Domestic risk retention capacity: SECP recommends establishment of national reinsurance pool

ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) has strongly recommended establishment of a national reinsurance pool to create domestic risk retention capacity.

According to a new report of the SECP on reinsurance performance review, the feasibility of establishing a national reinsurance pool should be explored. A national pool would encourage higher retention levels, enabling local insurers to retain more premiums and manage larger risks collaboratively.

This would reduce reliance on external reinsurers, keeping more funds within the country, and improving the overall financial strength of the local insurance industry. Such a pool could also serve as a buffer during catastrophic events, distributing risk more evenly across participating insurers.

The decision by the Competition Commission of Pakistan to open up our reinsurance market to private insurance companies is also a positive development and in-line with the SECP’s proposed amendments to Insurance Ordinance, 2000 in this regard, the SECP report said.

The SECP has also recommended a more open local reinsurance market to encourage competitive pricing, better terms, and enhanced coverage while reducing dependence on foreign reinsurers.

The report said that expanding and liberalising the local reinsurance market is essential for fostering competition and innovation. A more open market encourages competitive pricing, better terms, and enhanced coverage while reducing dependence on foreign reinsurers.

A robust domestic reinsurance market also fosters local expertise and capacity, ultimately strengthening the entire insurance ecosystem in Pakistan.

Regulatory bodies should actively promote the establishment of new reinsurance companies in the local market. The market has tremendous potential for reinsurance, especially for retakaful arrangements, which would allow diversification of risk-bearing capacities, improve competition, provide local insurers with more reinsurance, reduce financial strain on the economy because of repatriation of forex reserves, and create a more dynamic insurance landscape, the report maintained.

Sufficient capitalization enables companies to absorb larger risks, negotiate more favorable reinsurance contracts, and withstand market fluctuations. Moreover, strong capital reserves improve the company’s standing with rating agencies and reinsurers, enhancing credibility and negotiating power.

In this regard, the SECP policy team has prepared a concept paper of increasing the paidup capital of life and non-life companies to increase it up to Rs 3,000 million and Rs 2,000 million respectively by 2028. This is in line with SECP’s 5-year strategic plan “Journey to an Insured Pakistan,” the SECP report added.

Copyright Business Recorder, 2024