The intensity and frequency of disasters is increasing all throughout the world. Similarly, disasters in Pakistan are no longer exceptional, isolated events; they are becoming more frequent, intense, and undeniably more devastating. However, for a hazard to become a disaster, a complex combination of circumstances must be considered, including the level of exposure, inherent vulnerabilities, and the region’s and people’s adaptive capacity. Climate change is undoubtedly amplifying all of these underlying issues, increasing the intensity of disasters and incurring unsustainable financial and economic losses to local and national economies. Disaster damages frequently total billions of dollars, with only a tiny fraction of these costs insured.
The 2022 floods resulted in over USD 30 billion in damages and losses, and only 1% of the damaged assets were under any form of insurance protection. In comparison, New Zealand—significantly exposed to seismic risks and a high frequency of earthquakes—has developed an arrangement in which its Earthquake Commission, in partnership with private insurance companies, insures 90% of damages against such calamities. This stark contrast highlights Pakistan’s enormous Protection Gap. The Protection Gap is defined as the difference between the total economic cost of disasters and what is actually covered by insurance or other so-called risk transfer instruments. Historically, an over-reliance on government and donor assistance has discouraged investment in pre-disaster financial protection systems.
The lack of access to localised climate models, disaster risk data, and hazard mapping has been another significant disadvantage. Without clear, explicit, and accurate information, governments cannot allocate resources effectively, and insurers cannot set appropriate costs for products. Although this has been a major roadblock in the development of catastrophe risk insurance in Pakistan, it should be noted that several Pakistani organisations have been gathering relevant data in an inconsistent and fragmented manner for years.
Publicly available data reveal that insurance companies in Pakistan offering agricultural insurance products are unable to charge a premium exceeding two percent
Due to a lack of coordination and the absence of standardised data collection and compilation policies and practices, insurance companies have missed the opportunity to conduct proper risk assessments, actuarial analyses, and systematic evaluations of the viability of their insurance products.
The agricultural insurance sector in Pakistan encounters major obstacles despite its importance to the national economy. Although the sector is crucial for food security and livelihoods, insurance uptake remains minimal, with fewer than 10% of farmers currently insured. Various factors contribute to this, including cost concerns, limited awareness, and a deep-seated distrust of insurance companies stemming from previous experiences.
Agricultural insurance premiums account for just two percent of the overall premium income in the non-life insurance sector. Publicly available data reveal that insurance companies in Pakistan offering agricultural insurance products are unable to charge a premium exceeding two percent. A report on the insurance industry noted that pricing is neither determined by actuarial methods nor adjusted according to prevailing market conditions. Setting appropriate prices for agricultural insurance products is essential to creating offerings that appeal to farmers while remaining financially viable and sustainable for insurers. This requires the extensive collection of reliable historical farming and climate data.
In competitive markets, the cost of agricultural insurance is fundamentally determined by the demand and supply of insurance. Nonetheless, the insurance premium is typically based on core actuarial components—primarily the catastrophe load, expense load, and expected annual losses. The anticipated annual loss is calculated based on the frequency and severity of risks involved. The size of these three components of the technical insurance premium depends on the specific products and the markets in which they operate.
Moreover, to be included on the bank panel, insurance companies are compelled to reduce their premium rates, and currently, the average premium rate is actually below 1.5%. To remain competitive, smaller insurance companies offer lower premiums, which in turn reduces their maximum exposure limits and ultimately the total insured amount.
Insurance penetration remains consistently low in Pakistan. So low that the insurance sector accounts for less than 1% of the country’s total GDP. There is an alarmingly low level of insurance coverage specifically for damages caused by disasters. In the absence of insurance protection, low-income households are frequently pushed further into the poverty trap. Another critical drawback has been the absence of strong institutional and regulatory frameworks. Risk-based supervision, legally mandated solvency requirements, and robust insurance laws are crucial, particularly for the development of disaster risk-based insurance products and services.
There is an urgent need to develop and implement a climate and disaster risk financing strategy focused on creating viable financial products such as public asset insurance and agricultural insurance. These products should be developed in close coordination with a wide range of stakeholders.