Insurance for the poor

Insurance industry of Bangladesh has a long history of evolution. About a century back, couple of insurance companies started both general and life insurance business during the British regime in India. However, insurance business got the momentum during the East Pakistan regime. In the pre-liberation period, there were as many as 49 privately owned insurance companies underwriting general insurance business along with one central government run-organisation, namely, Pakistan Insurance Corporation. After liberation, the insurance industry was nationalised vide Presidential Order No. 95 of 1972 excepting postal life insurance and foreign life insurance companies. By virtue of nationalisation order, five public sector corporations were set up to manage the insurance industry of which four were subsidiary corporation, two each for life and General and an apex body, viz., Jitiya Bima corporation as a controlling corporation.
At a later stage, the five corporations were replaced by two state owned corporations namely, Sadharan Bima Corporation for general business and Jiban Bima Corporation for life business under a restructuring plan made in 1973 in order to curtail excessive administrative expenses of the corporations. Again, in the process of denationalisation, the Insurance Corporations Act was amended in 1984 to allow insurance companies to operate in the private sector subject to certain restrictions regarding business operation and reinsurance. Subsequent to that, the Act was further amended for the relaxation of the existing regulation to promote the private sector insurance companies. Presently, 62 insurance companies are operating in the country, of which 44 are in general business and the remaining 18 are in life business, even though the two state-owned corporations, along with some private sector companies, are dominating the market.
The gross premium of life insurance business stood Tk 45 billion in 2009 with a considerable growth over previous year. However, presence of large number of companies in a small market leads to tough market competition and unethical practices which has already created a significant number of sick insurance companies in the industry. Understanding the importance of revitalising the sector in line with the international norms, the regulatory authorities have decided to introduce mandatory credit rating requirement in the industry. Under the above directives, all general insurance companies are directed to get credit rating with effect from 2007 with mandatory surveillance at the end of each year. However, the life insurance companies were directed to have the surveillance rating biannually.
The insurance industry is now at the final stage of transition. The parliament has already passed two bills namely Insurance Development and Regulatory Authority Act 2010 and Insurance Act 2010 to replace the age old insurance laws. The Department of Insurance will be replaced with a five-member Insurance Regulatory Authority headed by the chairman not below the rank of a secretary to the government. For further enhancing the solvency position, the paid up capital for general and life insurance companies have been raised to Tk 400 million and Tk 300 million respectively. The number of directors in the company has also been reduced to 15 from 20 with the participation of independent directors. The law also debarred the directors of an insurance company to be a director of a bank simultaneously.
The new law has also introduced mandatory solvency margin for the insurance companies. Beside, the insurance companies will be required to ensure international accounting standard, separate Islamic insurance from conventional ones and put a limit on commission expenses. Moreover, the life insurance companies will be required to make the valuation of liabilities on yearly basis to reveal the real strength of the company. The law also allowed foreign investment in general insurance sector. With the promulgation of the new law, the insurance industry will be under the Ministry of Finance from the Ministry of Commerce.
Regulatory framework: The Insurance Act 1938 was enacted to consolidate and amend the law relating to the business of insurance in the Indian sub-continent. This Act was adopted in Pakistan after independence in 1947, and amendments to the Act were made several times to reflect economic environment and structural changes in the insurance business. The insurance Rules 1958 were put in place to facilitate operational details for enforcement of the relevant provisions without any ambiguity.
After independence of Bangladesh, the Insurance Act, 1938 was adopted in Bangladesh as per the Bangladesh (Adaptation of Insurance Act) order, 1972. The Insurance Act, 1938 and the Insurance Rules, 1958 were amended from time to time to regulate and promote orderly growth of the insurance business in Bangladesh. The Department of Insurance, an attached department of the Ministry of Finance, is the regulatory authority of the insurance sector.
