Proposal to set up national reinsurer comes under fire

by Surekha Galagoda

The recent budget has proposed to make it mandatory for 50% of reinsurance business of all insurance companies to be done with the National Insurance Trust Fund (NITF).

According to experts, this move has been taken to restrict the outflow of foreign exchange. But if a major disaster such as a tsunami occurs who will bear the loss? It will have to be paid from the taxpayers money.

It is a good move to stop the outflow of foreign exchange as the country needs it but burdening the taxpayer in the process is not advisable.

During the tsunami of 2004 insurance companies received claims to the value of US$125 million and they were able to recover 98% from the reinsurers.

In the event the new system was in place more than US$ 100 million would have to be borne by the taxpayers. If the country wants to restrict the outflow of foreign exchange there are many ways to do it rather than making it mandatory for 50% of reinsurance monies to be transferred to the NITF and burdening the tax payer in an immergency, said financial experts.

Also reinsurance money is not revenue but a liability.

Experts also questioned as to why we are hedging the business of oil if the Government is proposing to make it mandatory for 50% of reinsurance business of all insurance companies to be done with NITF.

Experts said that in most markets where reinsurance monies are kept back in the same country tariff plays a great role to generate equitable premium from all companies.

In the event the proposal sees the light of day the tariff will be reintroduced and therefore the public will not get the benefits of privatisation.

Speedy settlement of claims and other value added benefits given to customers by insurance companies would be lost due to the bureaucracy of the national insurer.

In addition the special and major risks which might be excluded due to capacity constraints under the compulsory cessions will not get favourable terms by the reinsurers as they are not getting a reasonable spread of all the risks.

The industry appreciates the efforts taken by the Government to increase FDI but warned that these adhoc decisions will affect the confidence of foreign investors who generally expect a liberalised financial market.

Already there are four international players which make the market more attractive but decisions such as this proposal will discourage them and in the event they pull out from the Sri Lankan market it will negate the efforts taken by the Government and the authorities to promote Sri Lanka as a centre for foreign investors.

The financial experts said that National/regional reinsurance companies were established based on the recommendations made by UNCTAD in the late sixties to retain more premium in small markets to cater to the needs of the then economies.

To pursue similar recommendations after 50 years in a totally different economic environment will not be viable in the context of today's Sri Lankan market.

Most of the markets have abolished compulsory reinsurance during the last decade as the model has not achieved the desired results. Philippines, Indonesia, Nepal and South Africa are some of the emerging markets that are not practising compulsory reinsurance.

But it is still practised in India. However, the current policy cession will be reduced to 10% by 2008 and signs are that it will be completely abolished in time to come.

According to sources, the proposal to set up a National reinsurer is opposed by the industry as it is taking the industry backwards.

The NITF was set up by an Act of Parliament. It absorbed the Civil Riots and Civil Commotions fund to provide risk insurance for properties affected.

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