Bangladesh Struggles with Low Insurance Penetration Despite Economic Benefits

Despite having 81 insurance companies, including 35 life insurance and 46 non-life insurance firms, Bangladesh's insurance penetration ratio remains abysmally low at just 0.46%. This is significantly lower than the global average and that of neighboring countries like India at 4.2% and Pakistan at 0.91%. The sector's minimal contribution to Bangladesh's GDP can be attributed to undue competition, anomalies, and several other factors.

Why this matters: A low insurance penetration ratio can have far-reaching consequences for a country's economic stability and social security, as it leaves a large proportion of the population vulnerable to financial shocks. Addressing this issue is crucial for Bangladesh to achieve sustainable economic growth and reduce poverty.

The claim settlement ratio, a key indicator of the insurance sector's health, has been declining in Bangladesh. Historical data shows the ratio was 54% in 1973-1990, rising to 73% in 1991-2008, and 78% in 2009-2019. However, it dropped sharply to 68% in 2021 from 88% in 2020. In contrast, the global average claim settlement ratio stands at an impressive 98%, with India also maintaining the same high standard.

Several factors contribute to Bangladesh's low claim settlement ratio, including delayed settlement of claims when policies mature, incomplete information provided by agents to policyholders, lack of professionalism among agents, corruption, financial irregularities, and embezzlement in some companies. The regulatory authority's failure to ensure accountability and monitor companies, rising income inequality keeping a large proportion of the population outside insurance coverage, and a mismatch between demand and supply of products and services also play a role.

To address these issues and increase insurance penetration, Bangladesh Bank has introduced Bancassurance Guidelines, allowing banks to work as corporate agents of insurance companies to sell their insurance products. The main objectives are to increase insurance penetration and outreach of banking and insurance services, promote financial inclusion, social security, and sustainability through insurance coverage, and enhance consumer protection by providing one-stop service for banks and insurers.

Banks must meet certain eligibility criteria to participate in bancassurance, including a minimum regulatory capital of 12.5%, credit rating not less than Bangladesh Bank's rating grade 2, minimum CAMELS rating of 2 from Bangladesh Bank, non-performing loans (NPLs) not exceeding 5%, and positive net profits for the last three consecutive years. Bancassurance offers several benefits such as increased profits for banks through commission on insurance sales and improved overall performance through strict maintenance of eligibility criteria.

However, the introduction of bancassurance poses challenges for existing insurance agents, who must adapt to the new system and compete with banks. Insurers will need to design customized products to meet the demands of bank customers, which can increase the diversity of products in the market. Dr. Md Main Uddin, a professor and former chairman of the Department of Banking and Insurance at the University of Dhaka, emphasizes the need to address these issues to utilize the insurance market's potential for sustaining the country's economic growth.

To improve the insurance sector in Bangladesh, it is essential to mitigate the lack of trust and irregularities, ensure timely claim settlements, design diversified products and services according to customer demand, minimize liquidity constraints through prudential use of funds, and strengthen the regulatory authority's monitoring and punitive actions against erring companies. With 14 banks in Bangladesh already facing a record capital shortfall due to high NPLs, the successful implementation of bancassurance guidelines and addressing the sector's challenges will be crucial for the growth and stability of both the banking and insurance industries in the country.

Key Takeaways

• Bangladesh's insurance penetration ratio is low at 0.46%, compared to global average and neighboring countries.
• Claim settlement ratio in Bangladesh has declined to 68% in 2021, far below the global average of 98%.
• Bancassurance Guidelines aim to increase insurance penetration and outreach of banking and insurance services.
• Banks must meet eligibility criteria to participate in bancassurance, including minimum regulatory capital and credit rating.
• Addressing irregularities, timely claim settlements, and diversified products are essential to improve the insurance sector in Bangladesh.