As Bangladesh has covered considerable ground into achieving the coveted middle-income country status, a robust insurance sector will be vital in consolidating the growth story.
By managing risk on both a micro and macro scale, insurance constructs foundations for sustainable growth, a resilient environment for investment, while safeguarding socially vulnerable segments of the population.
The insurance sector can contribute towards the economy through funding infrastructure development, which requires long-term investments and insurance companies tend to make such investments.
This synergy is leveraged by other nations, which make it mandatory for pension funds to allocate part of their funds to domestic infrastructure investments.
The need to fund infrastructure projects will increase with the growth of Bangladesh economy.
Fundamental macroeconomic indicators, including GDP growth and foreign direct investment (FDI), could be advantaged by a strong insurance sector as well. The insurance sector can promote growth by providing guaranteed access to liquidity via insurance coverage.
If higher savings are channelled to various financial savings instruments, including insurance, the capital markets will benefit greatly, boosting growth. FDI, yet another central concern for a developing nation, is also likely to be boosted by regulatory reform relating to solvency and risk management.
In comparison to other nations, Bangladesh’s insurance sector is trailing behind. Overall insurance penetration (insurance premiums as a fraction of GDP) in Bangladesh was only 0.57 per cent in 2018 and has been decreasing since 2009.
Bangladesh’s life insurance penetration rate falls behind compared to its contemporaries. While Bangladesh’s life insurance penetration rate is only 0.41 per cent, Vietnam’s and India’s rates are 1.58 per cent and 2.74 per cent, respectively in 2018. Globally, Bangladesh ranks 86th out 88 nations in terms of premium per capita (USD).
Bangladesh stands to benefit from insurance in a few critical areas. We need insurance products like agricultural insurance. Protection against agricultural production shocks are essential for socioeconomic development. These will help the rural population keep their children in school and preserve assets.
Other than NGOs and public insurance corporations, however, there are very few providers of agricultural insurance products. Moreover, as Bangladesh suffers from frequent natural calamities, it can benefit from reinsurance.
Thus, there is ample space for the expansion and improvement of Bangladesh’s insurance sector.
Bangladesh does have the macroeconomic pulse to facilitate growth in the insurance sector.
According the Boston Consulting Group (2015), three out of five cities in Bangladesh would have more than 100,000 people as members of the middle and wealthy class in the upcoming decade.
This could generate a market for insurance products as individuals and companies become increasingly risk-aware. In particular, the non-life segment is expected to grow at high rates exceeding the life segment by a 1 per cent margin as per PwC Analysis.
The Bancassurance model (a partnership between an insurance company and bank where the bank sells insurance products) could be an optimal solution for Bangladesh’s insurance sector.
Banks tend to be pre-equipped with the technological and human resources to provide the best customer service.
For example, customers can pay premiums and withdraw cash backed by life insurance policies on their banks’ ATMs. Insurers can leverage banks’ various distribution channels and widen their reach without creating a network of agents from scratch.
However, we should not forget that the path to growth has always been full of obstacles. Firstly, the insurer-customer relationship is plagued by limited trust.
Claims settlement problems hamper the relationship, as the process is arduous and long. In Bangladesh, the websites are poorly developed and there has been little utilisation of modern technology in the process.
Insurance companies have limited access to accurate and updated demographic statistics to use for actuarial computations.
Lastly, regulatory reform is required. Regulatory reform in the insurance sector can stimulate Bangladesh’s growth and generate savings by providing the tools for better risk management.
Regulatory reform must satisfy a few crucial criteria. Insurance regulation needs to prevent the sale of unfair policies and mispricing to consumers.
This is especially important because insurance by nature is a complex product, where vulnerable consumers can easily be deceived by complicated benefit structures or policy language.
Lastly, regulators must account for insolvency risk. The regulators should ensure that there is a satisfactory level of capital reserves to protect customers from scenarios where they cannot collect claims when they need to.
The benefits of a well-built insurance sector are far-reaching and can target key socioeconomic problems.
While there are challenges, regulatory reform and an appropriate business model in the form of Bancassurance can catalyse the growth of the insurance sector.
The writer is a partner at PwC. Views expressed here are personal.