Islamabad has encouraged state-owned insurance companies to work more closely with the agricultural sector in a bid to increase insurance coverage for deserving areas. If put into motion, the implications of this suggestion will be far-reaching – for both businesses and the economy.
As it stands, the prized agricultural sector employs over 36 per cent of the workforce, makes up 23 per cent of the national GDP and brings in an impressive eight billion dollars in export earnings. However, it remains highly neglected by insurance companies, which could prove problematic.
The severity of this neglect can be realized by SECP (Securities and Exchange Commission of Pakistan) statistics, which state that insurance companies’ total earnings from non-life sectors is just a measly two per cent. This shows that only a minority of those in the agricultural sector are insured.
With state-owned insurance companies now expected to step into and operate in under-covered areas, it would be fair to say that the profit margins of private insurance companies will largely remain unaffected. This is because if private companies lose out on insurance contracts, it won’t be tough to replace these farmers as many would be willing to sign on.
While insurance companies will likely remain unaffected, this policy recommendation, if implemented, will serve to enormously benefit many in the agricultural sector. This is because having insurance plans protects farmers from bearing the financial loss of crop failures.
Crop failures have remained common in Pakistan due to frequent droughts and, more recently, flooding. In the past 24 years, Pakistan has been hit with five droughts, which have resulted in significant losses in farmers’ yields. However, the flooding experienced in 2022 resulted in massive nationwide crop failures, which wouldn’t have hit farmers as hard as they did if they had been insured.
The floods devastated crop yields, resulting in an estimated yield loss of 61 per cent to sugarcane and 88 per cent to cotton, and in just Sindh alone, rice yields fell by an estimated 80 per cent. The loss to livestock, which makes up 63 per cent of the agricultural sector GDP, was severe, too. Crop failures of this magnitude are enough to put any small farmer out of business if they aren’t insured.
What’s more interesting is that the root of the problem for farmers starts before they even set foot in the agricultural space. In economics theory, rational actors prefer having consistent income streams.
However, this consistent source of income is challenged by the crop failures experienced in farming, as a good yield nets a tidy profit while a crop failure brings in no income. As such, the lack of insurance impedes the entry of businesses interested in commercial farming.
If state-owned insurance companies throw a lifeline at under-covered areas, it will help out the agricultural sector and the farmers who call it home. For now, all eyes are on the decision-makers who can pull the strings to put this plan in motion.
