He, however, vehemently opposed the decision, saying that he did not have enough money to meet his household needs, let alone pay the premium. Since the insurance was a prerequisite for taking out the loan, he and other members of his centre took it with utmost reluctance because they were not convinced of its usefulness.
A little while later, the disastrous floods struck again and since the crop and cattle were the only earning sources in the household, their economic situation began to decline as their entire savings were used up for rehabilitation. Dilnawaz informed the loan officer of his plight who told him that he could use his crop insurance to get his losses made up. Now he realises the value and usefulness of insurance. I would never have bought the insurance policy of my own accord, he says. "Had it not been forced on me, I would have been ruined."
Today, there are many, unlike Dilnawaz, who are miles away from the benefits of insurance. Pakistan is a country where merely 0.8% of the GDP is spent on insurance and the population at large remains unprotected against contingencies. Healthcare, in particular, is increasingly becoming more and more difficult for low-income families to afford. As a result, they tend to delay their medical treatment or go to quacks for temporary relief, often leading to serious illnesses and even death. There is a dire need to design insurance products to give these low-income people at least a fighting chance to stabilise their lives and help protect themselves for a better tomorrow. Here comes the role of micro insurance.
Microinsurance is now considered the fastest growing insurance product in the world. From the Philippines to India, and from Bangladesh to Brazil, microinsurance is benefiting millions of low-income people, farmers, and owners of small businesses. This is the right time to make the most this untapped potential in Pakistan as well.
In order to assess the footprints of microinsurance in Pakistan, the SECP recently published a report, Micro insurance in Pakistan: A Diagnostic Study. It was conducted jointly by the SECP and the World Bank under the project sponsored by the FIRST Initiative. The report takes the readers to the next level of deliberation as to why microinsurance is important and what are its potential benefits. In the recent devastating floods, it was observed that the people who are vulnerable to the economic shocks suffered the most.
With no proper risk mitigating mechanisms, the vulnerable segments of the population had to suffer heavy losses which were ultimately transferred to the national exchequer and consequently had to be borne by the taxpayers. However, one must see such incidents not as a threat but as an opportunity for the insurance industry to shoulder the economic burden of the government yet keeping it profitable for itself.
Technology also plays a pivotal role here. As the access to technology improves, the focus is being put on types of insurance products that can be offered through the technology platforms. Though there is a huge microinsurance opportunity, the sector has a number of challenges which must be overcome to succeed. From an economic point of view, microinsurance can be an effective complement to existing options of social protection programmes of the government, just like it is being witnessed in the Benazir Income Support Programme. It reduces vulnerability and mitigates the negative effects of external shocks on poor households. Simultaneously as it grows, microinsurance provides a risk transfer mechanism from the grassroots level to capital markets and international reinsurance markets where the international players are ready to take the risk of supporting the large numbers of small policyholders. One would be interested in knowing the concept of catastrophe insurance schemes, which are so common around the world to support the disaster-vulnerable populations, whereby some of them also sometimes float the catastrophe bonds, or simply say the cat bonds, which are the debt instruments for financing the disaster rehabilitation instances, yet giving the hedging investors an excellent opportunity to grow their investments. This is a point for connecting the risks faced by the low-income populations to the retail-end capital markets.
The catastrophe insurance schemes are particularly important for the target populations of microinsurance as these are the people who are more vulnerable to disasters. Also, the prevalence of such schemes generally helps the overall economy, thus protecting the impetus given to the corporate sector and capital markets, and protecting the macro-level indicators from falling short of growth. It is like installing shock-absorbers to the economy where buyers and sellers all are protected. For example, if a large population is affected by a disaster, there will be no or negligible customers for any commodity or industrial produce, resulting in declined production and growth numbers.
Similarly, a conducive and enabling regulatory environment is required for the development of microinsurance, and the SECP is vigorously working to adapt relevant rules and regulations, which support the evolution of more inclusive insurance systems by encouraging the existing insurers to serve the low-income segments and thus facilitating microinsurance business to evolve and integrate with the formal insurance sector. Attributed to this, the consultative process is under way and a formal regulatory framework for microinsurance is expected to be unveiled before end of this financial year. While the continued support of the international community for microinsurance is imperative, there is a particular need for initiatives such as pilot projects on microinsurance. The insurance companies are also expected to take the lead in realising the full potential of this market.
Microinsurance is an extremely long-term trend, and it will grow and grow. Interest from reinsures and other international stakeholders also confirms this. This is a game of efforts and patience, though without proper focus on the business planning and efficient product development, the reaping of benefits would be a miracle. At the outset, the SECP has harnessed its resources but simultaneously the action call has begun for the international community to support the microinsurance implementation in Pakistan.
The writer is a Commissioner, Insurance Division, at the SECP. He has over two decades experience of the insurance sector.