ISLAMABAD: Only 9.5 percent farmers are insured in Pakistan out of the total population of farmers of 8.2 million. This data has been compiled by the Securities and Exchange Commission of Pakistan (SECP).

A report of the SECP on the insurance sector disclosed that out of the total population of farmers of 8.2 million, 9.5 percent of the farmers are insured against the disaster risk mainly through the government-run crop loan insurance schemes mainly including the Crop Loan Insurance Scheme and Livestock Borrowers Schemes by the State Bank of Pakistan and Punjab Fasal Bema Scheme by the Punjab government.

Agriculture insurance written premium constitutes only two percent of the total premium of non-life sector. It is Rs 2.8 billion in 2022 with an increase of only eight percent from 2021 which is 19 percent below the industry average increase. The data disclosed that the insurance companies in Pakistan, offering agricultural insurance products, cannot charge a premium of more than two percent.

A report of the SECP on insurance sector revealed that the price is neither actuarially determined and nor revised considering the prevailing market conditions. Pricing agricultural insurance products is a critical aspect in designing products that are attractive and affordable to farmers, financially viable and sustainable for insurers. It requires a long series of high-quality historical agricultural/weather data.

The price of agricultural insurance in competitive markets depends ultimately on the demand for and supply of insurance. However, the price of agricultural insurance (or insurance premium) is determined using actuarial-driven key factors, which mainly include the catastrophic load, expense load and annual expected losses. The annual expected loss is based on the loss frequency and the loss severity of the underlying risk. The respective sizes of the three components of the technical insurance premium depend on the products and the markets.

In addition to this, in order to be on the panel of the banks, insurance companies are pushed to further reduce the premium amount and currently the prevailing premium rate was even less than 1.5 percent. The smaller insurance companies in order to be competitive offer lesser premium which eventually also reduced their maximum exposure limits and ultimately the amount of sum insured. The undercutting practice tends to decrease the market participants i.e. insurance companies exiting/abandoning the scheme due to low profit margin, the SECP report added.

Copyright Business Recorder, 2023


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