The Reinsurance Market and the Capacity

have Shrunk and therefore the Cost of

Reinsurance becomes Higher
  Views by Mr. Saifuddin N. Zoomkawala

The global economic recession has impacted the insurance sector as it has done to other economic and financial
sectors. The reinsurance market and the capacity have shrunk and therefore the cost of reinsurance becomes higher
as well as the terms and conditions of re-insurance companies become more stringent.

The political turmoil that is consistently prevailing in our society compelled the reinsurance companies to revise their
policies. Munich re, one of the biggest reinsurance companies of the world, has actually withdrawn all their business
interests from Pakistani market because of the losses the insurance industry of Pakistan has to bear on days like
12th May 2007 and 27th December 2007. They first cancelled all the riots & strike covers and recently decided not to
do any type of general insurance business in Pakistan. However, they are still underwriting life insurance business.

I, as an insurance professional, would like that our local reinsurance capacity and the technical know-how should be
invigorated on urgent basis. The exchange of business through reinsurance between local companies is more viable
than going into the overseas market. We should encourage mutual exchange of business to avoid flow of foreign
exchange abroad. As for the reinsurance Treaties, these are now becoming more and more difficult to execute with
Rated reinsurance companies and therefore, Pakistan Reinsurance Company and the ECO pool should come up with
offer of adequate reinsurance facility.

About World Bank and IMF

Pakistan needs the financial assistance from theWorld Bank and the IMF to meet its financial obligations. Actually
speaking our expenses are more than our revenues and therefore we need international financial institutions to
provide financial assistance to fill in the gap.

When theWorld Bank and IMF provide us financial assistance to meet our expenses, they also want us to abide by
their rules and regulations is actually a blessing in disguise. Because Pakistan abides by a system of financial
discipline under compulsion which, unfortunately, Pakistan otherwise does not adheres to at its own.

Interviews
 

Interview of Mr. Saifuddin Zoomkawala published in "The Financial Daily"

 
  'Challenges ahead for insurers'
  Interview by Shabbir Kazmi

In an attempt to review performance of insurance sector during 2007 and 2008

and examine challenges and opportunities facing them during 2009, TFD spoke to
Saifuddin Zoomkawala, Managing Director, EFU General. Following are excerpts
from this exclusive interview.
   
  Factors affecting operations of insurance companies
 
  In my view, the problem faced by any business or industry is lack
of investment confidence. To build this, there is need for stable
 political climate and smooth law and order situation. Unfortunately
for Pakistan, after the horrifying event of the assassination of
Mohatarma Benazir Bhutto, the investment climate has
deteriorated, loosing investors' confidence. The event of 27
December, 2007 and the political instability post March 2008,
changed the business climate in Pakistan, and gave a major hit to
Pakistan economy. Yet, the insurance market grew at a rate of
10%, mainly due to inflation factor.

The year ahead will be a challenging one, although the majority of

insurers have begun 2009 on a positive mood, not looking back to
2008, as it has concluded with many big losses to the industry.
There are clear opportunities for those who wish to grow, though
huge expansion is unlikely in the current climate. Now the
emphasis is shifting from privately funded power and energy
related projects to government-backed or public-private
partnership projects such as power plants, roads, bridges etc, this
may improve property insurance business in 2009.

With the prevailing recession, when the imports are being cut the
marine insurance is likely to be affected during 2009. This is
mainly due to cost of oil which has come down to US$ 35 from the
highest peak price of US$147 in July 2008. Further, austerity
measures adopted by the Government, discouraging imported
luxury items or increasing duties on these items, the premium for
this business may remain static or may increase depending upon
inflationary factor and strength of Pak Rupee against foreign
currencies.

Motor insurance premiums have increased in last few years

manifold. In 2008, it has not grown as compared to 2007 because
of surge in interest rate and leasing facility becoming expensive.
With decrease in demand, as cars have now become expensive
due to US$ - Pak Rupees parity, and factors explained here, the
premium for this class may touch Rupees 15 billion in 2009.

In order to restore investors' confidence, we need special efforts

on part of Government to improve law and order situation and
create conducive political climate. I feel the Government priority for
this sector should be an establishment of Pakistan Insurance
Regulatory Authority (PIRA), which will help the industry in many
ways, especially for investment and promoting its image.
   
