Bancassurance: The untapped potential

The process of selling insurance products through the banking channel is called bancassurance. It originated in France in 1980 and flourished worldwide due to its convenience. Bancassurance brings banks and insurance companies together and both sides benefit from it.

The insurance industry in Bangladesh comprises 79 insurers (one received licence in 2020) including 33 life insurers whereas the banking industry comprises 58 banks operating nationwide through their 10,000 plus branches.

In Bangladesh, out of 160 million people only 12 million have life insurance policies and their various kinds of assets and other belongings are excluded from insurance coverage. Hence the insurance penetration rate here is the lowest in South Asia which is only 0.57 whereas in India this rate is 3.70 and in Sri Lanka it is 1.15. These data suggest that millions of people and their assets are yet to be brought under the insurance coverage.

The insurance industry still depends on tie-up agency systems. The agency system is old-fashioned and less appealing in a dynamic financial structure. In the context of Bangladesh it has various demerits, for example, high agent switching rate, lofty commission, misappropriation of policyholders' premium and many having insufficient insurance literacy. The advent of bancassurance and corporate agency system or broking system has undermined the necessity of agency system in modern world. Here comes bancassurance-the modern, cost-effective and one of the most accepted distribution channels.

In neighbouring India, Sri Lanka and Pakistan bancassurance has been being used successfully for a long time and it is adding value to their financial systems. It creates synergy when two carriers help each other in a manner that banks earn commission and insurers procure new business. The Insurance Act 2010 allows insurers to disburse commission up to 35 per cent of first year's business, 10 per cent commission for 2nd year renewal and 5.0 per cent for 3rd year. Commission could be a source of non-operating profit for banks. In the same way, insurers could procure quality business, less likely to lapse, through bancassurance since customers procure insurance from banks judiciously and prudently without any pressure from any agent. Quality business ensures high renewal premium income which is the backbone for long-term sustainability for insurers. Moreover, through bancassurance the insurers' management expense falls significantly.

According to the Insurance Development and Regulatory Authority (IDRA), a total of Tk 96.08 billion premium income was underwritten in the life insurance sector, out of which Tk 33.56 billion was the first year's premium income, whereas in the non-life sector a total of Tk 36.83 billion premium income was reported in 2019. If bancassurance could have been in place, the commission would be treated as banks' non-operating income.

Therefore, to reap the benefit of bancassurance and to create a diverse financial market, the two regulatory bodies-IDRA and Bangladesh Bank-can introduce it under the purview of the Insurance Act of 2010 and the Bank Companies Act 1991.

It will help open a banking channel for the customers to procure insurance products from. This will give customers a much trusted place to buy the insurance products. It will ultimately help both the key financial sectors to grow faster.

[Abu Mahmud is a Master in Actuary Science and working as an officer at the Insurance Development and Regulatory Authority (IDRA).]