The significance of climate risk insurance in today’s world extends far beyond just financial security. It is a crucial lifeline for communities facing the devastating impacts of a rapidly changing climate.
For countries like Pakistan, where the climate emergency is not a distant threat but a harsh reality, these words carry profound significance. The country, ranked in the top 10 on the climate vulnerability index by GermanWatch, has endured a relentless barrage of climate-induced disasters in recent years.
The 2022 floods alone submerged a third of the country, displaced 33 million people, and caused economic losses exceeding $30 billion. But the crisis goes far beyond floods. Intense heatwaves, often pushing temperatures above 50 C, have become more frequent, affecting public health and damaging biodiversity, shrinking water resources and increasing mortality rates. Droughts have further ravaged agricultural productivity, leading to widespread food insecurity and loss of livelihoods, particularly in rural areas where farming is the backbone of the local economy.
It has been estimated by the World Bank that Pakistan’s GDP is expected to decline by 18–20 per cent by 2050 due to the climate crisis. Against this backdrop, the need for innovative financial solutions to mitigate climate risks has never been more urgent. However, microfinance institutions (MFIs), with their extensive reach into underserved communities, are emerging as key players in bridging the gap between vulnerable populations and climate risk insurance. With over 40 MFIs operating in Pakistan, the sector is uniquely positioned to scale up climate insurance coverage and build resilience at the grassroots level.
Globally, the fusion of microfinance and climate risk insurance is being hailed as a game-changer. According to the International Finance Corporation (IFC), the demand for climate risk insurance in developing countries is projected to grow exponentially, with the market potential estimated at $200 billion by 2030. This surge is driven by the increasing frequency and severity of climate-related disasters, which have displaced millions and pushed vulnerable populations deeper into poverty.
MFIs, with their deep-rooted presence in underserved communities, are uniquely positioned to democratise access to climate insurance. By integrating insurance products into their portfolios, MFIs can empower low-income households and small businesses to build resilience against climate shocks. This is not just a theoretical proposition; evidence from many developing countries like Kenya, Indonesia and Bangladesh demonstrates that MFI-led climate insurance initiatives have significantly reduced post-disaster indebtedness and accelerated recovery times.
In Bangladesh, BRAC Bank, one of the world’s largest NGO-led banks and a pioneer in microfinance, has been at the forefront of integrating climate risk insurance into its services. Through its Climate Change Program, BRAC has provided weather-indexed insurance to over 200,000 smallholder farmers, enabling them to protect their livelihoods against extreme weather events like floods and cyclones. The programme uses satellite data and weather indices to trigger payouts, ensuring timely and transparent compensation for farmers.
During the devastating floods of 2020, farmers enrolled in BRAC’s insurance scheme received payouts that allowed them to recover quickly and avoid falling into debt. This model has not only safeguarded livelihoods but also encouraged farmers to adopt climate-resilient practices, such as planting flood-resistant crops and diversifying income sources. The success of BRAC’s initiative offers valuable lessons for Pakistan, where the penetration of insurance remains alarmingly low.
In Pakistan, less than one per cent of the population is covered under any form of insurance, according to the Securities and Exchange Commission of Pakistan (SECP). This gap highlights the urgent need for innovative approaches to expand coverage, particularly in rural areas where the majority of the population relies on climate-sensitive livelihoods such as agriculture. The country’s microfinance sector has the potential to be a catalyst for scaling up climate insurance coverage. Leading MFIs like NRSP, Akhuwat, Kashf and Khushhali Microfinance Bank have been working on strengthening climate adaptation and resilience by integrating risk insurance. Many of their initiatives, though still in their early stages, demonstrate the potential of MFIs to drive climate resilience at the grassroots level.
By integrating climate risk insurance, MFIs can strengthen their position to comply with global standards like the Task Force on Climate-related Financial Disclosures (TCFD) and International Financial Reporting Standards (IFRS). The TCFD provides a framework for organisations to disclose climate-related financial risks, enabling investors and stakeholders to make informed decisions.
By offering climate insurance, MFIs can demonstrate their commitment to managing climate risks, thereby enhancing their credibility and attracting sustainable investment. Similarly, IFRS standards, particularly IFRS 9, require financial institutions to account for climate-related risks in their financial reporting. So, climate risk insurance helps MFIs mitigate these risks, ensuring compliance with global reporting standards and improving their access to international capital markets. These alignments not only support to strengthen the credibility of MFIs but also enhance their ability to contribute to global climate resilience efforts.
Despite its potential, the road to scaling up MFI-led climate insurance in Pakistan is fraught with challenges. One of the primary barriers is the lack of awareness and financial literacy among potential clients. Many low-income households view insurance as an unnecessary expense rather than a critical safety net. Overcoming this mindset requires extensive outreach and education campaigns, which MFIs are uniquely positioned to lead.
The high cost of premiums remains a significant hurdle, particularly for cash-strapped farmers and small businesses. MFIs also often struggle with high compliance costs and restrictive guidelines, which can undermine their ability to offer affordable insurance products. In this context, the State Bank of Pakistan has a critical role to play in reforming regulations to support MFIs' efforts to expand access to climate insurance and other resilience-building products. For example, creating simplified compliance processes and providing support for training and capacity-building could help strengthen the sector and align it with national climate adaptation goals.
Innovative financing mechanisms, such as subsidies or partnerships with international development agencies, will be essential to make climate insurance affordable and accessible.
Another critical challenge is the lack of reliable data to support climate insurance products. Accurate weather data, and forecasted data models, for instance, are essential for designing effective weather-indexed insurance schemes.
The way forward for Pakistan lies in a multi-stakeholder approach that leverages the strengths of MFIs, regulators, international organisations, and the private sector. Collaborative efforts, such as public-private partnerships, can help overcome the barriers of cost and infrastructure. For instance, the government could provide subsidies to make climate insurance more affordable, while international development partners could offer technical and financial support to strengthen data systems and build institutional capacity.
At the same time, MFIs must continue to innovate and tailor their products to meet the unique needs of their clients. This could include bundling insurance with other financial services, such as microloans or savings accounts, to create comprehensive resilience-building packages.
As the world struggles with the escalating climate crisis, the role of microfinance institutions in promoting climate risk insurance cannot be overstated. For Pakistan, a country on the frontlines of climate change, this is not just an opportunity but a necessity.
By leveraging the strength of microfinance to democratise access to climate insurance, Pakistan can build a more resilient future for its people and pave the way for other vulnerable nations to follow suit. The time to act is now, before the next disaster strikes. The stakes are too high, and the cost of inaction is simply too great.
The writer is an environmental scientist.
She leads the programme on ecological sustainability and circular economy at the Sustainable Development Policy Institute (SDPI), Islamabad.
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