ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) is trying to convince the insurance companies to set up 'Terrorism Insurance Pool' to provide foreign and local investors protection against business losses in case of any terror attack.
SECP Chairman Muhammad Ali informed reporters here on Tuesday that the magnitude of the losses in case of unfortunate terrorist attacks is very large particularly to businesses and infrastructure in such cases. To deal with such large-scale damages, all insurance companies should form a pool to provide protection to businessmen against terrorist attacks. The risk will be distributed among all the insurance companies to handle any unfortunate incident.
Some of the benefits of the Terrorism Insurance Pool includes such that the insurance of terrorism risks in the Pakistani market will be undertaken through a pool system that is a response to the significant increase in premium rates following terrorist attacks. This will substantially reduce the impact of loss of property through effective mitigation efforts; while also reducing the financial exposure of the government to terrorism events and transferring risks away from individuals and firms, encourage them to behave in an economically more productive fashion.
The SECP officials further stated that the Insurance Pool will tend to provide coverage to all the properties within the scope of the Pool policies against terrorism risk in return for premium. It will also ensure risk sharing within the country and also distribute the financial liabilities caused by terrorism activities on to the international reinsurance markets, while mitigating the possible financial burdens on the public funds/government due to terrorism. Finally, it will contribute to the development of insurance awareness and risk awareness in public.
The terrorism insurance pools were set up in many countries around the world, such as UK, USA, France, Germany, Australia, Austria, India, Nepal, Sri Lanka, Indonesia, the Netherlands, Spain, South Africa, etc, mostly in the aftermath of 9/11 incident in the US, as many insurance and re-insurance companies suffered major losses and avoided providing cover. Therefore, the terrorism cover, as a peril was excluded from direct insurance coverage. Each country developed its own terrorism pool, where the premiums for covering terrorism risks are transferred to a major corpus of fund set up especially for the purpose. Currently, Pakistan has all the key ingredients to set up a pool. These ingredients are an immediate need for terror cover, insurance companies support for such a scheme and, with the SECP help, the ability to impose regulation quickly. The significant support of the SECP makes the formation of the Pool a potential reality and the sooner this project is implemented, the sooner the community will have coverage.
The availability of Property cover against the peril of Terrorism in Pakistan can be segmented into cover for large/high value risks (over US $10 million) and small/low value risks. For the Large risks, there are number of re-insurers, particularly in Lloyds, who are prepared to provide coverage and each risk is considered on its merit and rated accordingly, although some like Hotel chains remain difficult. Though, for small industrial and commercial property, terrorism coverage is often unavailable and reason for its lack of availability is that Pakistani insurers cannot lay this risk off easily in the global reinsurance market.
The local insurance companies have treaties with limited scope of cover ie terrorism cover only, and no political violence, riots, strikes, civil commotion, malicious damage coverage. There is only one re-insurer who is the market leader in these kinds of reinsurance treaties in Pakistan and reliance on only one re-insurer for such treaties and placing all such risks on facultative market which cannot be placed in these limited scope treaties otherwise, may prove precarious for the overall functioning of the market. The lack of such reinsurance coverage available for medium and small risks is a major problem in Pakistani insurance market. The information compiled at the SECP reveals that approximately, Rs.1.5 billion is the amount of such facultative reinsurance premium for the coverage of terrorism and political violence, remitted abroad during year 2011, they said.
SECP officials were of the view that while it has also remained an industry demand to SECP to help it in establishing such a scheme in Pakistan, SECP concluded a feasibility report, with the assistance of Asian Development Bank, on the establishment of the terrorism insurance pool in Pakistan. The report was shared with all stakeholders including the insurance companies and policy advocacy presentations were made at various forums. Recently, the model was also deliberated upon with Pakistan Reinsurance Company Limited (PRCL), the only and state-owned reinsurance company in Pakistan which has indicated its willingness to support the initiative.
Moreover, with the cascade of recent devastating floods and other catastrophes in the country, the industry and other stakeholders are raising their demand for establishing an all-encompassing insurance Pool scheme, which should not only cover the terrorism risks, but also the risks like natural catastrophes. The SECP is in a continuous dialogue with the stakeholders, including donor agencies, for seeking support and implementing such larger insurance pool scheme in Pakistan, the SECP officials stated.