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A game-changer?

JASIM UDDIN HAROON | March 01, 2022 00:00:00

Insurance has a deep-rooted history in the sub-continent. It finds mention in the writings of Kautilya (Arthasastra ). Ancient Indian history has preserved the earliest traces of insurance in the form of marine trade loans and carriers' contracts. However, during colonial rule, both life and non-life insurance evolved over time heavily drawing from other countries experiences, particularly the practice in England.

The modern insurance actually began after promulgation of the insurance act of 1938 which had incorporated previous all practices, and rules of 1956 which are more or less still in practice in Bangladesh.

Although the history is old to some extent, the growth in insurance business in Bangladesh has remained much low in comparison with other south Asian nations including India and Pakistan. Bangladesh's insurance penetration in terms of GDP stood at 0.40 per cent in 2020 (Swiss Re Institute). This is 4.2 per cent in India, 1.2 per cent in Sri Lanka, and in Pakistan 0.70. The biggest insurance penetration is in Hong Kong followed by Taiwan.

Bangladesh has repealed the 1938 act by replacing it with the insurance act of 2010. It simultaneously established a regulatory body, namely IDRA (Insurance Development and Regulatory Authority). The penetration ratio or density of insurance remained lowest in South Asia.

There is a product in the banking sector named DPS for small savers who deposit monthly amounts and get back it with profit after 5 years or 10 years. It is very much popular. But the insurance industry offers the similar products but the people are not that much interested despite the fact that it covers risks.

However, a good initiative for introducing bancassurance, an alternative channel of sales of insurance plans to the bank clients, is in the final stage. The central bank of Bangladesh has already drafted guidelines for banks in order to unveil the new marketing strategy in the country.

Bancassurance introduction in the country's financial market has been much delayed. A tiny economy like Nepal did it in 1995. Neighbouring India and Pakistan both did the same even 20 years back. This type of alternative selling of insurance products, 'bancassurance', originated in France in the 1970s.

Our insurance regulator initiated it more than three years back. Two life insurers--US-registered MetLife and privately-owned Guardian Life Insurance Company have contributed much to it as they persuaded the regulators and the government's policy makers. They believe that the technique will help raise the insurance penetration in Bangladesh.

The model may be a game changer in the insurance industry as people's confidence on the banking system still remains much high. It is believed that both life insurers and commercial banks will get a big boost in their revenue.

A Bangladesh Bank presentation states that introduction of bancassurance will lead to higher penetration of insurance aiding better risk coverage of other financial products. This will require no equity investment from banks. Such a system, available in almost all south Asian economies, will reduce the risk-based capital requirement for the same level of revenue. This will ensure an additional and more stable stream of income through diversification into insurance and reduce the reliance on interest spread as the major source of income.

With bancassurance, the insurance and banking industries can make significant progress in meeting the SDG targets for the insurance sector, according to BB.

This also would help many more people have access to the insurance products by taking advantage of the nationwide network of bank-branches.

According to the draft guidelines prepared for the banks by the central bank the bancassurance model to be followed in the country is "Corporate model". There are few more models of the business available in the world.

To start a bancassurance business banks will require a permission or approval from the BB and a separate licence to be issued by the insurance regulator IDRA.

As per definition of bancassurance by the BB, sale and distribution through the bank branch network, sales network and digital platform will solicit, distribute, sell and promote insurance plans to the existing customers of the banks.

There will be one chief bancassurance officer to lead the business in the bank. He will hold at least a master's degree and at least 12 years' experience either in banking or insurance. There will be five grades below the CEO of the banks. Under the wing, there will be bancassurance officers in the bank.

The BB has prepared eligibility criteria for the bancassurance business for banks. The bank which wants to do the business with the insurers must meet the minimum legal and regulatory capital requirement; the CRAR of the bank should not be less than 10 per cent. The bank must meet the minimum credit rating set by the BB.

The level of net non-performing assets should not be more than 7.0 per cent. The bank should have made a net profit for the last three years in a row. There must be a separate wing, bancassurance unit, to be set up by the banks.

Insurance industry is blamed for not settling claims timely. But under the bancassurance the bank must assist the insured persons or nominees as a facilitator in processing the claim. Banks at the request of the insurers will provide all necessary assistance in collecting the necessary documents and information regarding the settlement of the claim.

A bank cannot join more than three life insurers and three non-non life insurers.

IDRA also needs to prepare a separate set of guidelines for the insurers to do the business. Bangladesh's insurance sector is largely blamed for not settling claims timely. Many topbrass of the insurers argue that they want to resolve it quickly but cannot do either for lack of documents or non-payment of regular premiums by the clients. But the clients claim they paid it regularly. This could be easily resolved by introducing automation.

The claim payment ratio may be a good condition of eligibility for doing bancassurance business by the insurers. In many nations it is more than 97 per cent. It may be set at least at 90 per cent to be eligible for the bancassurance business.

Bangladesh has more than 500 life-insurance products. But the products are almost same in nature. The industry needs to create time-befitting products to woo banks' clients.

The proposal for introducing the bancassuance model in the financial market was earlier rejected by the central bank on the grounds that people's confidence on the insurance industry was poor. So the game-changing issue should be handled carefully. Otherwise, both insurers and banks will suffer.

The author is a special correspondent at the FE.

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