Bancassurance can change how we do insurance

The contribution of the insurance sector to GDP is measured by what is popularly known as penetration ratio—a ratio of premium to GDP, which is only 0.46 percent. This is very low compared to other countries, as it is 4.2 percent in India and even 0.91 percent in Pakistan. Although Bangladesh has 81 insurance companies, of which 35 deal with life insurance and 46 with non-life insurance, the low penetration ratio indicates that this sector has not grown properly. Burdened with a large number of insurance companies and faced with undue competition, our insurance sector was bound to perform poorly and resorted to various anomalies.

Against this backdrop, Bangladesh Bank recently issued "Bancassurance Guidelines for Banks" to allow banks to work as corporate agents of insurance companies to sell their insurance products on the market. This system of selling insurance services to bank customers is known as bancassurance. Here, banks will simply work as corporate agents, let their customers know about insurance policies, and sell insurance products to interested customers.

The main objectives of bancassurance are to provide a regulatory and supervisory framework to sell bancassurance, and increase insurance penetration and the outreach of banking and insurance services to promote financial inclusion. It will also try to promote social security and sustainability through insurance coverage, enhance consumer protection, and provide one-stop service for banks and insurers.

There are some eligibility criteria that banks must maintain to work as corporate agents of insurers for the bancassurance business. A bank must have a minimum regulatory capital of 12.5 percent, has to meet the credit rating not less than Bangladesh Bank's rating grade-2, meet the minimum CAMELS rating of 2 from Bangladesh Bank, its non-performing loans (NPLs) must not be more than five percent, and it should have had positive net profits for the last three consecutive years. A bank can enter into a contract with a maximum of three life insurance and three non-life insurance companies.

Besides these, banks are allowed to sell insurance services to their existing customers by conducting need analysis. They have to disclose all material information regarding features and costs of insurance services to avoid potential misunderstanding. Here, customers will decide whether they want to buy insurance with banking products or not. In addition, banks will check the appropriateness of insurance products for their clients. They must not force their clients to buy the products. In order for banks to know their customers, the former will observe financial behaviour of the latter for a certain period. Hence, no walk-in-customers are eligible to buy these insurance services from banks.

With bancassurance, banks have the opportunity to sell insurance services in large volumes since many people have bank accounts and banks are considered more trustworthy than other financial institutions. Using their branch network, digital platform, and sales network, banks can easily reach their large number of customers to sell insurance services.

The insurance sector has been facing a lack of confidence due to its low claim settlement ratios, which is mainly a result of fund embezzlement, poor investment quality, and a liquidity crisis. There is an allegation against insurance agents that they do not properly inform policyholders of all the terms and conditions. Most policyholders form policies simply based on the words of agents. But later, when the policies mature, they identify inconsistencies between the promises and the realities. Agents also try to sell policies by misrepresenting facts.

This issue can be resolved through bancassurance, wherein banks will work as insurance agents. If banks can capitalise on this opportunity, their profits will be boosted, and as these institutions have a large customer base, they can easily advertise insurance policies to them.

Banks will benefit from bancassurance in two ways. The first and direct one is commission on the sale of insurance services. If banks can sell more and more services, it will increase their profit. The second and indirect benefit is that banks must maintain some criteria to be involved in bancassurance, which are bound to improve their overall performance. Banks will have to reduce their NPLs, maintain the minimum capital ratio and attain profit for three years before engaging in bancassurance.

These criteria automatically disqualify some banks from offering bancassurance. The latest Bangladesh Bank data show that 14 banks face record capital shortfall, which is mainly because of high NPLs.
 

When banks must maintain these criteria strictly to be engaged in bancassurance, they will also look for those insurance companies which have reputation in the market. Banks will certainly look for those companies which have good claim settlement ratios, no history of fund embezzlement, and have shown prudence in fund investment. They will also consider the dynamism of insurers in developing products for bank customers.

In general, banks customers, being more financially literate, will accept the policies that meet their financial requirements. They may demand customised products, so insurers will have the challenge of designing those quickly. Banks can collect information from their customers regarding the specifications of products, and through cost-benefit analyses, insurers should devise them. This will increase the diversity of products that are on the market. Plus, if these products can be sold in large volumes, insurers will benefit financially and their business will grow. Ultimately, the penetration of the insurance sector improve.

On the other hand, bancassurance will put extreme pressure on existing insurance agents. If these agents fail to convince policyholders better than banks, they will disappear over time. Hence, they must be honest and efficient enough to attract new policyholders. In contrast, if banks fail to train their officers involved in bancassurance, the potential of bancassurance may not bear fruit. However, a fair competition between corporate agents (banks) and individual agents is expected to provide better services to policyholders with transparency and accountability.

If insurance products can be made attractive considering financial needs of people and there is perfect trade-off between banks and insurers to sell the same, it is expected that many people will come under insurance coverage. Not only that, those who do not have bank accounts may be induced to take insurance policies by opening one. This will certainly increase the outreach of banking and insurance services, promoting financial inclusion.

The most important thing for bancassurance to be successful is that insurers must have good intentions. They need to attain capacity in fund management, particularly investment and liquidity management, and have to check misappropriation of funds. The regulatory authority must take stern actions against those involved in fund embezzlement. Insurers have to bring more people under insurance coverage, guaranteeing social security—the ultimate objective of insurance. If bancassurance becomes successful, the long-standing stigma plaguing the insurance sector of Bangladesh will be over to an extent and its contribution to the economy will reach a standard level.

Md Main Uddin is professor and former chairman of the Department of Banking and Insurance at the University of Dhaka. Reach him at mainuddin@du.ac.bd

Views expressed in this article are the author's own.

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