SECP Recommends Innovative Solution to Safeguard Farmers Against Climate Risks

The Securities and Exchange Commission of Pakistan (SECP) has recommended that an agricultural insurance pool could act as a risk aggregator, providing farmers and herders with affordable and effective agricultural insurance that is financially sustainable in the long term without heavy public subsidies. A special report of the Securities and Exchange Commission of Pakistan (SECP) on crop and livestock insurance revealed that the insurance pool may first propose standardized contracts covering specific risks (for example, floods, and lack of rainfall) to limit transaction costs and adverse selection problems. Domestic insurance companies could act as agents, bringing the business to the pool in exchange for a commission, or they could buy shares of the pool based on their market shares. The SECP recommended that the government make more efficient use of resources and enhance capacity within the local insurance industry by converting the existing CLIS scheme into a broad-based co-insurance pool structure. In the first phase, the scope of this co-insurance pool can be limited to CLIS and subsequently, its scope can be enhanced. Such a mechanism will effectively make an applicable limit of liability cap on the total premium received at the consortium level, which will be effectively higher than the existing cap applicable on premiums received by individual companies. The risks associated with pools need to be mitigated via reinsurance arrangements with globally sound and internationally rated reinsurance companies. This can be done either through per-life, per-event, individual or aggregate reinsurance, and/or stop loss arrangements of different formats. The purpose is to protect the pool from being completely burnt out and to bring global technical expertise and reinsurance support to the local general population. Other administrative modalities for the finalization of such a mechanism can be discussed and agreed upon between all the stakeholders. The report further disclosed that there is a notable absence of any national crop and livestock insurance schemes catering specifically to non-loanee farmers in the country. The existing coverage extends to merely 9.5 percent of the total farming population, with only 787,000 farmers currently enrolled out of a substantial 8.2 million. The challenges faced by non-loanee farmers are multifaceted, exacerbating issues related to affordability, awareness, and resilience in the face of disaster risk exposure.