Navigating the trust deficit in our insurance industry

Illustration: TBS

Examining the Claim Settlement Ratio (CSR) is the best method to understand the insurance sector, which represents the percentage of claims an insurance company settles in a year compared to the total number of claims received.

Historical data show that the claim settlement ratio of Bangladesh was about 54% in 1973-1990, immediately after independence. It increased to nearly 73% from 1991 to 2008 and rose to 78% from 2009 to 2019. However, this rate dropped sharply to 68% in 2021 from 88% in 2020.

In contrast, the global claim settlement ratio is an average of 98%. In the neighbouring country India, most insurers are able to settle at least 90% of their claims.

The declining claim settlement ratio trend in Bangladesh started during the Covid-19 pandemic, but historically low settlement ratios raise questions about the industry's integrity, accountability, and future growth.

Economic performance of the insurance industry

In 2023, the economy of the Bangladesh insurance industry exceeded Tk17,000 crores, with life insurance contributing over Tk12,500 crores and non-life insurance contributing Tk4,500 crores. The total premium earnings for 2023 were about Tk17,000 crores, indicating a positive growth trend of about 10%. In 2022, the collective total assets of these companies rose to Tk63,629.05 crores, marking a 3.34% increase from the previous year's Tk61,571.87 crores.

However, despite this growth, the overall insurance coverage in Bangladesh remains low compared to the size of its economy, with a penetration ratio of only 0.5 percent. This is significantly lower than international standards and lags behind other South Asian countries, such as Sri Lanka (1.2%), India (4.0%), and Pakistan (0.8%).

Issues with insurance policies and agent practices

Irregularities regarding risks and coverage of policies are significant issues in the insurance sector. Often, insurance agents provide incomplete information to policyholders or hide the truth, leading to unrealistic expectations and subsequent dissatisfaction when claims are made.

Additionally, many policyholders do not continue their policies beyond the first year. According to IDRA data, in 2023, 1.542 million customers saw their policies cancelled in the country. Even 364,000 policies of the country's 36 life insurance companies were cancelled in the first three months of this year due to the deterioration of the customer's financial condition, non-disclosure of all important information at the time of policy sale, and other reasons. 

Insurance professionals said the amount of commission that agents get in the first year of the policy is less than what they get in the second year. As a result, they are more interested in selling new policies than renewing existing policies. But this is not a professional explanation at all; rather, it denotes the weak and non-professional state of the insurance sector in the country after crossing five decades of independence.

Additionally, many life insurance companies in the country are not able to pay insurance claims on time, so customers' confidence in them is decreasing. This lack of professionalism among agents has contributed to the negative perception of the insurance sector, leading many to view it as deceitful.

Socioeconomic factors affecting insurance uptake

Despite substantial economic growth over the last two decades, income inequality has kept a large proportion of the population outside insurance coverage. Many people cannot afford to take out and maintain insurance premiums.

According to a Light Castle Analytics Wing study, Bangladesh's insurance industry remains underdeveloped despite a booming economy and expected graduation from the Least Developed Country (LDC) status by 2024. The reasons include a lack of consumer awareness and education about insurance, exacerbated by vague and complicated terms and conditions.

Approximately 7% of households in Bangladesh finance healthcare payments by selling their assets. Insurance could alleviate this burden by covering the costs of unaffordable treatments. However, regulatory bodies must ensure that insurance policies are fair and transparent, as complicated policy language and unjust pricing often lead to exploitative contracts.

According to the Household Income and Expenditure Survey 2022, the average family spending on health saw a dramatic increase of over 202%, significantly outpacing the total spending growth of 98%. In contrast, average spending on education declined by about 31% during the same period.

High lapse rate and financial instability

Over the past 14 years, more than 2.6 million insurance policies have lapsed in Bangladesh due to several factors, including the deteriorating financial health of clients, lack of awareness, and agents' failure to properly explain product features. The lapse rate, which measures the frequency of policyholders failing to pay their premiums on time, is significantly higher in Bangladesh compared to India (10%) and the global average (96-98%).

In Bangladesh, about 50% of life insurance policyholders stop paying premiums after the first year. This high lapse rate is attributed to clients purchasing plans beyond their financial capacity and agents not providing crucial information that might dissuade clients from initially subscribing to these policies.

Another reason for policy discontinuation is fund embezzlement by agents, where premiums are either not deposited within the stipulated period or not at all. Additionally, natural calamities such as floods, droughts, and cyclones impact the financial capacity of policyholders. These issues lead to lost revenue, negatively affecting the financial stability of insurers and damaging customer relationships.

To address these issues, the commission rate for agents should be revised to incentivise greater focus on policy renewals. In 2023, ten companies with high lapse rates were directed to increase their renewal rate to 60%. Public perception and behaviour towards insurance in Bangladesh remain largely negative, primarily due to a trust deficit.

The need for health insurance

Experts have noted that senior government officials have repeatedly called for health insurance for all public servants and their families, but significant progress has yet to be made. The government initially planned to provide free life and health insurance for all frontline pandemic workers but eventually settled for donation-style compensation for victims. Successful state initiatives, such as expatriate workers' safety insurance and health insurance pilot projects, demonstrate potential. However, concerns about the subsidies required in the annual national budget have stalled further progress.

Health insurance coverage for the masses is crucial for economic recovery from the pandemic fallout, as good health and affordable healthcare contribute to economic productivity. Currently, only the wealthy and some state and corporate employees have access to affordable, quality healthcare.

To achieve nationwide coverage, insurers need to partner with government hospitals, necessitating legal adjustments to allow public sector hospitals to accept payments from third parties. Upgrading the relevant legal framework is essential for this. However, raising awareness is also crucial.

Raising awareness and improving perception

Health insurance coverage is necessary to help people feel financially secure in cases of illness or critical injuries. Awareness and interest in health insurance has increased due to the high costs of treating Covid-19 and other critical issues.

Bangladesh's healthcare system is characterised by a mix of public healthcare services and a rapidly growing private sector. Consequently, the country remains at the top of the global table for out-of-pocket healthcare expenses. Before the pandemic, patients were paying Tk74 out of pocket for every Tk100 spent on healthcare, and this might have risen to Tk80. Hundreds of thousands of people go broke every year due to critical illnesses or major accidents, with approximately 6% of the population sinking below the poverty line annually due to health emergency costs, according to a 2021 study by International Centre for Diarrheal Disease Research, Bangladesh (icddr,b).

People commonly fear insurance, often believing it to be a deceitful industry. Many think that insurance companies simply take their money and profit from it.

The concept of health insurance, in particular, has not yet been widely accepted in the minds of many people. In Bangladesh, proactive investment in healthcare is largely ignored. People generally visit doctors and hospitals only when they are ill. Consequently, the perception and investment in health insurance remain persistently neglected.

Currently, only 20% of the total insured population in Bangladesh has health insurance. Of this, 80% of the health insurance premiums are paid by corporate companies and international agencies for their staff.

After 52 years of independence, the question remains: why do people in Bangladesh have minimal trust in insurance, especially health insurance?

Identifying and addressing this question is crucial for improving the insurance landscape in Bangladesh. Additionally, following the recent economic stagnation caused by the quota reform movement, new risks in this sector are anticipated, highlighting the need for proactive measures.

Saikat Biswas. Sketch: TBS

Saikat Biswas is a development practitioner associated with a UN agency.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard