Bangladesh’s insurance sector is a vital area that requires more attention
The role of insurance in managing risks in an economy cannot be overstated. On a micro scale, it safeguards households and companies from a myriad of risks. On a larger scale, it reduces the financial burden on a government and creates a stable environment in which businesses can thrive and succeed.
While Bangladesh has made gigantic strides on the path to economic prosperity, its insurance sector is a vital area that requires more attention and would benefit from regulatory reform. Currently, Bangladesh’s insurance sector comprises 45 general insurance companies and 31 life insurance companies. In addition, the country has two state-owned insurance corporations -- one in the general segment and the other in the life segment.
Within Bangladesh’s insurance sector, life insurance constitutes a 73.5% share of its insurance market and non-life insurance a 26.5% share. Micro-insurance and Islamic Insurance (Takaful) are also a part of Bangladesh’s insurance sector.In 2017, non-life insurers earned a gross premium income of Tk2,908.1 crores and life insurers Tk8,203.1 crores.
The assets of all the insurance companies stood at Tk44,328 crores by the end of 2016. Investments in both life and non-life insurance companies have grown significantly during the period between 2006 and 2014.
Yet, despite some growth, a comparison with other countries paints a dreary picture. Overall, insurance penetration (insurance premiums as a fraction of GDP) in Bangladesh was a meager 0.7% in 2016 and has mostly been on a downward trend since 2009 (see Figure 1). Figure 2 clearly indicates that Bangladesh’s life insurance penetration rate falls behind those of several other developing countries.
Compared to its South Asian counterparts, including India, Bangladesh has the lowest premium per capita. According to the World Bank, from 1999 to 2004, the average gross premium income as a percentage of its GDP was 2.7% in India, 1.27% in Sri-Lanka, but only 0.51% in Bangladesh. Egypt, which like Bangladesh is one of the countries featuring in Goldman Sachs’ Next Eleven (N-11), has been implementing regulatory reforms.
These reforms have helped Egypt strengthen its insurance sector significantly, as is evidenced by the growth of its insurance density premium per capita from $8 in 1999 to $23 in 2016 (PwC Analysis). Globally, Bangladesh ranks 86th out 88 countries in terms of its premium per capita (US dollars) and 85th out of 88 countries in terms of its premium as a percentage of its GDP.
Additionally, Bangladesh lacks insurance products in areas that could prove imperative to its growing economy and population.One such area is agricultural insurance. The agricultural sector is an integral part of the country’s economy and accounts for more than a third of all employment, and Bangladesh suffers from agricultural production “shocks” every five years.
Safeguards against such shocks will enable rural low-income households to keep their children in school, retain their productive assets, and protect their future economic and human development.However, apart from NGOs and public insurance corporations, there are very few providers of agricultural insurance products. Bangladesh has been exposed to the risk of natural calamities and this has had significant adverse consequences for its economy. Insurance can help it significantly in managing this problem.
For example, Cyclone Sidr accounted for 20% of the government’s expenditure in 2007. Reinsurance can play an important role in reducing the financial impact of disasters on the government budget, eg in 2011, Thailand suffered due to floods and the country’s losses were monetized at $30 billion. But due to the reinsurance, $12bn was the insured loss. Consequently, its economy recovered in a short time.
Health insurance in Bangladesh in both the private and public sector is virtually non-existent. The percentage of its GDP spent on health is only 2.64% -- the lowest in South Asia. Close to 9% of households pay huge healthcare payments, and 7% have to finance their healthcare costs by selling their assets.
People in rural areas are especially vulnerable to falling into the poverty trap. Pension schemes are mostly seen in the Government sector and most elderly people have to rely on family support for their sustenance. And as Bangladesh develops and life expectancy rises, the proportion of elderly people will increase proportionately.
Therefore, to relax the burden on government funds when this happens, the country’s pension system needs to grow to accommodate employees from various sectors. So it is clear that there is ample space for expansion of and improvement in Bangladesh’s insurance sector.
Bangladesh’s macroeconomic trends show that potential growth in the insurance sector is possible, especially since Asia in general is expected to see unprecedented growth with over a quarter of global primary insurance premiums likely to be generated from the region. The region is set to represent a large share of overall life insurance premiums between 2016 and 2025, rising from 11.6% to 21.7% (see Figure 3). Bangladesh is poised to capture some of this growth. According to a report published by the Boston Consulting Group (2015), three out of five cities in Bangladesh will see the emergence of more than 100,000 people in the middle and wealthy classes in the upcoming decade.
