Daily Times

Pakistan urgently needs to enhance the current disaster risk finance approach as risk retention mechanisms are insufficient to cover the losses associated with even the most frequent of flood and earthquake events, Asian Development Bank (ADB) said in a report on Tuesday.

The report titled “Narrowing the Disaster Risk Protection Gap in Central Asia” said the private insurance solutions to the natural disasters’ risks have achieved only minimal market penetration. “These challenges are compounded by a challenging external financing context at the sovereign level, making it difficult to access debt quickly and cheaply after a disaster, and low levels of financial inclusion that exacerbate the vulnerability to disaster events of many in Pakistan”, it added.

Previous disaster events illustrate the challenges that Pakistan faces, for example, floods in 2010 and 2015 caused an estimated Pak Rs32.6 billion ($326 million) losses to farmers in Punjab. To support the affected farmers, the Government of Pakistan provided Rs6.7 billion ($67 million), amounting to only 18.5% of the required amount, the report added.

There would appear to be a need to increase the coverage and depth of the existing risk retention instruments for high frequency events, through enhanced functioning of the national and provincial disaster management funds. This could be complemented with the use of risk transfer instruments that might support either the emergency response cost and/or the support the reconstruction of assets damaged or destroyed by lower frequency, higher intensity events.

These actions are consistent with the identified work plan of the Disaster Risk Financing Unit of the National Disaster Risk Management Fund, the report said. It said the National Disaster Management Act of 2010 established a National Disaster Management Fund and separate disaster management funds to be administered by each provincial government. These are intended to cover spending on items such as shelter, food, drinking water, medical cover, etc.

However, ADB reports that “significant work remains to be accomplished in operationalisation of the funds, adequate provision of financing mechanisms and standardization of procedures across provinces.” It reports that the federal government typically only has limited contingency funding of around $15 million-$20 million to respond to national emergencies while a 2019 World Bank paper reports that the federal fund has $10.6 million.

With support from ADB, a disaster risk financing unit has been established under the National Disaster Risk Management Fund (note it is different from the National Disaster Management Fund discussed above). This unit is responsible for the improved management of natural hazard risks and has set itself three targets. The AAL (direct losses only) from flood events is estimated at $1.5 billion and from earthquakes at $614 million. In terms of the extent to which insurance might cover these losses, the analysis assumes that 1% of the losses from flood events may be covered by insurance, in line with the ADB analysis. It is assumed that a higher proportion of the losses from earthquakes might be covered by insurance based on market reports that 70% of property insurance policies cover earthquakes.