The Securities and Exchange Commission of Pakistan (SECP) has conveyed to the insurance companies that they are required to maintain at all times reinsurance arrangements for its exposure in respect of individual contracts accepted as well as aggregate losses arising out of individual events.
An order issued by the SECP here on Saturday against an insurance company disposed of the proceedings initiated against the company, its chief executive and directors for alleged contravention of Section 41(1) read with Section l1(1)(d) of the Insurance Ordinance, 2000 (Ordinance). The company, its chief executive and directors shall be collectively referred to as the "respondents" hereinafter.
The SECP said that during examination of the annual audited accounts and regulatory returns for the year ended December 31, 2015, it was noted that the company did not maintain adequate reinsurance arrangements for its exposure in respect of individual contracts accepted and in respect of aggregate losses arising out of individual events as required under Section 41(1) of the Ordinance.
Review of statement of premiums for the year ended December 31, 2015 revealed that total premium written by the company under the credit and suretyship class of business was amounting to Rs153.565 million, out of which only Rs4.5 million (2.9 percent) were ceded to the re-insurers, the SECP said.
Statutory auditors of the company also raised their concern regarding inadequate reinsurance arrangements in the audit report and management letter for the year ended December 3t1, 2015. In response, the management of the company stated that:
The SECP said that the management is making all possible efforts to arrange required reinsurance arrangement locally and internationally. The delay in this process happened due to stringent requirements for reinsurance by beneficiary - IATA, namely that the reinsurer must be internationally "A" rated reinsurance company, local insurer must cede 100 percent to reinsurance and the most unusual requirement of executing a separate "cut-through agreement" between reinsurer and IATA, thereby bypassing the local insurer in certain circumstances. The requirements are found excessive by the prospective reinsurers and were accordingly rejected by all the reinsurers approached by the company. However, company is considering all possible options to cope with the reinsurance requirement.
The SECP said that furthermore, in note 1.2 of the Annual Audited Accounts for the year ended December 31, 2015, it was revealed by the statutory auditors that: " .... The company has not maintained reinsurance arrangement for credit and surety class of insurance during this year. Instead the directors of the company have secured company''s insured risk via irrevocable letter of credit and created sufficient reserves to meet any future claims..."
Reinsuring the risk through irrevocable letter of credit and reserves cannot be treated as an alternate arrangement for the purposes of compliance with Section 41(1) of the Ordinance given that the company is only engaged in the credit and suretyship class of business.
In view of the above, it appeared that the company and the CEO & directors violated the provisions of Section 41(1) read with Section 11(1)(d) of the Ordinance.
Section 11(1)(d) of the Ordinance requires that:
Conditions imposed on registered insurers.-(l) An insurer registered under this Ordinance shall at all times ensure that:
(d) the provisions of this Ordinance relating to the obtaining of reinsurance arrangements are complied with;
Section 41(1) of the Ordinance provides that:
Requirement to effect and maintain reinsurance arrangements.- (1) An insurer shall effect and shall at all times maintain such reinsurance arrangements as are, in the opinion of the directors (or such other person or body responsible for conducting the management and business of the insurer), formed on reasonable grounds, having regard to the exposures of the insurer in respect of individual contracts accepted and in respect of aggregate losses arising out of individual events, adequate to ensure continuing compliance by the insurer with the provisions of this Ordinance relating to solvency.
Therefore, a show cause notice (SCN) ID/Enf/Continental/2017/12628 dated November 3, 2017 was issued to the respondents, calling upon them to show cause as to why the fine as provided under Section 156 of the Ordinance should not be imposed on them and/ or direction under Section 63 of the Ordinance may not be given for the aforementioned alleged contraventions of the law.
The company vide letter dated November 7, 2017 requested the Commission to grant 15 days to collate the requisite information and appear for hearing in person. The Commission vide its letter dated November 20, 2017 scheduled the hearing on November 27, 2017. However, on November 27, 2017, the company submitted request to reschedule the hearing to any another date. The request of the company was acceded to and hearing was rescheduled for December 5, 2017.
The hearing of December 5, 2017 was held at the Head Office of the Commission in Islamabad, which was attended by Syed Nayyar Hasnain Haider, managing director of the company who appeared for hearing in his personal capacity as well as representing other members of the board.
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