Micro-insurance: Road to success
After the global economic downturn in 2008, Pakistan’s economic performance improved steadily with the expected GDP growth rate of 3.3 percent for the 2009 - 2010 fiscal year. Some important gains were also made in stabilizing the macro economy of the country resulting in reduced inflation, contained government borrowings, contraction in external imbalances and increase in remittances from abroad. The rising trend in the economy was evident in the beginning of the fiscal 2010 – 2011, showing further improvement by achieving 4 percent GDP growth rate.
While the country was going through this economic revival, it faced the natural disaster of floods in July-august of 2010. The insurance industry struggled and showed promising growth in terms of gross written premium in this period. However, the floods revealed that in the absence of proper insurance coverage, economic losses suffered by the masses, especially the low-income groups in rural areas had an adverse effect on their financial stability.
According to Asif Arif, Chairman Securities and Exchange Commission of Pakistan (SECP), there is need for an effective mechanism for improving insurance penetration, which is currently at a mere 0.7 percent of GDP. To address this, World Bank (WB) consultant Emon Kelley has suggested to Pakistan to start launching fixed micro-insurance policies rather than covering the loss on the basis of products so as to increase micro-insurance promotion in the country. As Arif explains, “The idea is to reduce hassle and speed up the compensation procedures.” If the cost of the shop is Rs. 50,000, then the inquirer from the insurance company will not go into micro details to assess the loss faced by the insured person, he says.
Kelly pointed out that as part of an effective penetration strategy, micro insurance products are supposed to be very business-friendly and require the least amount of documentation. This is important because of the low trust level of the masses in insurance companies. In particular, since the rural society is not so well aware about insurance, the sales mechanism of the insurance policy has to be different in rural areas as the conventional method of insurance sales agents cannot work for micro-insurance.
The positive performance of the insurance industry over the past few years points to more improvements in coming years, but it is necessary to produce innovative insurance products to prevent sectors such as the floodhit low-income rural society from extreme poverty. The SECP has taken the Pakistan Insurance Institute, State Bank of Pakistan, insurance companies and microfinance banks on board to formulate regulations to introduce microinsurance in the country on commercial lines.
Another essential element of the micro-insurance proposal is the need for related laws which are not only meant for economic development but are also meant to protect the masses from unexpected economic loss through natural disasters or a financial mishap caused to the community.
SECP regards the finalization of micro-insurance proposals with World Bank consultation in 2012, as a success for insurance penetration in the country
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