This is general third party road insurance by Govt of Pakistan, and yes policeman is true it is a mandatory thing for driving.
It makes sure that if any accident happen, Govt will take care the driver for any loss, as a symbol of a social service.
On the other side, it is totally useless in PK. You can never claim it!
I think these are only for vehicles which have life paid tax, like bikes, and vehicles older than 87. It is not valid for regular cars as they pay car tax and thats included in that (though I'm not sure in that)