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Monday, April 15, 2024

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Coverage gap main challenge for Takaful operators to soften blow of Pakistan’s floods

Takaful and insurance play a mitigating role in disaster management. However, the people in Pakistan are not able to benefit from the mitigating effect of insurance and Takaful in the aftermath of the floods, which started on the 14th June 2022, due to the substantial coverage gap in the country.

“The uninsured losses will be significantly higher than the insured ones. The livestock segment is completely uncovered. If we just look at the economic loss of livestock, that runs into billions of Pakistani rupees itself … It will take a number of years to get things back on track for the rural economy,” Umair Ismail Ghaya, the head of specialty and transformation at Salaam Takaful, told ISFI.

According to the United Nations Office for the Coordination of Humanitarian Affairs, as of the 16th September 2022, the floods in Pakistan has resulted in the destruction of 765,000 houses, the damage of 1.14 million houses, the damage of 12,700 kilometers of roads, the death of 1,500 people, the injury of 12,900 people and the loss of 936,000 livestock.

While one would expect Takaful operators to be heavily impacted by the floods in Pakistan due to an increase in claims, the relatively low saturation of Takaful in Pakistan, combined with Takaful operators not generally not offering the same variety of products as their conventional counterparts, has left Takaful operators better off than conventional insurers.

“There have been significant losses on the current crop loan insurance scheme that is prevalent. It is primarily done by the conventional insurers. Takaful operators had a very limited stake and exposure in that,” Umair shared.

The impact of the catastrophe on Takaful operators is still too early to determine with claims expected to roll in in the near future. According to Umair, the total losses for crop insurance will range from PKR900 million (US$3.78 million) to PKR1 billion (US$4.2 million). The figures and information on this are very much still developing.

Farmers from regions where crop land has not been destroyed from excess precipitation have still been impacted due to missing out on the sowing window for certain crops, meaning they will lose a whole crop cycle, severely impacting their income. According to Umair, this was particularly challenging for cotton growers resulting in a significant loss of yield.

The income level of farmers also poses a significant challenge for Takaful and insurance to play a mitigating role to soften the effects of such calamities. Farmers give coverage the lowest priority when it comes to their expenses. The effect of this is particularly poignant in the case of the current floods as the poorest regions, notably the provinces of Sindh and Balochistan, have been the most severely hit.

As a result of the floods, there has been a greater emphasis from the market for flood cover across the entire agricultural value chain. The flood presented a problem statement to the market. Salaam Takaful is advocating for a national insurance scheme based on a Takaful model. It has conducted several pilot parametric Takaful projects as part of its larger initiative.

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