Insurance sector of Bangladesh: Essential but neglected

The development of a sector in an economy is generally measured by its contribution to the GDP. Contribution of the insurance sector to the GDP is measured by a ratio popularly known as penetration ratio — a ratio of premiums to GDP. 

This ratio averaged 7% in the world in 2021. In the same year, it was 4.2% in India, 2.8% in Malaysia, 2.6% in Vietnam and only 0.91% in Pakistan. And in Bangladesh this ratio was merely 0.46%, implying that the insurance sector did not develop like other sectors. 

The reasons are many. Although it is often blamed on a lack of awareness among people about insurance services, counter arguments are even much stronger.

The country has 81 insurance companies, of which 35 are life and 46 non-life. The life insurance companies constitute 74% and non-life insurance companies 26% of the market share. The moot question is does the economy of Bangladesh need so many insurance companies? The answer is no, because India has only 57 insurance companies and Malaysia merely 25.

The birth of many insurance companies in Bangladesh was completely absurd. A good number of companies were given licences just on political consideration. They were permitted not because they were needed for the economy but because they were distributed as a source of benefit to some politically or otherwise influential people. 

The basic premise is that if an economy has more insurance companies than it needs, some will certainly show poor performance, given a limited number of clients. There will be undue competition among them. Some may resort to various anomalies as well. 

The progress of the insurance sector of a country can be understood by looking at its claim settlement ratio. This ratio refers to the percentage of claims that the insurance company settles in a year compared to the total number of claims received. If the ratio is high, it means more claims are settled. 

But what are the claim settlement ratios of the insurance companies in Bangladesh? 

The historical data show that it was about 54% in the 1973-1990 period, which rose to nearly 73% over the 1991-08 period. This further increased to 78% in the 2009-2019 period. However, this rate dropped dramatically to only 68% in 2021 from 88% in 2020. 

In contrast, the global claim settlement ratio is 98% on average. Even in India, the average claim settlement ratio is 98% and most of the insurers settle at least 90% of their claims. The recent deterioration of this ratio in Bangladesh may be due to the pandemic. But what about its historically low settlement ratios? 

Many factors can be attributed to such low claim settlement ratios.

The insurers do not settle the claims even after some policies are matured. There is undue delay in claim settlement. In some cases, if clients are not powerful, their claims are not settled properly. A large number of insurance companies have to compete for the same number of clients with almost similar products and services. 

Some companies fail to invest their funds appropriately to generate the required return while other companies face investment losses. Besides, there was corruption, financial irregularities and embezzlement of funds in some companies which resulted in serious liquidity crisis. The regulatory authority also fails to ensure the accountability of the companies. Its lack of monitoring and supervision also allowed the companies to continue with many anomalies.  

The low claim settlement ratios and undue delay in claim settlement have put the insurance sector in a serious image crisis. With such low ratios, the insurance companies fail to attract clients because a client looks at the claim settlement ratio first before taking a policy. The delay in claim settlement indicates that the insurers are not sincere in preserving the interest of the insured.

While a skilled work-force is necessary for the growth of this sector, it fails to attract the talented graduates. The obvious reason is low remuneration. When graduates compare the initial salary of this sector with other sectors, they become disappointed. This is the least preferred sector to the brilliant graduates of the country. As a result, this sector is run by relatively less competent employees. 

There is information asymmetry regarding risks and scopes of coverage of a policy. During the conversation between an agent and a policy-holder, sometimes incomplete information is provided by the former to the latter. In many cases, policy-holders do not look into the terms and conditions of policies; rather they depend on what the agent says. 

In such cases, the agent can exaggerate the benefits of a policy. When the policy matures, the policy-holder finds a huge gap between the promise and the reality. It is also observed that most policy-holders do not continue their policies after the first year. It is blamed that the agents are more interested in opening new policies because their commission is more in the first year of a policy than the later years. The lack of professionalism of these agents develops negative perceptions about the insurance sector.

Although the economic growth was substantial for the last two decades, the income inequality also grew considerably. This uneven income distribution kept a large proportion of the population outside insurance coverage. They failed to earn the ability to take insurance policies and continue the same. 

