The insurance sector in Pakistan accounts for only 0.7 percent of the gross domestic product (GDP). Just recently, the Asian Development Bank pledged $700 million towards transforming this situation. The beneficiaries will be the people who can least afford to be excluded.
The Asian Development Bank is providing a policy-based loan worth $700 million to Pakistan; however, the uniqueness of this loan is not merely in its size, but in the area that it addresses, which will have an impact on the daily lives of common people in Pakistan. The $700 million ADB loan for Pakistan’s insurance sector is intended to change the way risks are absorbed by households, farmers, businesspeople, and the government.
The Insurance Transformation Program is the formal name given to this initiative which seeks to increase insurance coverage, narrow the massive gap in the level of protection, encourage private sector involvement, and create financial resilience required for sustainable economic growth. It is worth noting that a country like Pakistan has been losing billions of rupees due to flood and drought, but there has been no system for addressing such losses in the past several decades.
Pakistan’s Insurance Dilemma in One Figure
The extent of the problem facing Pakistan’s insurance industry from this particular ADB loan can be quickly assessed with one figure. The level of insurance penetration in Pakistan comes out to only 0.7% of GDP.
Such a ratio positions Pakistan as one of the most uninsured economies in Asia. It indicates that a large percentage of people in Pakistan are uninsured, meaning that in case of any unforeseen circumstances such as disease, accidents, bad crop yields, floods, and business interruptions, there is no financial cushion to fall back on. This is because in Pakistan, disasters do occur often enough.
Firms suffer the same risk. The farmer who loses his produce either due to flooding or drought is not entitled to any compensation for that loss. The women and families living in vulnerable situations, who already start out poorer, are worst hit when the shock occurs.
The figure of 0.7 percent penetration is not merely a policy issue; it is a human vulnerability at national level.
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Rules-Based to Risk-Based Approach
One of the major structural aspects of the ADB loan to Pakistan’s insurance industry is that it promotes the change in regulatory framework which governs the operation of insurance in Pakistan. The current regulatory regime in place in the country is rules-based as opposed to risk-based.
The Insurance Transformation Program would transform Pakistan’s insurance system into one based on risk and markets. This is more a philosophical shift than regulatory in nature. The risk-based insurance model ensures pricing for insurance services is done on the basis of risk exposure, helps manage risks more efficiently, and allows the market to offer relevant services.
Such a shift would also make it possible to raise patient capital to support development, with insurance pools turning into sources of such capital if correctly developed and regulated. This is something which Pakistan has not been able to do thus far. The program by the ADB is intended to rectify that situation.
Beneficiaries and the Ways They Benefit
In the case of the ADB’s financing arrangement for the development of the insurance industry of Pakistan, the beneficiaries of the project have been identified in detail, which indicates that they were carefully chosen on the basis of vulnerability.
The farmers are the core focus of the prioritization scheme being used in the program. The agricultural country of Pakistan faces heavy weather risks with little in the way of protection. Insurance policies for the farmers are being designed especially for them.
Such a transformation will make it possible to generate long-term capital for developmental purposes because, through proper regulation, insurance funds can be a source of patient capital. This is an area where Pakistan has not been successful in tapping the potential of its insurance market. The ADB project intends to correct this situation.
Nayab Fatima is a media professional specializing in fact-based journalism, research, and analytical reporting on technology, telecom, aviation, and automobiles.
