Risk mitigation option for the cos: SECP underscores for creation of insurance pool

ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) has proposed creation of an insurance pool to create an alternative for the insurance companies to park their risks which are left uninsured or transferred to the international market.

According to a new report of the SECP on insurance pool, given that the need of forming an insurance pool is well-established, the following points need to be considered to ensure that the pool operates effectively and achieves the intended objectives:

(a) The nature and complexity of the risks to be ceded to the pool need to be specified to ensure that the payouts are made for perils covered by the underwriter. Otherwise, the cover-all strategy would compromise the pool objectives of mandated risk perils and segments.

(b) Active participation by all stakeholders such as government organizations, global support agencies including the World Bank and Asian Development Bank, local and foreign insurance companies, relevant LEAs and industry experts is a prerequisite.

(c) The regulatory environment should promote a conducive level-playing field to keep the interests of all stakeholders aligned such as mandatory ceding to the pool, standardized pricing, cost-sharing basis etc.

(d) Costs of setting up and maintaining the insurance pool and the benefits and downside risks should be managed systematically and regularly. The pool members would be liable to cover insurance claims costs, other associated liabilities and expenses arising from the pool, subject to its participation on a joint and several liability bases, but will benefit from any profit and/or other efficiency-related benefits.

The SECP proposed that an insurance pool must have a clear governance structure that outlines the roles and responsibilities of the participants. This could include a board of directors, an executive/management committee, and a pool manager.

The Pool Manager can be the technical expert or an insurance brokerage firm appointed by the higher-level stakeholders and the members of the pools. An expert firm is expected to develop technical expertise from international markets, utilize reinsurance markets to reduce the volatility in insurance experience, and benefit from diversification, premium rates efficiency, and the reduced reinsurance risk of default.

The insurance companies can enter a reciprocal participation agreement with each other and can cede business into the pool while accepting reciprocal coverage from all members. The members could be liable to cover all claims costs and other associated liabilities arising from the pool, which may be subject to individual limits, but they will benefit from any profit distribution generated by the pool.

Risk assessment: The pool, through pool manager/technical expert, must conduct a thorough risk assessment to identify the risks that will be covered and to set premium rates. This may involve using historical data, actuarial models, and expert opinion.

Reinsurance: The pool may purchase reinsurance from other insurance companies to protect itself from large losses and to reduce volatility in its profile, particularly if it is exposed to high severity risks or operates in the catastrophe prone regions. This can help to ensure that the pool has the financial resources to pay out claims even in the event of a major disaster.

The pool must be transparent about its operations and its financial performance. This will help to build trust among participants and to attract new members, the SECP report added.

Copyright Business Recorder, 2024