In the aftermath of the 2022 floods that affected over 30 million people, Pakistan faces a difficult path to recovery. As reported in the Financial Times last month, out of the estimated $16.3 billion needed for recovery, the international community has pledged $10 billion — with only $3 billion having been disbursed to date. Much of this disbursed amount comes in the form of repurposed loans, which detract from other development projects and increase Pakistan’s debt burden. Over 12 million families remain in makeshift shelters. According to World Bank projections, the cumulative impact of these disasters could reduce Pakistan’s GDP by up to 18–20% by 2050. Pakistan is trapped in a cycle of catching up with the impacts of recurrent floods, droughts, earthquakes and heatwaves; as one official observed to the Financial Times – “we are trading away our future to repair from the disasters of the past.”
Securing the Future by Preparing the Present: Moving from Reactive to Proactive Climate and Disaster Risk Finance (CDRF)
Today, Pakistan is confronted with a severe financing gap – it is highly exposed to disasters and losses are extremely high. The government relies primarily on budgetary (re)allocations from other budgetary lines to reactively finance its disaster response, but funds are inadequate. Furthermore, while Pakistan has established essential national structures and institutions to be responsible for disaster response, they face coordination challenges, thus hampering the flow of funds and the effectiveness of their response.
To effectively respond to disasters, a country must have access to predictable and reliable funds in the wake of disaster. This can only be achieved with a proactive approach – by putting in place financial strategies well in advance of the next disaster (ex-ante or pre-arranged financing), in a coordinated way where different corresponding financial mechanisms, depending on the severity and frequency of the disaster, are deployed with minimal delay:
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Risk Retention – The first line of defence involves dedicated reserves like national funds that need to be accessible quickly for immediate relief in higher-frequency, smaller-scale disasters, such as localized floods. It can be bolstered by contingent credit facilities. For instance, Pakistan leverages its social protection programme, the Benazir Income Support Programme (BISP), to mobilize targeted payments to vulnerable households during crises.
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Risk Transfer – For larger, less frequent disasters, governments can use financial instruments like insurance and catastrophe bonds. Such instruments enable relatively fast mobilisation of a high amount of financial resources to cope with impacts such as recovery and reconstruction, reducing financial strain on government budgets. In Pakistan, the government-initiated Crop Loan Insurance Scheme (CLIS) provides critical financial support to agricultural loan holders in case of catastrophic crop losses (exceeding 50% of average yield) (UNDP, 2024). Premiums are subsidized for farmers with lands below a certain size, thus targeting smaller-scale farmers. The InsuResilience Solutions Fund (ISF) is currently supporting similar initiatives e.g. in Uzbekistan and Rwanda.
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Ex-Post Mechanisms – The first two CDRF layers decrease dependency on post-disaster like donors, loans, or budget reallocations, which are not always reliable or often carry high economic trade-offs, as illustrated in Pakistan’s ongoing recovery challenges.
Insurance as a Tool for Disaster Risk Transfer: Underutilized Potential
Globally, including in Pakistan, insurance is still under-utilized as a tool to manage sovereign-level disaster financial risk – this refers to arrangements where governments themselves are the risk holder and take up an insurance contract to access additional funds during a disaster. The government of Pakistan currently makes minimal use of sovereign risk transfer instruments, including insurance, instead retaining most of the financial risk. The various ways in which insurance can be deployed include:
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Protecting critical infrastructure – Insurance can help safeguard essential public assets, providing reconstruction financing for roads, bridges, schools and hospitals. The government of Pakistan has set up a state-owned insurer with the mandate to protect public assets, but implementation remains limited and warrant an examination of how this could be improved, for instance through regulatory changes, public-private partnerships or insurance market development.
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Covering different stages of disaster response – Parametric insurance pays out faster based on objective and transparent criteria in the form of indices, but comes with basis risk. On the other hand, indemnity insurance can better match losses; but may take longer and comes with certain reinstatement conditions. Some countries therefore have adopted a hybrid approach, combining indemnity for long-term recovery needs with parametric products for immediate emergency funding.
Complementing but not replacing risk retention – To manage financial exposure, countries can adopt a multi-tiered strategy where losses up to a certain threshold are retained, with excess risks transferred to insurers. Insurance can also complement local risk pooling and social protection systems. For instance, the ISF is supporting the National Solidarity Fund (FSN) of Senegal in using risk transfer instruments to expand FSN’s financial resources in the aftermath of a drought or flood, ensuring fast payouts and effective disaster response.
Regional risk pooling – Regional Risk Pools are collaborative initiatives among countries that, by pooling disaster risks regionally and then transferring the risks to global markets, offer sovereign-level parametric insurance products. Currently the only operational regional risk pool facility in Asia, SEADRIF, is only accessible to ASEAN countries.
Effective Use of Insurance as a CDRF Tool
For insurance and other CDRF instruments to be effective, they must be adapted to national needs and local contexts and designed with a clear purpose in mind. For instance, in Pakistan, provincial governments rely on federal government when its own reserves run out (World Bank, 2024). Could Pakistan benefit from embedding risk transfer and insurance directly into provincial-level CDRF strategies, for instance? Drawing inspiration from the experience in Senegal, insurance could potentially also provide disaster cover as a top-up to Pakistan’s flagship BISP programme, supporting its long-term financial sustainability. In contrast to retail customers, governments as policyholders have the benefit of being able to negotiate their terms of cover directly with the insurer and tailor products to their needs.
Crucially, risk analyses and data must be available to ensure that solutions are needs-driven and targeted – an area in which Pakistan has laid strong building blocks through their Multi-Hazard Vulnerability Risk Assessments (MHVRAs). Sufficient institutional capacity is needed to translate risk information and CDRF gaps into an efficient and purpose-oriented combination of financial instruments. Legal, regulatory and policy frameworks must ensure funds can be deployed without administrative bottlenecks, allowing timely assistance to reach affected populations.
Financial Preparedness as a Catalyst for Resilience and Stability
The NDRMF of Pakistan has developed a National Disaster Risk Financing Strategy, which addresses issues including sovereign disaster risk finance and transfer (UNDP, 2024). This a significant positive step. The handing over of Pakistan’s Request for Climate and Disaster Risk Finance and Insurance Support to the Global Shield at COP 29 marks another milestone; the Global Shield, with its financing structure including the Global Shield Solutions Platform (GSSP), stands ready and is committed to supporting Pakistan in taking this forward. Equipped with an effective CDRF strategy, countries can limit economic disruption and sustain development even through climate disasters – achieving greater resilience and sustaining communities through the hardest times.