PAKISTAN: Enabling Microinsurance Sector to Take Off
During the 2003–2007 period, Pakistan’s GDP was growing at 6 percent annually on average*, but it deteriorated as a result of the global financial crisis, political turmoil, and the devastating floods in 2010 and 2011. In 2010, 20 percent of the population lived below the poverty line; the agriculture sector employed 44 percent of the work force and contributed 21 percent of GDP. The monsoonal rains, resulting in floods, have created havoc and had a dramatic impact on millions of lives. In 2012, the damage to agricultural land and infrastructure due to floods was estimated at Rs 250 billion, which became a major challenge for the government as well as the insurance industry. The destructive floods in 2010 and 2011 showed that in the absence of proper insurance coverage the economic losses suffered by the people can have a very adverse effect on their livelihoods.
Microinsurance products would have provided a risk management tool for the country’s farmers if their crops and livestock were insured against natural calamities; however, the market for microinsurance in Pakistan was severely underdeveloped. The regulatory and supervisory system for insurance did not explicitly recognize microinsurance and hence did not address any of the special requirements needed to develop the microinsurance market. The lack of suitable, well-designed products and the lack of awareness about the potential benefits of microinsurance are other reasons contributing to the underdeveloped stage of the microinsurance market. As of 2012, only 2 percent of the poor had access to microfinance services.
The Securities and Exchange Commission of Pakistan (SECP), established in 1997 and operational as of 1999, regulates and supervises all companies and the corporate sector, except banks, including capital markets and insurance companies. The SECP issues insurance regulations and is responsible for licensing insurers and brokers. It has been working proactively with stakeholders to promote microinsurance through various policy reforms and approached FIRST for TA in developing a conducive legal and regulatory framework to enable the development of a formal microinsurance sector.
FIRST responded quickly with a $185,000 TA project, Microinsurance Regulation and Supervision, in 2011–2012. The project, implemented by the World Bank, delivered to the SECP the following:
- A Supply and Demand Analysis Report on the microinsurance market (the Diagnostic Study)
- An informal Insurance Core Principles Assessment of the insurance supervisory regime
- A Regulatory Framework Report on microinsurance, which included concrete draft microinsurance rules, a draft framework, and rules for specialized microinsurance providers
The SECP later organized working groups and roundtable meetings, and leveraged its website to gather inputs from key microinsurance stakeholders, discuss the Diagnostic Study, develop a national microinsurance strategy, and finalize the draft Microinsurance Regulatory Framework.
In February 2014, the SECP published the 2014 SEC (Microinsurance) Rules, which put special focus on consumer protection, ade¬quate disclosure requirements, and transparent regulatory reporting by insurers, so as to enable growth of the microinsurance seg¬ment in a disciplined manner. The SECP acknowledged FIRST’s contribution to this progress in its 2014 Annual Report:
[T]his was made possible with the support of the World Bank FIRST Initiative. The rules were finalized by the private sector-led working group comprising of professionals from diverse backgrounds, including the insurers, insurance brokers, development organizations such as the Pakistan Poverty Alleviation Fund (PPAF) and UK Aid, microfinance banks and the Pakistan Microfinance Network (PMN), which is the association of all microfinance institutions in Pakistan.
FIRST’s TA has provided inputs for the SECP to use in drafting a strategic framework for the development of the microinsurance sector, encompassing the following target areas:
- 200 percent growth of microinsurance outreach in five years, measured by number of policyholders and value of sum insured
- Institutionalization of diversified and sustainable microinsurance models
- Development of tailored microinsurance products to cater to multi-peril risks
- Development of client awareness and assurance of client protection of the target segment
Today, there are more than 6 million microinsurance policyholders and the number is growing. Development of microinsurance as a means to enhance financial inclusion in the country has become one of the SECP’s top priorities. Building on this momentum, the SECP has recently sought FIRST’s TA in modernizing the legal framework for the whole insurance sector and moving to risk-based supervision.