A paradoxical situation has emerged in the country. The rich have the ability to manage risks personally and still they have insurance policies. But the poor who face many risks do not have insurance policies which can be attributed not only to the lack of awareness but also to the inability to buy the policies.  

There is also a mismatch between the demand for and supply of the products and services. Before launching any product, there should be a survey on prospective customers so that the supplier can understand its latent demand and design it accordingly. But in our country, most of the time, products and services are launched without serious investigation into the market. 

A British Law governed the insurance sector of Bangladesh before the enactment of the insurance law in 2010. The negligence to this sector is evident from the setting up of the Insurance Development and Regulatory Authority (IDRA) only in 2010 although this sector has been operating in the country in parallel with the banking sector after the independence of the country. 

The IDRA does not have adequate workforce to regulate the insurance sector properly. A good number of its employees work on contractual basis. In addition, there is also doubt about the autonomy of this institution in taking corrective measures against the insurance companies involved in irregularities like Bangladesh Bank which sometimes fails to take actions against some bank owners involved in irregularities. 

The detection of some financial scams where directors syphoned off a huge amount of money from some insurance companies put the insurance sector in dire condition. The directors syphoned off the money of policyholders, making the regulatory lapses clearly visible. The regulator failed to identify these scams on time. 

Developing the insurance market is crucial for achieving the balanced and sustained economic growth of Bangladesh. There is huge potential for this sector to contribute to the economy. The low penetration of this sector means it has a huge untapped opportunity given that there has been significant growth of the economy, income level, life expectancy and young population. To increase penetration, lack of trust in this sector must be removed soon. Insurance services must be made available to people through various channels.

The Bangladesh Bank has issued 'Bancassurance Guidelines for Banks' very recently to allow banks to work as corporate agents of insurance companies to sell insurance products in the market. This system of selling insurance services to bank customers is known as bancassurance. Here banks will simply work as corporate agents, make their customers know about insurance policies, and sell them to interested customers. 

The main objectives of bancassurance are to provide a regulatory and supervisory framework to sell bancassurance, increase insurance penetration and increase the outreach of banking and insurance services to promote financial inclusion. It will also try to promote social security and sustainability through insurance coverage, enhance consumer protection and provide one stop service for banks and insurers.

There are some eligibility criteria which must be maintained by banks to work as corporate agents of insurers for bancassurance business. The major criteria are that a bank must have minimum regulatory capital of 12.5%; it shall meet the credit rating not less than Bangladesh Bank rating grade 2; it shall meet the minimum CAMELS rating of 2 of Bangladesh Bank; its non-performing loans (NPLs) must not be more than 5%; it should have positive net profit for the last three consecutive years. A bank can enter into a contract with a maximum of three life insurance and three non-life insurance companies. 

If insurance products can be made attractive considering financial needs of people and there is perfect trade-off between banks and insurers, it is expected that many people will come under insurance coverage. Not only that, those who do not have bank accounts may also be induced to take insurance policies by opening bank accounts. 

This will certainly increase the outreach of banking and insurance services, promoting financial inclusion. The most important thing for bancassurance to be successful is that insurers must have good intentions. They need to attain capacity in fund management particularly investment and liquidity management. They have to check misappropriation of funds. The regulatory authority must take stern actions against those involved in fund embezzlement. Insurers have to bring more people under insurance coverage, guaranteeing social security — the ultimate objective of insurance. 

In order to ensure proper growth of this sector, some steps should be taken in no time. Proper and timely claim settlement is a must to increase penetration and trust. Diversified products and services should be designed according to the demand of customers. The liquidity constraint has to be minimised by prudential use of funds. The regulatory authority should monitor and supervise the insurance companies on a continuous basis. 

It must also punish the companies failing to abide by the regulatory requirements. This can demonstrate a signalling effect to other companies, creating pressure to work within the regulatory framework. By educating the prospective customers, ensuring transparency, establishing accountability, providing comprehensive information about products and services, adopting technology for digitalisation and ensuring fair claim settlement may boost up this sector to make its due contribution to the economy of Bangladesh.

Dr Md Main Uddin. Sketch: TBS

Dr Md Main Uddin is a professor and former chairman of the Department of Banking and Insurance at Dhaka University.