKING THE MONOPOLY IN REINSURANCE
TARIQ AHMED SAEEDI (firstname.lastname@example.org)
June 30 - July 06, 2008
Given the fact that reinsurance operations in Pakistan have yet to catch agreeable speed transference of significant premiums from local insurance companies to abroad is clearly implicit. As a whole the outlook of insurance industry of the country is not indicting towards positive prospects due to many causative factors foremost including society's blitheness about prospective happenings. Whereas the reasons behind snail-paced reinsurance sector lies under the weak reinsurance capital foundation and the dejected tendency of local insures to prioritize local reinsurance over foreign ones.
Most of the general and life insurance companies operating in the country form major portion of their reinsurance deals with foreign reinsurers because of the volume of risks involved while too they are advised to have financial protection from the sole state-run reinsurer-Pakistan Reinsurance Company-of the country. The oneness of reinsurance operation is also shifting risk security amount of local insurers across the border. The monopoly exercised by the government reinsurance company is indeed depriving insurers of availing locally diversified and equally complicated reinsurance options and services.
Reinsurance is basically an insurance of insurer. It insures the insurance policies issued by the insurance company. Like insurance cover insulates policyholder from untoward financial uncertainty reinsurance deal between insurer and reinsurer gives fiscal sustenance to insurer to bear insurance liability.
The reinsurance has importance both for insurance company and policyholder as they mutually get out of financial crises thanks to third party back-up. More so for insurance company that is legally obliged to get reinsurance policy cover. Reinsurance provides a kind of risk sharing opportunity for the insurers and helps establish a pool of huge amount of money that can be utilized for supporting national economic activities as well.
Since the capital base of indigenous reinsurance organization is not strong enough to fulfil large requirement of facultative insurance, local insurance companies preferably make partnership with foreign reinsurers to meet large corporate claims associated with marine, group life, and general insurances. And, for it insurers need to pay agreed premiums.
The structure of overall insurance industry of Pakistan is too feeble to allow circulation of large-sized capital in the system. So is of insurance company, which avoids to independently taking responsibility of claims with large liability and accosts to cooperative assistance for risks sharing in such type of facultative insurances. It is a common global practice to go into facultative insurance arrangement provided the enormity of liability. The cooperative liability arrangement can be made among peer insurers or between insurers or reinsures. Reinsurance is however provided only by reinsurance company. World over reinsurance business has evolved into a highest revenue generator within banking and finance industry, catching in too money in lieu of premiums from Pakistan-based insurance clients.
In such a backdrop, a deficit of $74 million instigated by reinsurance services does not leave one wondering. The figures complied for the period of July-April 2008 depicted that for facultative reinsurance life, marine, and other non-life reinsurance services $6.9 million, $15.3 million, and $76.2 million-a cumulative sum of $98.4 million-were transferred to different reinsurance companies abroad while for similar services an aggregated $24.3 million was received.
It is worthwhile to note the financial structure of PRCL, which has more foreign clients than local. It claims to provide risk management services to 700 foreign and 59 local insurance companies. PRCL provides mainly two reinsurance services of treaty and facultative to insurance companies. Treaty services consist of quota share, surplus, excess of loss, stop loss.
While a declining trend was recorded in its gross premium figure and net profits according to its financial statement covering last quarter results of FY08 its service provision zone, known as Northern Zone Lahore, exhibited relatively better penetration of reinsurance in Lahore as the company recovered good premiums from the area. The results depicted that the gross premium for the period was Rs.1,063 million as opposed to Rs.1,205 million in the corresponding period of last fiscal year, whereas net premium before unearned premium reserve was Rs.508 million and post net premium Rs.484 million. In contrast, during the same period under comparison net premium before unearned premium reserve and net premium after premium reserve stood at Rs.375 million and Rs.401 million respectively.
However, the zone office has developed a better treaty relationships with 24 insurance companies based in the area and earned the company Rs.46.181 million premiums. Its financial statements for the quarter ended on April 21, 2008 showed treaty business returns received from only thirty five insurance companies. The net claims, net commission and management expenses have accumulated to Rs.434 million for the current quarter as compared to Rs.348 million for the corresponding quarter of 2007.
The reinsurance company has few other sources of revenue generation. It has been managing National Insurance Fund, National Coinsurance Scheme, War Risk Insurance, and Export Credit Guarantee Scheme. During the quarter underlined the income from investment including rental and others was to the tune of Rs.170 million as compared to Rs.130 million in the corresponding period of last year. In addition to this, PRCL's net profit before tax and after tax for the first quarter of the outgoing fiscal year was Rs.213 million and Rs.166 million respectively as compared to earlier Rs.179 million and Rs.141 million.
The structure is telltale of insipid performance of reinsurance sector of Pakistan. Despite enjoying a monopoly in the sector and having heavy foreign clientele list, it is bizarre, why PRCL still has low turnovers than a local insurance company? Reinsurance sector should be capable enough to attract attention of enterprising insurance industry so that accumulation of premiums in it sounds logical. To start up monopoly is to be broken.