The current arrangements world wide is that the supervisory authority should be independent to carry out its role of regulating the activities of the insurers as well as developing a stable and efficient insurance market. Although the structural arrangements for the supervision of insurance sector vary from country to country, the need for operational independence is well recognised in developed as well as in developing countries and consequently regulatory authority free from frequent interference of the administrative ministry has been established in most of those countries including our neighboring counties, but the methods and procedures of supervision of the insurance sector in Bangladesh have remained almost the same as were in the days of undivided India. The only visible change is the change of administrative ministry from Ministry of Commerce to Ministry of Finance. New Insurance Act has been promulgated and an independent Regulatory Authority is likely to be formed in the year 2010.
There is no specific provision for regulation of micro-insurance business in the Insurance Act, 2010. While a very liberal insurance legislation can give rise to massive expansion of insurance services eroding the long term viability of the insurers, a very rigid legislation can restrict the growth of micro-insurance business. In the absence of appropriate legal infrastructure the interests of policyholders cannot be adequately protected, and the institutional risks are very high. The insurers, which started micro-insurance business did so on their own initiatives. Although some of the things, e.g. investment in micro-enterprises, and agency system etc. introduced in earlier years were very innovative, but those methods and approaches were not consistent with the relevant provisions of the Insurance Act.
The Insurance Act prohibits any one from carrying on any class of insurance business in Bangladesh unless certificate of registration for that class of business in obtained from the Insurance Regulatory Authority Micro-credit Regulatory Authority Act, on the other hand, allows Microfinance Institutions to provide insurance services to their members.
Many NGOs have been providing micro-insurance services in one form or other to their members outside the radar of any regulatory framework. It is very important to have a well designed regulatory framework to promote orderly growth of micro-insurance business. This can only be ensured if the Central Bank, Office of the Chief Controller of Insurance, Micro-credit Regulatory Authority and other stakeholders can work together to design a regulatory framework, which is conducive to growth of micro-insurance business, and, at the same time ensures the long term financial solvency of the providers of insurance services.
As per the Insurance Act, the Regulatory Authority is required to: (a) prepare mortality table indicating the average mortality rate of the policyholders; (b) prepare statement of yield indicating the range of interest rates or yield on insurers’ fund; and (c) lay down the level of expenses of procurement and management of assets. The Act also stipulates that valuation of policy liabilities should be carried out in such manner and such basis that the actuarial reserves calculated in that manner and on that basis are no less than the actuarial reserves calculated in the manner and on the basis laid down by the Regulatory Authority. Since guidelines on the above are necessary for product pricing and reserving it is essential that such guidelines should be in place to adopt a uniform approach for the life insurance sector in Bangladesh, both for ordinary and micro insurance.
The Act provides that in case of life insurance employer of agents should receive commission, over-riding commission or any other remuneration in any form an amount exceeding such maximum percentage or below such minimum percentage as may be prescribed. The Regulatory Authority has not yet come up with any such rule in the absence of which some of the insurers have been setting remunerations to their employer of agents at rates much higher than the rates that should have been set to limit the overall expenses within the limit of expense loading used in the determination of premium rates.
The government of Bangladesh had undertaken financial sector reform in the early 1990s, and, since reform is an ongoing process, it is still continuing in one form or another. The insurance sector has been kept outside the purview of the reform process. Reform in the insurance sector is now the need of the hour. We are hopeful that the Government would initiate the reform process in order to provide a stable and vibrant insurance sector in Bangladesh, which will ensure; (i) orderly growth of micro-insurance services, (ii) insurance business based on Shariah, (iii) level playing field for all insurance companies including state owned insurance corporations, (iv) framing rules and regulations in line with the international best practices, and (v) operational independence of the new regulatory authority.
Poverty and security: Poverty is the probable outcome of deprivation of land and non land asset, access to education, remunerative occupation and opportunities of diversified income sources. In Bangladesh the poor face crisis situation and suffer from damages in natural calamities very frequently. In alleviating poverty, major source seemed to be raising productivity. Distributive measures are though important to alleviate poverty are insufficient to eradicate it. Of course, equitable distribution has in built impulse on raising productivity and accelerated growth.
Rural households of Bangladesh need productive capital resources and land for utilisation of their surplus labor and work opportunities on self employment as well as wage employment which may enable them to generate increased earnings. A massive micro credit programme has, therefore, been felt and being implemented for the poor not only for productive employment but also to cope with natural or social catastrophe in order to protect them from downward mobility.
As micro finance is getting more priority than any other tools for alleviating poverty, various other financial services need to be introduced in this sector for achieving the desired goal. In this context, micro insurance product may play an important role. Evidence shows that many potential borrowers of micro credit have been ruined due to a single accident and fell into debt forever. A single comprehensive micro-insurance package cover for both life and risks of properties can be of great help to save the poor and small entrepreneurs.
If poverty is considered as something not warranted or desired by any society, the policies that are not capable of tackling it must then be considered as wrong. The concept of poverty can not be explained independently of the concept of inequality in the society. This means that the poverty and inequality are casually related. While the absolute inequality contributes to absolute poverty, the relative inequality to relative poverty.
According to the object of incidence of uncertainty, risk of the poor people may be either, natural, social or economic. Production of crops for ones own living and others and running of small business are common in rural peoples life. Therefore, once they lose their production because of any disaster, which mean not only a disaster for those poor but also for the whole nation. Unfortunately, the question of financial security of the poor people has drawn little attention of the policy makers.
Total welfare of the poor is derived from things obtainable with money. Economic security is part of total welfare. This is a state of mind of well being by which an individual is relatively certain that he or she can satisfy basic needs and wants, both at present and future. There is, however, no universal agreement on the meaning of security. Typically it is a collection of programs to provide individuals with cash payments that replaces part of the income loss arising from the uncertainties of life as enumerated above. The major approaches of social security are: (a) Social Insurance. (b) Public assistance. (c) Public Provident fund. (d) Public Pension & Provident Fund. None of the approaches mentioned above have been applied in Bangladesh so far.
Insurance is an essential service which a welfare state must make available to its people, specially to the poor people. It is desirable that the specially designed insurance products should be made available to the rural areas and to the socially and economically backward classes, with a view to reaching all insurable persons of the country and providing them with adequate financial protection against death and loss of property by different perils. Providing and financial social security to the economically weaker sections of the society is a major social responsibility. Unfortunately, this has been neglected so far by most of the development agencies engaged in rural Bangladesh to alleviate poverty.
The prime risk of the poor is the possibility that some peril may interrupt the income that is earned by him/her. There are four such perils:- death, sickness, accident & old age. There is also the peril of unemployment. Insurance cover can be given on each of these perils. Private insurance companies normally offer insurance policy against death, personal accidents & sickness. Unemployment and old age risks are normally taken care of by the welfare Government of the developed countries. In Bangladesh also old age risk is now being taken into care in a very limited scale, by the state through old age public assistance program.
Mutual insurance: As an alternative to commercial insruance Mutual insurance can be organised. Mutual organisations are owned by the policyholders who share any profits made. There are no profits as such, since any excess income is eihter returnable to the policy holder-owner as dividends or is used to reduce premiums. The policyholders could be called upon to make further contributions to the fund, if the original premiums were inadequate to meet the claims and expenses. Nowadays most mutual insurance companies are registered as limited by guarantee, wherein the policy-holder-owner’s maximum liability is limited to their premiums.
In the developed world, there are many types of mutual organisations with different types of business. Some mutual insurance companies operate only in a given type or class of insurance. Where only farm property is insured, the group is known as a farm mutual. Each policyholder binds himself for a pro-rata share of all losses and expenses of the company. The mutual companies plan to fix the initial rate somewhat below stock company levels and in addition pay a dividend, if warranted.
It is most interesting to observe that despite several comparative advantages of mutual organisations over stock companies, there is not a single mutual insurance organisation in Bangladesh. Although, we understand that mutual insurance companies currently have a commanding presence around the globe. Six of the ten largest insurers in the world are mutual organisations.
