Recent data from the Securities & Exchange Commission of Pakistan (SECP) shows that insurance became less popular in real terms during 2024 compared to 2023. Insurance penetration, total premiums as a percentage of GDP, fell from 0.79 per cent to 0.7pc, while insurance density, per capita insurance premium, dropped from Rs3,205 to Rs2,913.

A key reason is that large segments of lower-middle-income and poor households remain excluded from formal insurance. This raises an important question: Can we expect financially challenged groups to buy insurance as a retail product like their wealthier counterparts? The answer is no. For low-income and bottom-of-the-pyramid segments, insurance must be treated as an item of infrastructure rather than a retail product.

A risk-transfer tool

In its purest form, insurance transfers the risks faced by individuals, communities or governments to specialists called insurers. When risks are not transferred, they are retained, meaning losses must be covered from one’s own resources. The floods in 2022, for instance, forced the government to fund recovery and rehabilitation largely from public coffers. Risk retention becomes challenging when finances are already weak, pushing people and states further into poverty. Deeper insurance penetration, therefore, is a sign of both micro and macro resilience.

Structural issues

Insurance’s failure to reach the masses is often blamed on low awareness or distrust, but these are symptoms rather than causes. The real issue is structural. In emerging markets, including Pakistan, insurance mostly operates at two extremes of conventional models serving a small urban elite and donor-funded social schemes that disappear once subsidies end. Neither builds systemic resilience for the majority.

Like electricity, we must treat insurance not as a luxury, but a necessity to be embedded within the national economic fabric to protect the country from financial shocks

Between these extremes lies the missing ground, ie insurance as an infrastructure that is permanent, inclusive and embedded in national systems. Consider electricity. Once a privilege, now essential. Insurance deserves the same treatment, not a luxury but the wiring that prevents individuals and states from financial collapse when shocks occur.

Insurance as infrastructure?

First, risk is universal. Everyone, farmer, worker, business or government, faces uncertainty from illness, disaster or income loss. Infrastructure, by definition, serves all.

Second, the cost of inaction is huge. The 2022 floods caused over $30 billion in losses, of which almost nothing was insured, and left the state and donors to bear the cost.

Third, insurance accelerates recovery. Economies rebound faster when reconstruction funding flows quickly. It provides liquidity at the right time.

Finally, insurance promotes equity. It enables the poor to protect what little they have and converts exclusion into participation.

Every major disaster generates two key challenges in terms of recovery and those are speed and quality. Both are functions of the availability of funds, faster and in ample amounts. The funding challenge leads to a range of recovery outcomes from none, impaired, restorative and the ideal reformative recovery.

There is an undeniable correlation between insurance penetration and the speed and quality of economic and societal recovery. For example, research from the Cambridge Centre for Risk Studies indicates that economies with non-life insurance penetration above 4pc as a percentage of GDP were able to achieve reformative economic recovery from major disasters in approximately three years. On the other hand, those with very low insurance penetration struggled beyond five years and barely achieved impaired to restorative recovery.

Similarly, recovery from the German flooding in 2013, where more than 600,000 people were affected, was completed within a mere 12 months. On the other hand, the 2010 earthquake in Haiti took several years to recover. The level of insurance penetration is, of course, one of the key differences between the two economies.

Role of the state

If insurance is infrastructure, governments must enable it to function as such. This means embedding insurance into policies for social protection, agriculture, health and climate adaptation. Subsidising premiums for vulnerable groups should be seen not as welfare but as preventive fiscal management.

Every rupee spent on risk transfer saves many more in post-disaster aid and reconstruction. Governments must also insure public assets and set national coverage benchmarks. Public-private partnerships can then extend protection outward, linking local insurers with reinsurance and donor support.

The missing link

Discussions about inclusive growth often focus on credit and savings, ie the ability to take risks and invest. Yet, the capacity to recover is equally vital. Without protection, all development remains fragile. Insurance, therefore, is not an optional financial tool but the backbone of resilience and a key infrastructure of stability. It must move from the margins of financial inclusion to the centre of national planning. Until that happens, we will continue to rebuild slowly after every shock instead of bouncing back stronger. n

The writer is an insurance professional

Published in Dawn, The Business and Finance Weekly, December 1st, 2025