Why the insurance sector of Bangladesh needs reshaping
The contribution of the insurance sector to the GDP is measured by a ratio popularly known as penetration ratio – a ratio of premium to GDP. The penetration ratio in Bangladesh, currently at only 0.46 percent, is very low compared to the global standards. Lack of awareness about insurance is often stated as the reason behind the meagre penetration ratio, but there are many other addressable issues in the sector.
Bangladesh has 81 insurance companies, of which 35 companies deal with life insurance and 46 with non-life insurance. The question about whether our economy needs so many insurance companies is moot. The answer is a no, and it's a no-brainer. India, for example, has only 57 insurance companies, and Malaysia has only 25. Allowing such a large number of insurance companies to operate in Bangladesh was completely unjustified. A good number of companies were given licences based on political considerations; they were permitted not because they were needed for the economy, but because they were beneficial to some influential people. If an economy has more insurance companies than it needs, companies are bound to perform poorly and resort to anomalies due to undue competition.
The progress of a country's insurance sector can be understood by looking at its claim settlement ratio. This ratio refers to the percentage of claims that the insurance company settles in a year compared to the total number of claims received. If the ratio is high, it means more claims have been settled. So, what are the claim settlement ratios of the insurance companies in Bangladesh?
Historical data show that it was about 54 percent in 1973-1990, which rose to nearly 73 percent during 1991-08, and to 78 percent during 2009-2019. However, this rate dropped dramatically to 68 percent in 2021 from 88 percent in 2020. In contrast, the global claim settlement ratio is 98 percent on average. Even in India, the average claim settlement ratio is 98 percent. One could argue that the recent deterioration of this ratio in Bangladesh may be due to the pandemic. But what about the historical low settlement ratios?
Many factors can be attributed to such low claim settlement ratios. There are allegations that insurers delay the settlement of claims when some policies mature. In some cases, if clients are not influential, their claims are not settled properly. A large number of insurance companies have to compete for the same number of clients with almost similar products and services. Some companies fail to invest their funds appropriately to generate the required return, while other companies face investment losses. Besides, corruption, financial irregularities and embezzlement in some companies resulted in a serious liquidity crisis. The regulatory authority has repeatedly failed to ensure the accountability of such companies; lack of monitoring and supervision allows them to continue operating with many anomalies.
Furthermore, the lack of professionalism of agents has created a negative mindset towards the entire sector. Incomplete information is often provided by agents to policyholders. In many cases, policyholders do not look at the terms and conditions of policies; rather they depend on what the agents say. In such cases, the agents can exaggerate the benefits of policies. When the policies mature, the policyholders find a huge gap between the promise and the reality.
On the other hand, the rising income inequality has kept a large proportion of the population outside insurance coverage. A paradoxical situation has emerged in the country: the rich have the ability to manage risks personally and have insurance policies. But the poor who face many risks do not have insurance policies that can be attributed not only to the lack of awareness, but also to the economic factors creating their inability to buy the policies.
There is also a mismatch between the demand for and supply of the products and services. Before launching any product, there should be a survey on prospective customers so that the supplier can understand its latent demand and design it accordingly. But in our country, most of the time, products and services are launched without serious market investigation.
The negligence to the overall sector is evident from the setting up of the Insurance Development and Regulatory Authority (IDRA) only in 2010, although this sector has been operating in the country in parallel with the banking sector since independence. The IDRA does not have an adequate workforce to regulate the insurance sector properly. In addition, there is also doubt about its autonomy in taking corrective measures against the insurance companies involved in various irregularities and financial scams.
But the insurance market is crucial for sustaining the country's economic growth. To utilise this opportunity, the lack of trust and irregularities in this sector has to be mitigated. Timely claim settlements are a must-do to create trust. It is also crucial to design diversified products and services according to the customers' demand. The liquidity constraint has to be minimised by prudential use of funds. The regulatory authority needs to monitor the insurance companies rigorously and punish companies that break the law. Such actions will also create a ripple effect, and pressurise other companies to work within the regulatory framework.
Dr Md Main Uddin is professor and former chairman of the Department of Banking and Insurance at the University of Dhaka. He can be reached at mainuddin@du.ac.bd