This could easily translate into a higher demand for insurance products as individuals and companies become increasingly risk-aware. As per PwC’s Analysis, the non-life segment is expected to grow at a high rate and overtake the life segment by a 1% margin. And as the country becomes more industrialized, the demand for fire and property insurance as well as workers’ compensation is likely see a substantial growth in demand.
Bank assurance (a partnership between an insurance company and bank where the bank sells insurance products)presents growth opportunities in Bangladesh’s Insurance sector and can result in mutual benefits for banks, insurers, customers and regulators.
Banks usually have the preexisting technological and human resources to provide the best customer services. Therefore, it is likely to be more convenient for customers to, for instance, pay premiums and withdraw cash backed by life insurance policies from their banks’ ATMs.
On the regulatory side, financial institutions diversifying their product range may reduce systematic risk. In this scenario, insurers stand to benefit as well, as access to banks’ various distribution channels could widen their market-reach without them having to create a network of agents. Selling a range of financial services to customers can be in banks’ best interests since insurance products would give them a stable source of income.
The insurance industry’s trajectory towards higher growth is, however, not without challenges. For one, there is a lack of trust between insurance companies and their customers, because the former often engage in highly speculative investments. Claim-settlement related problems also undermine the customer-insurer relationship, and the process of settling claims can be arduous and long. Secondly, Bangladesh’s labour force lacks the necessary skills and knowledge to provide insurance services of the highest standard.
Therefore, there is a dire need for more actuary consultants and employees holding MBAs and Master’s degrees in the country. From a macroeconomic perspective, Bangladesh suffers due to uneven income distribution where the majority of the people are poor, do not have disposable incomes and are unable to afford insurance.
This hinders growth of a country’s insurance penetration rate.
Moreover, its technological capacities need major advancement. Globally, the insurance sector has been undergoing digitization and platforms are being created to optimize customer service and streamline processes. But in Bangladesh, there has been minimal utilization of modern technology with websites being inadequately developed and inefficient processes being used.
Moreover, insurance companies do not have access to accurate and up-to-date demographic statistics to use for actuarial computations. And last but not the least, the regulatory environment in Bangladesh leaves much to be desired. In this scenario, regulatory reform in its Insurance sector can stimulate the country’s growth and generate savings by providing easy access to tools for enhanced risk management. It is estimated that a 1% increase in its insurance penetration rate can markedly contribute to Bangladesh’s growth (see Figure 5).
One of the ways the insurance sector can contribute towards giving a boost to Bangladesh’s economy is via the development of its funding infrastructure.Infrastructure development requires long-term investments and insurance companies tend to make such investments. This synergy is leveraged by other countries where it is mandatory for pension funds to allocate a part of their funds to make investments in infrastructure.
As Bangladesh’s economy expands, so will its need to fund infrastructure projects. However, the social impact of increased insurance penetration levels in a country beleaguered by poverty like Bangladesh also needs to be kept in mind. Wide health and pension coverage would prevent many people from falling into the poverty trap. This is particularly relevant for women who have lower levels of income and a higher average life expectancy, and are consequently at a higher risk of being destitute when they are old.
Fundamental macroeconomic indicators including GDP growth, unemployment and foreign direct investment (FDI) could be strengthened by a robust insurance sector, which can promote growth by providing guaranteed access to liquidity via insurance coverage. And if increased savings are channeled to various financial savings instruments including insurance, capital markets stand to benefit greatly. A flourishing capital market contributes significantly to a country’s growth. Additionally, a resilient insurance sector can help to curb unemployment. Provided there is adequate training and education, young graduates will be able to find various career opportunities in the insurance sector. FDI, yet another central concern for a developing country, is also likely to be boosted by regulatory reform relating to solvency and risk management. In such an environment, financial stability, enabled by a strong insurance sector, should increase investors’ confidence and attract substantial international investment.
Regulatory reform must have some principal aims and insurance-related regulation should stop the sale of unfair policies and mis-pricing to consumers. This is especially important because insurance by its nature is a complex product, whereby vulnerable consumers can be persuaded to opt for complicated benefit structures, enticed by complicated policy language.
Furthermore, regulators must also take steps to prevent only profitable consumers being selected by insurance companies while the majority cannot access insurance. Ideally, regulation should strive to be inclusive and prevent unfairness.
Lastly, regulators must account for insolvency-related risk and ensure there is a satisfactory level of capital reserves to protect customers in scenarios where they cannot collect claims when they need to. Stipulation of risk-based capital requirements such as Solvency II in the EU or principal-based capital requirements such as in the US are regulatory paths that may also be considered.
Mamun Rashid is a partner at PwC Bangladesh.