SUNDAY DECEMBER 25: Protection against business losses: 'Terrorism Insurance Pool' being set up

ISLAMABAD: With the support of all insurance companies, the Securities and Exchange Commission of Pakistan (SECP) is in the process of setting up 'Terrorism Insurance Pool' to provide foreign and local investors protection against business losses in case of any terrorism attacks in the country.
Sources told Business Recorder here on Saturday that the 'Terrorism Insurance Pool' would help to compensate the losses caused to the assets of the corporate sector in Pakistan and restore confidence of the foreign and local investors on Pakistan's economy. The proposal is being developed in a mechanism to provide safeguard to the investment in Pakistan.
The SECP has also proposed creation of a Pool Claim Management Committee to determine the authenticity of the claims filed with the 'Terrorism Insurance Pool'. In this regard, all the insurance companies have supported the creation of the Pool. Even the major companies who currently have their own cover, said they want the introduction of a pool facility. In Pakistan all the insurance companies are being pressured by their clients to provide insurance coverage. People are concerned that random acts of terrorism could damage the buildings they own resulting in huge financial hardship.
According to sources, the SECP has also explained that how insurance companies should underwrite the terrorism policies. The policy issued by insurance company as an extension to their Fire Policy renewable on a yearly basis and cession of Terrorism Cover to Pool to be stated in the original wording in policy. Under the policy, the terrorism rates would be pre-determined and service commissions to insurer are agreed upon. The Pool will have a limit on the coverage provided and it might be able to issue policy on first loss basis. There is also a feeling to exclude certain risk classes from the legislation on Terrorism Insurance Pool (still to be decided).
Sources said that the SECP is also devising a mechanism for the Pool to respond to the claims. Under the first step, insurer will report the claim to the Pool. Pool Claim Management Committee would decide legitimacy of claim and if satisfied pays the insurer. The Pool has the sole authority in determining the legitimacy of the claim. The insurer will abide by the decision made by the Pool.
Under the SECP plan, the Pool will to report to insurance companies on a quarterly basis on premiums, exposures, claims, expenses. The Pool would also issue an Annual Report to insurance companies and hold an AGM. The Pool would call for Extraordinary GM if demanded by insurance companies.
The proposed structure of Pool revealed that the insurance companies would assign Executive Committee for the Pool for a fixed term. Executive Committee would be made up of chief executives of insurance companies or their representatives. The executive committee assigns a Technical Committee for a fixed term, which is responsible for policy wording, exclusions, tariff rates, etc and reports to Executive Committee. The technical committee is made up of senior management of insurance companies in charge of Terrorism/Fire underwriting.
The proposed structure of Pool further revealed that a legal entity of the Pool will be created (TBD). The insurance companies would have to agree on a Pool Administrator or create a Company to administer the Pool. The Pool Administrator would be responsible for receiving premium and exposure data from insurers and making payment of claims approved by the Executive Committee to insurance companies. The Pool Administrator would issue a report to insurance companies on a regular basis, eg quarterly (TBD), on premium received, exposure data of risks covered, claim payments and other expenses. The Pool Administrator' statements would be audited by an independent auditor on an annual basis, sources said.
In order to give protection to the 'Terrorism Insurance Pool', the Executive Committee (EC)/Board of Directors (BoD) would decide on protection, if any, for Pool. The Pool Administrator would arrange for Reinsurance Protection based on advice of EC/BoD. If Pool's Fund and or reinsurance is exceeded the Pool could ask insurance companies to make up for the difference on a pre-agreed formula to obtain a government guarantee to cover the difference, further claims are not paid.
Sources said that in many developed and developing countries, terrorism pools have been created through co-operation between local insurance associations and their respective government. Internationally, the following are some territories where terrorism pools operate: Britain Pool-Re, Austria Terror pool Austria, France GAREAT, India Indian Market Terror Pool, Indonesia Marein, Nepal Pool Nepal, Netherlands Dutch Terrorism Risk Reinsurance Company - NHT, Spain Consorcio de Compensation de Saguaros.
Limited, Sri Lanka Strike, Riot, Civil Commotion) & Terrorism Fund, Australia The Australian Reinsurance Pool Corporation, Namibia The National Special Risks Insurance Association, South Africa The South African Special Risks Insurance Association and USA The Terrorism Risk Insurance via Federal Reserve.
Sources said that the availability of Terrorism Coverage in Pakistan could be judged from the fact that for small industrial and commercial property, terrorism coverage is often unavailable. The reason for its lack of availability is that Pakistani insurers cannot lay this risk off easily in the global reinsurance market.
Two or three of the larger companies have obtained treaties. Limits are low and the premium volumes restricted due to the high rates charged. There is currently one major leader for these treaties. If they exited the market there may be no reinsurance cover at all.
The lack of coverage available, with few insurers supplying and supported by even fewer global reinsurers, for small everyday risks, is a major problem in Pakistan. Sources said that the terrorism is a national issue, which has a major impact on the social and economic activities of the country.
Terrorism Pools are not uncommon and successfully operate in many countries from United Kingdom, France and Germany in Europe to India, Australia and Sri Lanka in Asia Pacific. Without available terror cover foreign Investment is impeded. Local investment is stunted as companies manage the terrorism risk alone.
According to the proposal, the main causes of terrorism in Pakistan are of two kinds, the main causal factors contributing to terrorism in Pakistan are sectarian or religious violence. Other causes, such as political rivalry and business disputes, also take their toll. Terrorism in Pakistan since the 1980s began primarily with the Soviet-Afghan War, and the subsequent war against Afghan communists that continued for at least a decade.
In 2010 of the 22 major terrorism losses world-wide (65%) occurred in Pakistan resulting in 657 casualties and 1310 injuries. In 2008 of the 17 major Terrorism losses world-wide, 11 occurred in Pakistan. The 61 suicide attacks caused 899 casualties in 2072 injuries (including the deadly Marriott Bomb Blast), data revealed. For the functioning of Pool, there are two options before policy makers that what should be the allowable percentage of compulsory cession to the pool and retention by the insurance companies.
Proposed Plan A: There should be 100 percent cession of premiums (less service commission) to Pool. In this case, the 100 percent risk to be retained by Pool. However, there would be no retention by insurance company.
Proposed Plan B: 100 percent cession of premiums (less service commission) to Pool. Insurance company to retain a percentage of risk, eg 5-10 percent whereas the Pool would retain the rest of the percentage.