  Huge claims and response of global reinsurers
   
  The underwriting results of most of the companies from Pakistan
for 2007 and for three quarters ended, at 30 September, 2008,
were not quite satisfactory. Many companies suffered from either
large losses or a multiple risk losses, resulting in an unsatisfactory
bottom line to the reinsurers.

Further, the insurance companies were required to comply with the

SECP guidelines, with regard to the requirements of minimum
share and credit rating requirements of Reinsurers, the
reinsurance program of many companies, saw tough terms and
conditions under the treaties.

The commissions were either reduced or were put on sliding

scales. The Profit Commissions were deleted. Loss participation
clauses were tightened and in many cases the Reinsurers refused
to give required proportional capacity. Proportional treaties were
 replaced by Non Proportional structure, Excess of Loss Treaties.
   
  Colossal impairment cost
   
The stock market turmoil of 2008 plunged the KSE to a record low.
The problem is believed to be widespread for the companies
investing heavily in equities. After due deliberations, a solution was
worked out and recently SECP has issued the guidelines for
  drawing up financial accounts for the year 2008. It is difficult to
comment, how impairment cost will affect profits of key players of
various industries, as the results of two companies of the industry,
opting for different methods of accounting were not comparable.
   
  Declining auto sales
   
Due to slowdown in the country's economy, growth in the new
business will be slower. Therefore in order to maintain its position
for every insurance company, motor insurance business will still be
an important business. However, at the same time if there are
clients who are not performing well, which have bad loss
experience, these clients may be offered revised terms or weeded
out of the companies' portfolio.

Car leasing business, it is the new business which is on the

decline. However besides the maturity of the lease arrangement,
the renewals of the previous leases arrangement will continue till
  the expiry of the lease arrangement which is usually 3 to 5 years.
For non-leasing segment, the motor insurance comes as a part of
a package / client portfolio along with property and marine
insurance. Insurance companies cannot be selective to attract or
ignore a particular class of business.

Motor insurance business is sizeable proportion of any insurance

companies' portfolio. Due to the expected slower growth in the
other classes of business, motor insurance will not loose its
attractiveness. It will still be an attractive business for an insurance
company, specially the non leasing segments.
   
  Curbing operations of fake companies
   
There are few stalls outside Civic Center, (sporadically there may
be few stalls in some other places in the city) are doing this
business. EFU jointly with other insurance companies from the
platform of IAP has worked on some proposal and has sent to
SECP to streamline the third party insurance, with the support of
provincial excise departments and National Banks.

Curbing the operations of fake/ghost insurance companies is more

  a matter of implementation of the law of the land. The law is there
(Motor Vehicle Act 1939) which requires every motorist to have a
third party liability insurance policy; the insurance product for the
third party insurance is available with every insurance company.
Curbing fake insurance is a matter of implementation of law,
ensuring that every motorist has valid motor third party liability
insurance available with him, from a Genuine and authorized
insurance company.
   
  Takaful Window by conventional insurance companies
   
Recognizing that new companies would take some time to build up
their distribution channels, the government had promulgated
Takaful Rules in 2005, allowing dedicated Takaful companies to
start writing business only. By any standards, protection period of
five years is sufficient for any company to achieve its objectives. If
  the government is sincere in promoting the cause of Islamic
insurance, then SECP should allow existing conventional insurers
to write Takaful business through window operations, as promised
earlier. In turn, it will help the promotion of Takaful business at
much faster pace, as conventional insurance companies have
resources and experience.
   
  Response for crop insurance
   
The agricultural resources, which are at risk, are not insured. The
central bank has fixed Rs250 billion indicative target for lending to
agriculture. This has opened window for another major business
segment, Crop Loan Insurance.

Non-life private sector companies have been working on the

proposed insurance with stakeholders, and an insurance scheme
has been launched around November last year.

  The scheme was able to generate small volume of business from

Rabi corp. It may also be kept in mind that Rabi is relatively a
smaller crop compared to Kharif, therefore, insurance companies
could expect to underwrite higher volume of business from the
Kharif corp.

For this class of business, there is a specialist reinsurance market,

as all reinsurers do not cover this business. However, for Pakistan
the response was encouraging and key players of the market have
already finalized reinsurance arrangement.