How insurance can boost fiscal resilience

Pakistan cannot insure away its fiscal deficit. But it can reduce the stress that floods, crop failures and infrastructure needs place on the exchequer. The missing fiscal-policy lever is not another tax or subsidy, but better risk financing and a deeper partnership with the insurance industry. Pakistan’s fiscal debate is usually framed as a choice between raising more revenue and cutting expenditure. Both matter, but a third lever can make public spending predictable and less disruptive: insurance. The fiscal constraint is stark. The federal budget for 2026-27 provides for total expenditure of Rs 18. 771 trillion, including Rs 8. 848 trillion in interest payments, while the federal Public Sector Development Programme is Rs 1 trillion. With so little fiscal room, a flood, crop shock or infrastructure disruption can force supplementary grants, additional borrowing or cuts in development spending. Insurance cannot remove the underlying deficit or debt burden. It can, however, reduce the frequency with which shocks become fiscal crises. The policy objective should be to replace open-ended, post-event bailouts with planned premiums, layered risk transfer and long-term investable assets. Several countries use insurance this way as part of their fiscal architecture. Pakistan has a meaningful base. According to the Insurance Association of Pakistan, the industry held Rs 4 trillion in assets at end-2025, wrote Rs 708 billion in gross premiums and paid Rs 443 billion in claims during the year. These balance sheets are significant because life insurers hold long-duration liabilities that can be matched with long-duration investments. The opportunity is to create risks and assets that insurers can price and hold on commercial terms. The goal is to pre-finance risk, cap fiscal exposure and preserve development spending when shocks arrive. Disaster risk: from emergency cheques to a national risk pool Türkiye provides one of the clearest examples of how government can convert catastrophe risk into a structured insurance market. Following the 1999 Marmara earthquake, it created the Turkish Catastrophe Insurance Pool, a public legal entity providing compulsory earthquake insurance for eligible dwellings. Private insurers and agents distribute and service policies, while the pool accumulates premiums and transfers severe layers of risk into reinsurance markets. The model has achieved scale. The World Bank reported in January 2026 that TCIP covered more than half of Türkiye’s dwellings and processed most claims from the devastating 2023 earthquakes within eight months. The state still provides the legal framework and remains relevant for extreme losses, while more losses are financed through premiums, reserves and reinsurance. Pakistan’s need for such a mechanism is compelling: the 2022 floods caused more than $30 billion in combined damage and economic losses, while resilient recovery and reconstruction needs were estimated at least $16. 3 billion. Before that disaster, average annual flood damage and losses were estimated at around $1. 5 billion. A Pakistani model could take the form of a federal-provincial catastrophe pool covering selected residential, small-business and agricultural risks. Government would provide enabling legislation, hazard maps and targeted premium support for vulnerable households. Insurers would manage distribution, administration and claims protocols; domestic and international reinsurers would absorb higher layers of risk; and the federal government would explicitly cap the layer it is willing to back. Parametric protection and catastrophe bonds could later be added for extreme events. The fiscal benefit is not that disasters become less likely. It is that their impact on the budget becomes more predictable. A premium is a known annual cost; a catastrophe is not. Agriculture and livestock: from negotiated relief to rules-based protection Mongolia’s Index-Based Livestock Insurance programme shows how agricultural relief can be made more predictable, transparent and more effective. During the 2010 Dzud, Mongolia lost around 8. 8 million animals, a shock the World Bank estimated at about 4. 4 percent of national economic output. Instead of inspecting every dead animal, the programme used district- and species-level livestock mortality as the insurance trigger. The structure divided risk into layers. Herders absorbed small losses, private insurers covered the middle layer, and government support was reserved for catastrophic losses. By 2014, around 19, 500 herders were buying the insurance. The approach reduced verification costs, delays and moral hazard. The relevance to Pakistan is substantial. Livestock contributes 62. 4 percent of agricultural value addition and 14. 