ICIEC re-insurance deals: Govt decides to exempt Exim Bank from PPRA rules

ISLAMABAD: The government has decided to exempt Exim Bank from applicability of PPRA Rules for signing of the re-insurance arrangements with Islamic Corporation for the Insurance of Investments and Export Credit (ICIEC), well informed sources told Business Recorder.

Exim Bank of Pakistan, in its letter on January 13, 2023, requested PPRA Authority to guide them regarding applicability of PPRA Rules on re-insurance arrangements and if the same are applicable on re-insurance arrangements then exemption may be granted from Public Procurement Rules, 2004.

EXIM Bank’s mandate is to provide financing to support the growth of exports from Pakistan, undertake import substitution projects and provide trade risk mitigation products and services. To this end Exim Bank will be introducing, for the first time in Pakistan, Export Credit Insurance (ECI) products for exporters and banks with a focus on SME clients.

ECI is an indemnity contract between an insurance company and a business (exporter) whereas the insurer undertakes to pay the exporter in case the insured international buyer does not pay an amount due to the exporter for the good exported.

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Therefore, ECI provides businesses the confidence to extend credit to their customers, thereby providing exporters more trade opportunities. ECI is available internationally but not to Pakistani exporters, creating a disadvantage for them. EXIM Bank will provide the indemnification to create level playing field for Pakistani exporters while bearing the risks.

In line with international risk management practices, Exim Bank will reinsure part of its ECI portfolio risk. Exim Bank of Pakistan stated that reinsurance is a form of indemnity and reinsurance contract; therefore, it would be similar in nature to a contract of indemnity. Insurance companies transfer insurance risk to reinsurance companies to limit risk exposure and improve their financial statements.

The premium charged by the insurance company is the “risk premium” the company has calculated based on actuarial data. Reinsurance is a form of normal business transaction of an insurance company whereby keeping in view the peculiarity of every transaction, risk mitigation tools are deployed.

Exim approached credible international organizations in reinsurance business including Swiss-re, Munich-re, Credendo and Islamic Corporation for the insurance of investments and Exports Credit (ICIEC). In response the organizations provided a consistent reply indicating inability to offer Exim Bank any re-insurance support; however, there is a positive response from ICIEC (a subsidiary of Islamic Development Group).

According to Finance Division, in case of non-availability of re-insurance from the commercial market, it seems prudent for Exim to materialize the only available option of ICIEC. Besides, the fact that reinsurance will protect the balance sheet of Exim Bank and help to utilize Exim’s limited equity on other trade financing activities. Engagement with ICIEC will also be useful in knowledge transfer and technical assistance.

The sources said, in this regard multiple meetings were held at Secretary Finance Office and Director General M&E PPRA Office to explore other possibilities for signing of contract. Exim Bank of Pakistan stated that they have explored all available options for re-insurance arrangements. These options included the possibility of signing an agreement between Government of Pakistan and Multilateral Aid partner (ICIEC - an entity of IsDB Group, as Pakistan is a member state of ISDB), reinsurance arrangements with Re-Insurance Company Limited (Pak-Re) and decision of PRRA Board on the proposed re-insurance arrangements.

EXIM Bank of Pakistan also referred the matter to Liaquat Merchant Associates (LMA), one of the top law firms in Pakistan, which has opined that entering into reinsurance arrangement(s) by Exim Bank with reinsurers would not be classified as ‘public procurement’ as defined in PPRA.

The view of the law firm is as follows “thus, in our view, reinsurance is for all practical purposes a financial arrangement between the insurance company and the reinsurer whereby the reinsurer accepts to share the risk of the insurance company against payment of a pre-agreed premium.” EXIM Bank of Pakistan stated that only decision of PPRA Board on the proposed re-insurance arrangements is the possible option.

In view of the foregoing, Exim Bank has requested PPRA to provide guidance with reference to the applicability of PPRA Rules on the reinsurance arrangements. In case PPRA decrees that its rules are applicable on the proposed reinsurance arrangement, then Exim Bank would request that PPRA should provide Exim Bank an exemption from Public Procurement Rules, 2004, for signing of reinsurance arrangements with ICIEC.

The matter of the applicability of the Public Procurement Rules, 2004 on the re-insurance arrangements was deliberated at length at PPRA.

The recent amendments in Public Procurement Regulatory Authority Ordinance, 2002, enhance the ambit of public procurement by including commercial transactions between procuring agency and private party in terms of which a private party is allowed to receive a benefit from budget or revenue of the Federal Government or from fees or charges to be collected by the private party for performing the procuring agency’s function.

The sources further stated that since re-insurance arrangement involves transfer of a portion of procuring agency’s risk to another party in lieu of some share of the policy premiums sold by the procuring agency; therefore, Public Procurement Rules, 2004 are applicable on such procurements.

Exim Bank of Pakistan intends to reinsure part of its Export Credit insurance portfolio risk to ICIEC; therefore, in terms of section 2(l) of PPRA Ordinance, 2002, such financial transaction falls within the ambit of public procurement.

The sources said exemption from the Public Procurement Rules is granted by the Federal Government on the recommendation of the PPRA Board in the larger national interest in accordance with section 21 of the Public Procurement Regulatory Authority Ordinance, 2002.

The matter of the Exim Bank appears to be commercial interest of the organization for safeguarding its interest by transferring the insurance risk to re-insurance companies to limit risk exposure and improve their financial statements. However, the Exim Bank will be providing the indemnification products to Pakistani exporters for the first time, thereby creating a level-playing field for exporters with relation to foreign countries resulting in increase in the exports of the country.

After explaining the case, Exim Bank has sought exemption from applicability of PPRA Rules, for signing of the re-insurance arrangements with ICIEC.

Copyright Business Recorder, 2023