The Securities and Exchange Commission of Pakistan (SECP), a financial regulatory agency in Pakistan, has recommended that an agricultural insurance pool could act as a risk aggregator, providing farmers and herders with affordable and effective agricultural insurance, according to a Business Recorder report.
A recent report from the SECP on crop and livestock insurance showcases that the insurance pool may first propose standardised contracts that cover specific risks in order to limit transactions costs and adverse selection problems.
According to Business Recorder, the SECP recommended that the government make more efficient use of resources and also enhance capacity within the local insurance industry by converting the existing CLIS scheme into a broad-based co-insurance pool structure.
Moreover, in the first phase, the scope of this co-insurance pool can be limited to CLIS and subsequently, its scope can be enhanced.
From what we understand, such a mechanism will effectively make an applicable limit of liability cap on the total premium received at the consortium level, which will be considerably higher than the existing cap applicable on premiums received by individual companies.
However, the risks associated with pools need to be mitigated via reinsurance arrangements with globally sound and internationally rated reinsurance companies.
It is important to note, that this can be done either through per-life, per-event, individual or aggregate reinsurance, and/or stop loss arrangements of different formats.
Further, the report notes that the purpose is to protect the pool from being completely burnt out and to bring global technical expertise and reinsurance support for 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 also added that there is a notable absence of any national crop and livestock insurance schemes catering specifically to non-loanee farmers across the country.