A natural advantage of mutual ownership is that the ability to mitigate potential conflicts between the policy holders and owners of an insurer. Other advantages to mutual ownership include an ability to manage to the future and community spiritedness. Disadvantages include limited access to capital markets and a relative lack of management accountability. Apparently, the mutual form of ownership offers certain advantage that are specially pertinent to the insurance industry. It is, therefore, logical that the micro-credit providers of Bangladesh need to explore the possibility of providing mutual insurance cover to their members and clients instead of offering it individually or through some private/public insurance companies.
Despite comparative advantages of mutual insurers form the consumers point of view, it is quite surprising to note that mutual insurance has not been popularised from any corner. Although we know that the oldest insurer in this subcontinent was a mutual organisation. The first indigenous insurance organisation of the then undivided India was Bombay Mutual which was established in 1871.
Developing micro insurance products: There is considerable scope of developing life insurance products for the poor people, both as an instrument of saving and to cover the risk of premature death. The micro-finance institutions and the banks providing micro credit may provide insurance cover for the person to whom credit is given. It appears that life insurance companies have not so far made determined efforts to formulate relevant products and evovle marketing strategies to penetrate in this sector. A few possible approaches may be considered and are discussed below.
Emphasis has to be put on group sales. This is simply because contacting persons individually, explaining the benefits and concluding the contract would be costly proposal. An attempt could be made to form groups through the help of N.G.Os and or cooperative societies, social welfare organisations etc. For example, in Malayasia a large number of workers in palm oil plantations are covered through their union. In India, group of landless labourers, handloom weavers and members of milk cooperatives have been covered on a group basis.
For any insurance scheme for the poor premiums would have to be kept low so that the cover would be affordable by the persons concerned. A term insurance based package or a policy with a low saving element may be more suitable. The posibility of collection of premium on an easy weekly or monthly basis rather than on an annual basis, as in the case of industrial workers insurance may be explored.
It is no denying the fact that penetration of insurance in Bangladesh is very low, and the image of the insurance sector is poor. Allthough, the rural sector offers substantial opportunities, the development of new products in any branch of insurance in Bangladesh had been far from encouraging, even in comparison to India.
Most of the non-life insurance companies in Bangladesh are unlikely to have any worthwhile infrastructure outside the sphere of their primary activities. Private non-life insurance companies have so far not designed any product on crops, livestock, poultry & aquaculture. There is substantial amount of untapped general insurance business in rural areas such as:
Dwelling, stables, stores, shops,
Pumpsets, hervesters, threshers,
Handicrafts and household productions,
Personal accident & hospitalisation.
A linkage and close working arrangement with the rural banking sector and micro-credit providers is very significant for developing suitable product for the poor. Marketing of insurance is much easier if it is linked to credit. Furthermore it is also possible to coordinate and integrate part of the administrative work with the N.G.Os and other social welfare organisations.
When a link is established with micro-credit providers or other institutions, group insurance canl be provided. Group insurance is rewarding in many ways. Delivery & servicing become easier and administration costs can be kept low. If the group is sufficiently large and homogenous, problems of anti-selection, and to a great extent the problem of moral hazard can be mitigated.
While developing insurance products for the poor, it should be simple in design and presentation so that they are easily understood. As far as possible the intention should be expressed in non-legal direct language. Furhter, wherever possible a package approach should be adopted so that the various covers do not have to be evolved and marketed seperately.
The development of insurance business in a society is affected by three major factors:
Socio-economic characteristics of the economy.
Competencies and technical know how of the insurance operators.
Regulatory and legal framework of the insurance industry.
It is obvious that the economic condition of people is the most important factor that affects growth of the insurance. An individual must have the ability to save as a precondition of being a potential policy holder. At the same time, he must have regular income to pay for insurance. Unfortunately most of the people (more than 50%) of Bangladesh live below poverty line and can not afford to buy insurance services.
Even the small savers do not buy insurance, either because they are unaware of availability of insurance or because the insurance products are not designed/suitable for them. Therefore, the large majority of our population remain uncovered from any insurance protection against risks of day to day life.
