ISLAMABAD: 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.
A special report of the SECP on crop and livestock insurance revealed that the insurance pool may first propose standardized contracts covering specific risks (for example, floods, lack of rainfall) in order to limit transactions 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.
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The SECP recommended that the government can make more efficient use of resources and can enhance capacity within 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 applicable limit of liability cap on the total premium received at consortium level, which will be effectively higher than the existing cap applicable on premium received by individual company.
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 for the local general population.
Other administrative modalities for finalization of such mechanism can be discussed and agreed between all the stakeholders.
Currently, Pakistan lacks any sort of domestic insurance pool that would provide a mechanism for insurers to collectively share risks locally, reducing dependence on international re-insurers and promoting economic self-sufficiency within the insurance sector.
The absence of such a local mechanism contributes to a significant outflow of foreign exchange, as insurance companies in the country resort to reinsuring the risks beyond its capacity with foreign counterparts, the report added.
Copyright Business Recorder, 2023
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