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Risk is one of the most challenging and constant aspects of the human experience. By providing financial backing in case of unexpected events, insurance attempts to reduce the impact of risk on our health, belongings, and businesses. The Bangladesh insurance industry is not only central to the creation of a stable business environment but also critical for the reduction of the financial burden on the government during natural and economic crises. The investment of insurance premiums into other financial assets also helps generate growth in the country.
Bangladesh is the most underinsured country in the non-life insurance category, despite standing to lose as much as 0.8% of its GDP to natural disasters a year. [1]
The insurance gap in Bangladesh, indicating assets at risk that are not covered by insurance, stands at $5.5 billion, or 2.1% of GDP 1. In 2018, the insurance premium earnings, which refers to the recurring fee paid by the policyholder for the insurance contract, rose by 11% to a value of $1.47 billion. [2] There are 77 insurance companies in total – 32 life and 45 non-life insurance providers[1].
FIGURE: Insurance Penetration / Source: Swiss Re Institute
The main categories of insurance are health, including life insurance, property, and financial.
Gross Written Premium (GWP) or revenue globally was massive at $4.8 trillion in 2017, and estimated growth was around 4%.
A potential recession in late 2020, which experts are assigning a probability of around 40%, may damage growth prospects[3]. To deal with a slowing economy, companies will have to incorporate technology to increase efficiency and meet the demands of the evolving digital community.
Cloud computing is a major trend in the industry, with approximately 7 in 10 companies using it for cost reduction and more adaptive contracts, such as pay-as-you-consume contracts 3. Blockchain technology for secure, real-time data sharing is also on the rise.
The rise in the incorporation of technology in the industry, dubbed InsurTech, has also led to more innovative consumer relationships, necessary to adjust to newer forms of business such as in the sharing and gig economy.
The rise of InsurTech means that cyber risk and consumer privacy are of rising importance. The European Union has placed a regulation to protect consumer data that could fine international insurance carriers up to 4% of their global sales if violated[3].
Globally, insurance regulators are looking to reduce systematic risk in the industry and increase disclosure of climate-related financial information to analyze climate change risk. As climate change is often linked to the severity and frequency of natural disasters, this could be an increasing cause of concern for insurance companies.
Changes in regulation, consumer demands and expectations, and the economy, are further provoked by the adaptation of a digital ecosystem. Insurance companies globally are facing a choice to either adapt and become agile with the changes and flows of the industry, or hold on to outdated conceptions of brand strength, product complexity, and capital access to stay rigid and risk obsolescence.
Despite a booming economy and the expected middle-income country status by 2024, the Bangladesh insurance industry can only be described as underdeveloped.
A major reason for this is that most consumers in Bangladesh are unaware and uneducated about how insurance works, due to a lack of information dissemination. Vague and complicated terms and conditions further discourage them from taking insurance.
Around 7% of households in the country have to finance healthcare payments by selling their assets[6]. Insurance would relieve them of this burden by providing protection against the risk of unaffordable treatments.
To protect consumers, regulatory bodies need to impede the sale of unfair or exploitative contracts, which is often caused by complicated policy language and unjust pricing. Regulation to limit insolvency risks will also ensure that customers get paid when they need to collect claims, which is often considered a major peril of insurance contracts.
Moreover, the poor performance and outlook of the financial sector are not promising either. Banks are dealing with a liquidity crunch caused by the high number of defaulted loans, or non-performing loans (NPL), and multiple scandals have shaken customer confidence.
Not all the problems in the Bangladesh insurance industry arise from the demand side. To convince consumers to buy an insurance policy, the industry is reliant on agents who persistently contact potential clients. These agents have to be paid a portion of the first year’s premium as well as a smaller percentage of future premiums collected from the customer. To encourage these agents, insurers may offer commissions of up to 70%[1].
As most companies are concentrated in urban areas, there is a large market in rural areas that is not being accessed. A lack of enabling regulations, infrastructure, and market data limits the quality of insurance products, as well as their coverage. This is evident as even though Motor Third Party Liability insurance is compulsory, it only has a penetration of 70%[4].
Insurers earn returns on the assets they invest with funds raised from premiums collected. The policy mandates that 30% of the funds be invested in government securities, and the remainder can be invested in shares, fixed assets, and fixed deposits.[5]
Premiums earned from fixed assets have been falling as construction and maintenance costs rise, leading to lower profit from rent and possibly lowering the ability to settle claims. [5] However, the claim settlement rate has improved significantly in the past 10 years, with an increase from 72% in 2009 to 91% in 2018[6].
Life insurance dominates the market with a share of 73.5%, over nonlife’s share of 26.5%[6]. The top five largest life insurance companies constitute 70% of the market. MetLife, the only foreign company, has a market share of 30%[4]. The non-life insurance is comparatively less dominant, with the five largest companies composing 50%, and the market leader Green Delta Insurance composing 12% of the market share.
The lack of trust of customers is currently the biggest barrier to growth for the insurance industry in Bangladesh. This means that there is significant scope to increase information dissemination and promotional activities. A dearth of skilled labor in terms of both agents and managers may also be the reason for the gap in customer relationships.
As evidenced by global trends, there is an immense opportunity for the growth of technological capacity. As digital financing has been popularised to the public through services such as bKash, the introduction of a similar platform for insurance may be easier. Moreover, this does not require the same infrastructure as traditional forms, allowing companies to reach remote populations in rural areas.
A way to solve the problem of the lack of infrastructure and resources within insurance companies could be bancassurance, which refers to a partnership between banks and insurance companies where the bank sells the insurance products. It increases convenience for the customer as payments and claims can be done through traditional channels such as ATMs.
Moreover, consumers are more likely to trust banks than insurance companies. The diversification of financial services offered by banks reduces their systematic risk, making bancassurance beneficial to all parties involved.
A lack of diversified products has also been noted as a barrier to the industry’s success. There are several products that could be introduced to target the local market that are specially curated to the conditions of Bangladesh.
Perhaps the most likely to succeed would be agricultural insurance, allowing farmers to have backups in case of poor harvests, floods, or other uncontrollable conditions. Not only does the agriculture sector employ a third of the country’s population, but it suffers from production shocks every five years, causing significant drops in income[8].
There have been plans to introduce it under public-private partnership[7]. Microinsurance and Islamic insurance are products that can be developed further to target lower-income customers, or those still skeptical of the insurance industry and larger investments.
Despite the dismal image portrayed by the current situation and numbers, the insurance industry in Bangladesh has significant potential as the average income and GDP continue to rise. Moreover, as the middle and affluent class in cities throughout the country increases in size, the desirability of insurance also increases. The insurance premium of the industry is expected to grow at a rate of 7.04% over the next year[8].
Regulatory reform must focus on protecting consumers from complex and potentially deceptive contracts, and the increasing availability of insurance products to members of all economic strata. The Insurance Core Principles (ICPs) developed by the International Association of Insurance Supervisors (IAIS) provide a globally accepted framework of principles that the government can adopt for IDRA[8].
The impact of this industry can be easily illustrated by the impact of a 1% increase in insurance penetration.
FIGURE: Impact of Increase in Insurance Penetration / Source: PriceWaterhouseCooper
On top of this, mature insurance markets can attract FDI as investors feel reassured by strong financial infrastructure. However, the most significant change will be social as the burden of personal risk is reduced.
Microinsurance, agricultural insurance, and health insurance have the potential to become essential financial services for lower-income populations. For a country like Bangladesh, insurance could be the missing factor in the financial freedom of the masses.
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