It is no denying the fact that presently, insurance products are mainly focused on lives and properties of the richer class or the middle and lower middle class of the society. The indigenous insurance schemes of some of the micro-credit operators in Bangladesh are mostly life insurance products in nature. But the poor people need security both for their lives and properties(whatever they have). It has been observed that an individual member of MF-NGOs on an average has saved more than one thousand taka per annum. It is, therefore, envisaged that a reasonable amount out of this saving could be used for paying premium against insurance policies in order to protect them form any accidental loss of their lives and properties.
Since micro-credit constitutes the central component of development programmes of most NGOs in Bangladesh and it is getting more priority than any tools for alleviating poverty; it is now envisaged that a Comprehensive Micro-insurance Policy (C.M.P) for the micro-credit users will play an important role to achieve the desired goal.
Some MFI-NGOs that are now offering insurance services to the micro-credit clients are in true sense “self insurance”. These are being provided mainly because of following reasons:
i) Non availability of appropriate product/services.
ii) Non confidence on the insurers in general.
High cost of commercial insurance.
These schemes of MFI-NGOs have some inherent weaknesses as follows:
The basic principle of spreading the risk is defeated.
The fund which is built up may not be sufficient to meet the large and unusual losses.
There is no protection from reinsurance and absence of pooling arrangement.
There is lack of executive talent needed for underwriting, claim and fund management.
If insurance reserve fund is not set aside and only a book reserve is made the purpose is defeated.
Proposed model of mutual micro insurance: Considering diversified security needs of the poor, a package cover should be offered. This will be easier for sale and renewal. For convenience, we can offer non-life package, which can be combined with life insurance at the option of the borrower . But non-life package (CMP) ought to be linked with credit. This means every micro-credit borrower should be insured by the MFI and the premium amount should be added with the loan amount and to be financed by the MFIs.
For this purpose, it has been suggested that Mutual Association of MFIs should be formed and its management should be entrusted to insurance professionals as the Protecting & Indemnity Clubs of ship owners are being managed by the professionals. This is necessary not only to achieve efficiency in operational management but also because regulatory segregation exists between banking and insurance services.
It has to be kept in mind that technical management of insurance services is different from the credit and saving programmes. Therefore, it is prudent that micro-credit providers should arrange insurance cover through a separate institution, meant for the purpose which can be termed as Micro-insurance Mutual Association (MMA).
It may be argued that the proposed CMP perhaps can be offered by the commercial insurers and can be channeled /distributed through the MFIs. This would have been ideal if the insurers could do it without any profit motive. However, this can not be so because of their high establishment and overhead costs.
When a mutual insurer offers group-term insurance, the premiums will be charged according to the mortality experience of the group. In case of favorable experience, premiums charged may be brought down; or the surplus that would will be passed on to the members of the group, by way of reduction in the premiums payable in the following year.
Apart from micro-credit borrowers, “group term insurance” cover can be made available to other poorer sections of society like land less agricultural laborers, handloom workers, rickshaw, pullers, artisans, taxi drivers, cooperative milk producers, tailors, barbers, masons carpenters etc.
It may be noted that the MMA will be administered by the elected directors from member MFI-NGOs and all policy matters including extent of cover, mode of premium payment etc will be decided by the Board according to the need and suitability of the member institutions and micro-credit clients. Therefore, the proposed micro-insurance policy should be invariably a flexible product that can meet the long-term needs. In order to meet the needs of the poor, few private life insurance companies of Bangladesh have introduced Grameen Bima (Rural Insurance). This is only a rural version of the popular “endowment” life policy.
The frequency and severity of disasters have increased sharply in the recent decades. In Bangladesh, the major causes of deaths and damages to property from natural disasters are droughts, cyclones and floods. For obvious reasons, poor people are much more exposed to disasters than are rich ones. In Bangladesh, natural disasters as well as man made disasters are an integral part of poverty cycle.
