An insurer cannot engage itself in self-insurance: SECP

The Securities and Exchange Commission of Pakistan (SECP) has declared that an insurance company can not engage in self-insurance by insuring its own assets and issuing different policies covering its head office, branches, machinery breakdown, fire, motor and health, etc.
According to an SECP order issued here Saturday, the SECP law and IFRS 4 clearly forbid an insurer to engage itself in contractual obligations concerning self-insurance. Thus, a self-insurance contract is considered to be contrary to the core principle of an insurance contract, as it can neither be termed as a contract of insurance nor can it be treated or reported in the similar fashion as in the case of any other insurance contract.
The SECP has disposed of the proceedings initiated against the chief executive and directors of the company for violating the definition of the term "insurance" as laid down under Section 2 (xxvii) of the Insurance Ordinance, 2000 (the "ordinance"). The chief executive and directors of the Company shall be referred to as the "Respondents" hereinafter.
An onsite inspection of the Company was conducted on the order dated March 05, 2014, under Section 59A of the Insurance Ordinance, 200 (the "Ordinance"), during which, it was observed that the Company insured its own assets by issuing different policies including its head office, branches, machinery breakdown, fire, motor and health etc. to itself. These policies were issued prima facie in violation of the definition of insurance as laid down under Section 2(xxvii) of the Ordinance, SRO No. 149(1)2009 dated February 11, 2009 and Circular 04/2010 dated January 23, 2010.
The aforementioned provisions of the law and IFRS 4 clearly forbid an insurer to engage itself into contractual obligations concerning self-insurance. Thus, a self-insurance contract is considered to be contrary to the core principle of an insurance contract, as it can neither be termed as a contract of insurance nor it can be treated or reported in the similar fashion as in the case of any other insurance contract.
The company stated that since the matter of self-insurance has not been specifica1ly addressed in the Circular No. 4/2010 dated January 23, 2010, hence the Company assumed to have complied with the said Circular and thus insured its own assets. However, the explanation of insurance contract particularly with regard to insurance of Company''s own assets as mentioned in IFRS was overlooked unintentionally.
The SECP said that by virtue of the company''s registration under the Insurance Ordinance, the Respondents were required to ensure that the Company complies with the requirements of the Ordinance relating to the business of insurance, which includes the core concept of insurance as laid down under Section 2(xxvii) of the Ordinance.
An insurance contract is a contract between two parties, and in this view, an insurer cannot enter into a contract of insurance with itself. The company appeared to have violated the basic definition of insurance as stated under Section 2(xxvii) of the Ordinance, for which the Commission may take penal action(s) as provided under Section 156 of the Ordinance.
In exercise of the power conferred under Section 156 of the Ordinance, the SECP instead of imposing a penalty, take a lenient view and thus condone the company are further directed to ensure full compliance with the Ordinance rules, regulations and directives of the commission in future, the SECP order added.