6 percent of GDP, while supporting more than eight million rural families. Yet floods, droughts and disease outbreaks continue to generate repeated demands for compensation, loan relief and emergency assistance. Pakistan has already moved in this direction through Crop Loan Insurance Scheme Plus, introduced in 2026. The scheme expands crop coverage, uses technology-based calamity assessment, strengthens capacity through co-insurance and provides subsidised protection for eligible small farmers. The next step could be district-level index insurance for livestock and other agricultural risks, using triggers such as rainfall, flood intensity, area yield or livestock mortality. Private insurers could cover routine losses while government support would activate only above a clearly defined catastrophic threshold. This would give farmers faster relief while making fiscal support more transparent and auditable. Long-term capital: Mobilize insurer balance sheets without mandating them Insurance can contribute to fiscal resilience not only by transferring risk but also by mobilising long-term capital. Life insurers collect long-term savings and therefore need long-duration assets. Governments need infrastructure with long payback periods. The match works if projects are commercially sound and safeguards are strong. The United Kingdom’s Solvency UK reforms illustrate the regulatory route. The government reduced the risk margin for long-term life business and broadened assets eligible for the matching adjustment while retaining safeguards. The UK government and the Association of British Insurers estimated that these reforms could create capacity for more than £100 billion of insurer investment in productive assets over a decade. Pakistan should draw the right lesson. Insurers should not be instructed to finance projects simply because the budget cannot. That would transfer fiscal risk to policyholders. Instead, the task is to make infrastructure genuinely investable: long-tenor and rated instruments, predictable cash flows, inflation linkage where appropriate, transparent capital treatment and independent credit assessment. An illustrative 5 percent of Pakistan’s roughly Rs 4 trillion insurance asset base would be around Rs 200 billion. This is not a proposed quota; it shows that modest voluntary allocations can matter if Pakistan develops assets meeting insurers’ risk-return and liability-matching requirements. Infrastructure project bonds: making projects investable Regulatory permission alone will not mobilise institutional capital. Insurers and pension funds need securities they can actually buy. Chile’s concessions programme provides a useful example of how infrastructure projects can be structured for long-term investors. The OECD records that, from 1998, Chile permitted investment in unlisted infrastructure through project bonds. International monoline insurers commonly guaranteed these bonds, lifting many to investment-grade, often AAA, and making them suitable for pension funds. Concession operators also benefited from state minimum-revenue guarantees. By December 2010, Chilean pension funds had around $2 billion, or 1. 5 percent of assets under management, invested in infrastructure projects, almost entirely through infrastructure bonds. Pakistan need not copy the Chilean structure. The principle is to allocate risk so a project becomes an investable security. Roads, transmission lines, water systems or logistics projects could sit in ring-fenced project companies with transparent concession terms, escrowed revenues and clearly allocated construction, demand and political risks. Government support—whether through viability-gap funding, partial credit guarantees or minimum-revenue mechanisms—should be explicit, capped and budgeted. Multilateral guarantees could help viable projects reach investment grade. This is especially relevant during austerity. Infrastructure can proceed without the entire capital cost being charged to one year’s development budget. Government bears only the risks it is best placed to manage, private sponsors carry construction and operating risks, and institutional investors provide long-term debt where the security is commercially sound. Towards a Pakistani fiscal-resilience architecture The international examples differ, but the underlying logic is consistent. First, quantify the exposure. Second, decide which losses households, firms or government can reasonably retain. Third, transfer larger layers to insurers, reinsurers or capital markets. Fourth, create investable long-term assets. Fifth, disclose every public guarantee and subsidy so that fiscal risk is genuinely reduced. Life insurers can serve as anchors because of their scale, distribution and experience in public programmes. As a general principle, policyholder funds must remain protected, investments must satisfy regulatory and solvency requirements. Participation across insurers, takaful operators, reinsurers, mutual funds and capital-market investors would lead to competition leading to discipline and diversification. Governments should not steer institutional investors into projects merely because they are politically attractive. The central test must remain whether the underlying risk-return profile is suitable for policyholder and pension assets. The fiscal dividend is resilience Pakistan will not exit austerity simply by buying insurance policies. But sustainable fiscal reform also requires changing the way the state absorbs risk. A government that pays predictable premiums rather than unpredictable bailouts can better protect development spending. A farmer receiving an automatic index pay-out needs less emergency relief. An investment-grade project bond can finance infrastructure without placing the entire cost in one year’s PSDP. Building on the current National Disaster Risk Financing Strategy, a federal-provincial catastrophe pool can move part of a national shock away from the Treasury and into insurers, reinsurers and global capital markets. That is the real proposition: more effective use of risk markets. Pakistan already has the need, the institutions and a multi-trillion-rupee insurance balance sheet. What is missing is a deliberate framework that treats insurance not merely as a retail financial product, but as part of the country’s fiscal infrastructure. Copyright Business Recorder, 2026

Read full story on Business Recorder