In Bangladesh, NGO’s are increasingly involved in the implementation of schemes for reducing poverty. They are providing credit. A few of them are also extending insurance services to their members and credit users. These services are being provided more or less on rule of thumb basis. Since insurance is a scientific way of dealing with risks and providing security to people it is necessary that this is handled professionally.
It has been observed that micro credit programmes are to some extent effective in fighting poverty. However, it is unlikely that micro-credit alone can be the solution to poverty reduction. The government/ donors and micro-credit providers must find ways to extend micro-insurance services to the poor.
It is felt that mutual insurers should offer group policies for the poor. Group insurance enables a large number of people being covered under one contract. In case of individual insurance, the contract is with the individual policy holder. The decision to take out the policy is voluntary and the amount as well as plan of insurance is decided by the individual. On the other hand, in case of group insurance, the contract is with the group/association. A single master policy is issued covering all the members, as per agreed terms. Therefore, group policy for micro-credit borrowers, can be issued. The premium will be paid by the respective MFI/NGO or whoever represents the group and takes out the master policy.
Group term insurance is renewable every year and is the simplest and cheapest of all the schemes that a life insurance operator can offer. Under this scheme, a fixed sum is paid on the death of a member covered under the scheme. This scheme would be also appropriate to meet the outstanding loans. MFI’s, therefore, should take such policies to cover borrowers at least to the extent of outstanding loans.
When a mutual insurer offers group-term insurance, the premium will be charged according to the loss experience of the group. In case of favorable experience, premiums may be brought down or the surplus that emerges can be passed on to the members of the group.
Apart from micro-credit borrowers, “group term insurance” cover can be made available to other poorer sections of society like landless agricultural laborers, handloom workers, rickshaw pullers, artisans, taxi drivers, cooperative milk producers, tailors, barbers, masons, carpenters etc. In this respect, Social Security Fund need to be created by the government with the help of donors in order to meet emergency. Social Security Fund could be utilised in times of need for providing reinsurance cover of Mutual Insurers.
It is to denying the fact that the lack of access to insurance is one of the reasons of our inability to achieve any sustainable and substantial increase in living standards for the poor. On the other hand, we must remember that Islamic Shariah prohibits conventional insurance in its present form and methodology. As a result, penetration of insurance in Bangladesh has been very negligible. It is primarily limited to the urban elite sector. However, Muslim Jurists of recent age have concluded that insurance schemes comprising the elements of shared responsibility, joint guarantee and solidarity is permissible. The fundamental philosophy of Islamic Insurance (Takaful) and Mutual Insurance is the same.
Theoretically, Takaful is perceived as cooperative insurance, where members contribute a certain sum of money to a common pool. The purpose of this system is to uphold the Islamic principles of bearing one another’s burden. Takaful, from the practical point of view means mutual guarantee provided by a group of people living in the society against defined risks of life & property. A Takaful scheme aims at undertaking a joint responsibility towards financially safeguarding the widows, orphans and helpless ones in the society, and also the one who faces unexpected loss or damage. therefore, conceptually mutual insurance is in harmony with the central philosophy of Takaful.
The fundamental principles of Takaful may be summarised as follows:–
Policyholders cooperate among themselves, for their common good.
Policyholders contribute to help those who need.
Liabilities are spread out according to the community pooling system.
Transparency, fairness, equity and justice is maintained in the operation.
Shariah based investments are made on the basis of profit & loss sharing.
The basic idea of Takaful system has stemmed from the principle of Tabarru (donation), whereby each participant of the scheme contributes to a fund that is used to support one another. The objective of Takaful is to pay a defined loss from a common fund created by all the members of the scheme.
It is, therefore, submitted that the proposed Mutual Micro Insurance Associations follow the principles of Shariah in their operation. This will enable the poor people to get access to the required insurance cover at the least cost and will also ensure its accessibility as per the provisions of Islamic Shariah. Micro-takaful, therefore appears to be an alternate solution. This can be offered by the micro credit providers through Mutual Micro-insurance Association of MFIs/NGOs.
— The writer is managing director of Prime Islami Life Insurance Ltd