When one-third of Pakistan was submerged during the catastrophic floods of 2022 and economic losses exceeded $30 billion, the critical question was not just how to rebuild but how to pay for it. In the absence of pre-arranged financial mechanisms, Pakistan had to divert funds from essential social sector budgets and rely heavily on uncertain and cost heavy international donors.
This reactive approach to disaster financing is a costly cycle. Effectively jeopardizes development gains and pushes vulnerable households deeper into poverty.
Against this background, a comprehensive disaster risk management (DRM) approach is no longer just an economic necessity but a moral responsibility. While the framework for such an integrated system is slowly emerging, it still lacks key components.
Effective DRM demands continuous investments in early warning systems, risk-informed land-use planning, resilient infrastructure, and community preparedness. But equally critical, it must be paired with a robust disaster risk financing (DRF) mechanisms, including tools like insurance, pool funds, contingency funds, and catastrophe bonds. Separately, each of these elements is useful but together, they can be transformative.
Like in many developing countries, uptake of disaster risk transfer instruments in Pakistan has been slow. Structural barriers include an under-developed insurance sector, weak regulatory frameworks, data availability and access challenges and an overarching absence of risk-financing culture.
On top of this, private insurers are often unwilling or unable to enter markets exposed to high levels of diverse and unpredictable disaster risks. Even the sector mostly lacks public trusts for existing insurance products, i.e., they are not sure about payouts. Pakistan is a textbook case of this conundrum.
Several pilot insurance programmes have been tested over the years, but with limited scope and scale or sustainability. So what will it take to make disaster risk insurance work in Pakistan?
First, some fundamentals need to be fixed and build a supportive ecosystem so the insurance industry can grow into its role. This includes scientific, data-driven systems to estimate disaster risks and model losses under various scenarios, but importantly on high-impact scenario. Without accurate models, insurers can neither price premiums correctly nor assure adequate capital reserves or reinsurance coverage.
Fortunately, Pakistan has made notable progress in this area. The Natural Catastrophe (NatCat) Model, developed by the National Disaster Risk Management Fund (NDRMF), is a homegrown tool focused on helping the insurance industry assess and price disaster risks. It is one of the few such national models in the developed and developing world and is a beginning to be adopted by insurers. Crucially, it provides independent, verifiable, and reliable data building confidence among insurers, investors, and donors.
However, even with strong technical capacity, no single insurer in Pakistan has the capital reserves to withstand major disaster shocks. The solution lies in creating a multi-stakeholder disaster risk insurance pool, a model that has been successfully adopted in other high-risk developing countries.
To provide a strategic framework at national level, NDRMF has already approved first-ever Disaster Risk Financing Strategy of Pakistan in 2024, which is clearly high-lighting possible sovereign and non-sovereign risk financing solutions with a 10-years strategic implementation road map. Now it’s the time to roll-on implementation of the DRF Strategy both at national and sub-national levels.
As identified in the DRF Strategy, a pooled insurance fund backed by both government and private insurers can spread or transfer disaster risks more effectively, improve financial stability, and make it viable for insurers to offer disaster-specific and region-specific products and services. The Securities and Exchange Commission of Pakistan (SECP) has rightly identified the potential of this structure in its analytical work on agricultural insurance landscape in Pakistan, and also highlighted the DRF in its Five Year Plan 2023-2028. The SECP has unveiled in its five-year strategic plan for the insurance industry with a target to increase the number of insured people from about 8 million at present to 15 million and total premium of PKR 1.3tn ($4.6bn) by 2028.
International experience shows that pooling can attract initial capitalization and stop-loss protection from global partners like the World Bank, Asian Development Bank, and UNDP. Such support is essential to de-risk the market and build long-term resilience and sustainability.
Another stumbling block is limited capacity of domestic reinsurance capacity in Pakistan which is absolutely necessary for expanding the disaster risk insurance in the country. Risk pooling arrangements can make the local insurance sector more attractive to global reinsurers by reducing exposure concentration and improving predictability. Countries across Africa, the Caribbean, and Asia have built their insurance systems with substantial support from international reinsurance companies. These companies are open to engaging with Pakistan but they need a clear, consistent regulatory framework and visible government support.
Yes, the government has a role but it must be carefully calibrated. Its support should be focused on removing structural barriers, de-risking the market, and providing transitional support not crowding out the private sector. Ultimately, the goal must be a fully market-driven insurance ecosystem. Without open and fair completion, the insurance sector will not flourish and sustain.
Public resources should be strategically directed to those who need protection most. This includes index-based crop insurance for smallholder farmers and community-based micro-insurance for low-income and disaster-prone households. These models not only provide financial security to the most vulnerable but also foster trust in insurance mechanisms from the ground up. Moreover, with the penetration of insurance sector, side-by-side the risk literacy and culture of disaster risk reduction and climate change adaptation will take its path on a higher ground.
Disasters are not going away. But if we act now, Pakistan can ensure that the next one does not become an economic collapse. The tools and high-level strategic framework exist and the models are ready. What’s needed is to have the regulatory framework in place fostering partnership approach between public and private sector to turn disaster risk insurance from a policy aspiration into a protective reality, changing the face of disaster risk management approach in the county.
Bilal Anwer
The writer is an International Climate Policy and Sustainable Development Professional and is the CEO of the National Disaster Risk Management Fund
