Conduct of insurance businesses: Draft law introduces risk-based capital, solvency requirements

ISLAMABAD: The draft Insurance Ordinance (Amendment) Bill, 2020 has introduced risk-based capital and solvency requirements for the conduct of insurance businesses; Rs 500,000 penalty for not providing information; compliance with the requirements of international jurisdictions and also issued a variety of new definitions for the insurance sector including the concept of "authorised surveying officer"; "index based insurance" or parametric insurance"; "insurable interest";"InsurTech"; "other insurance intermediaries"; "reinsurance broker"; "retakaful" and macro-prudential supervision.

The Securities and Exchange Commission of Pakistan (SECP) has drafted "state of the art law" for the insurance sector, introducing the responsibilities of internal actuary and appointed actuary for life insurance business and non-life insurance business.

The draft Insurance Ordinance (Amendment) Bill, 2020 has proposed some major amendments in the Insurance Ordinance, 2000.

Under the new Ordinance, any person who is directed by the Commission to provide information under section 61 of this Ordinance and who willfully does not provide such information or conceals a part of the information, within the specified time shall be punishable by the Commission with fine which may extend to Rs 500,000.

The Insurance Ordinance (Amendment) Bill, 2020 has introduced a new concept of compliance with the requirements of international jurisdictions. Where an insurer undertakes insurance business outside Pakistan, it shall ensure compliance with the laws applicable to it under that jurisdiction. From the commencement date of this section, every insurer shall prior to undertaking insurance business in any jurisdiction outside Pakistan, apply before the Commission for its approval and the application so made shall be made in such manner and form as may be specified and shall be accompanied by such documents as may be specified. Every insurer to which this section applies shall disclose compliance in the statements and returns furnished by it.

The Court, the Commission, or other officer trying an offence for a default in compliance with any provisions or requirements of this Ordinance may, at any time during the pendency of the trial or at the time of passing final order, direct, without prejudice to any liability, any person, insurance intermediary, office, auditor, actuary or employee of the insurer in respect of which the default has been committed to comply with the said provisions or requirements within such time as may be specified in the order, the draft Ordinance said.

The SECP has also imposed prohibition to act as a direct insurance broker and reinsurance broker in a single risk. It shall be unlawful for a licenced insurance broker to perform the role as a direct insurance broker and as a reinsurance broker in placement of a single account or risk. It shall also be unlawful for a licenced reinsurance broker to perform the role as a direct insurance broker and as a reinsurance broker in placement of a single account or risk, Insurance Ordinance (Amendment) Bill, 2020 said.

For refund of deposits, the Insurance Ordinance (Amendment) Bill, 2020 has specified that the State Bank of Pakistan shall forward the request of the insurer to the Commission seeking its consent for return of such portion of the deposit as is in excess of any amount which the insurer is required under this Ordinance to keep deposited and such consent shall not be unreasonably withheld.

The SECP shall have the power to specify a percentage or a range of percentages for investment exposure of the non-life insurer, in different asset classes, which shall also be specified by the Commission.

The SECP has also introduced the concept of approval for acquisition or transfer. Any proposed transaction for the acquisition of a shareholding of more than ten percent (10%), or such other percentage as may be specified by the Commission, in an insurance company, or, in the case of a non-life insurer, of the whole or any part exceeding ten percent, or such other percentage as may be specified by the Commission, (measured by either the premium income or the sum of the liabilities for unearned premium, outstanding claims, incurred but not reported claim reserves and the premium deficiency reserve proposed to be acquired) of the business located in Pakistan of an insurer (whether in one or a number of related transactions and whether at the same or different times) shall not proceed unless, on application by the acquirer, approval is given by the Commission.

The SECP has also specified power to specify manner of presentation of policy benefits. The Commission may specify through regulations the form and manner of presentation of prospective benefits of the life insurance investment products which may include, among other things, the benchmarks or indices with which, the illustration of benefits, cash values or surrender values may be required to be linked.

The Insurance Ordinance (Amendment) Bill, 2020 has also introduced procedure for the premium to be refunded in full, if policy is found to be mis sold. Where a policyholder has intimated, within thirteen months after the issuance of policy, to the insurer that the policy was missold and the insurer subsequently determines that the policy was missold, then 100% of the premium paid by the policyholder will be returned to him and entire commission paid by the insurer to the agent will be clawed back. (2) Upon receipt of intimation from a policyholder regarding misselling, an insurer shall be responsible to investigate that the policy was actually missold within 30 days from the date of receipt of such intimation.

Under the revised Ordinance, the Commission shall have the power to direct the insurers to become part of insurance repository/ information sharing arrangement including cyber security information sharing platforms and may specify any requirements regarding the conduct and manner of operation of such arrangement or platforms and ancillary matters thereto.

Every insurance company, insurer, microinsurers, insurance intermediaries and other related entities registered or licensed under this Ordinance shall endeavour to prevent the commission of offences of money laundering as provided in Anti Money Laundering Act, 2010 and counter financing of terrorism laws for the time being in force with respect affairs of its business and share take adequate measures for this purposes. Whoever fails to comply with requirements of this section shall be liable to punishment as provided in the Anti Money Laundering Act, 2010 and any other law for the time being in force relating to counter financing of terrorism.

The Commission shall have the power to undertake macro-prudential supervision of entities engaged in providing insurance services in the country and shall establish systems and processes that are capable to monitor the vulnerability of the insurance sector with respect to economic and financial shocks. The Macro-prudential supervision means a supervisory framework governed through supervisory processes whereby individual insurers are supervised through information collected by identification, monitoring and analysis of macro-prudential factors such as economic, demographic, social, financial developments and other environmental factors that may impact insurers and insurance markets, SECP said.

Copyright Business Recorder, 2020