The business of banking is changing around the world – the integration of the global financial market, new technology, demand variation, diversification of non-banking activities and so on are the underlying reasons. The banks in Bangladesh mostly rely on interest from loans and need diversified products.
In Bangladesh, 62 banks and 76 insurance companies (life and non-life) are providing financial services. Grassroots people have a negative attitude towards insurance. But they have immense trust in the banking sector. Banking operations in Bangladesh are still branch-oriented, with more than 8,000 branches nationwide. Only one per cent of the total population enjoys insurance services. Almost all life and non-life insurance companies focus their business on urban areas, targeting city dwellers.
Bancassurance was introduced in Europe in 1980 and has become a popular bank-insurance joint product worldwide. The banking regulator, Bangladesh Bank, and the insurance regulator, Insurance Development and Regulatory Authority (IDRA), have joined forces to launch bancassurance in the country.
Although late, the Bangladesh authorities have decided to introduce bancassurance, and the necessary rules have been issued. Bancassurance, a term derived from the combination of “bank” and “insurance” in French, refers to the distribution of insurance products through banking channels. This service offers customers the opportunity to fulfil both their banking and insurance needs simultaneously.
Banks and insurance companies enter into cooperation agreements to market bancassurance through Distribution Agreements, Joint Ventures, and Full Integration. The cooperation generally involves four main types of life insurance products bundled with bank credit:
Savings products: These may be non-linked or linked, providing life cover and returns or a combination of both. Linked insurance plans are often referred to as insurance-cum-investment products, linked to the stock market. Non-linked insurance plans are traditional plans that are not linked to the stock market. They offer low-risk returns with a defined maturity amount and bonuses. Term insurance or an endowment policy can be classified as non-linked insurance policies.
Credit protection products: Insurance products bundled with bank loans or credit cards, specifically designed to secure the loan with an insurance policy.
Non-retail products: These products target the needs of a bank’s MSME clients, providing life insurance coverage for key persons. The insurance is also used as mortgage for loans to micro, small, and medium enterprises (MSMEs).
Standalone protection products: These products offer protection to beneficiaries in the event of the policyholder’s illness or death, often presented as part of a comprehensive, needs-based financial plan. Examples include term life, whole life, and living benefits (long-term care, critical illness) insurance.
Among these products, protection is still seeking a foothold in bancassurance. This product remains the central theme of the programme, with most initiatives currently focused on distributing a blend of savings and credit insurance products. This strategy aims to blend insurance products as a ‘value addition’ while promoting the bank’s own products.
Bancassurance is essential for Bangladesh as it could help raise the country’s insurance penetration rate, which is currently less than 1.0 per cent of GDP. The Insurance Policy, adopted in 2014, set a target of increasing insurance penetration to 4.0 per cent by 2021.
The traditional insurance agency system is costly and its effectiveness is waning. Banks cannot rely solely on loan interest and need diversified products. Bancassurance can reduce insurers’ strong dependency on agency distribution channels, allowing insurers to increase their business volume and improve profitability. This diversification will reduce risks and agency distribution costs. Insurance companies can also access ATMs and other technologies used by banks.
Consumers will benefit from cheaper insurance products, as the product features will remain the same, but distribution channel costs will be lower than the traditional agency distribution model. Bancassurance is a win-win strategy for banks, insurance companies, and customers. Banks can meet their deposit demand through bancassurance, and experts predict that soon 90 percent or more of premiums will be collected via this business channel.
This product will minimise the credit risk for banks by diversifying mortgage risk, personal loan risk, and SME loan risk. It also fosters long-term relationships with customers, as insurance products are issued on a long-term basis. The customers will benefit from a one-stop service, receiving comprehensive financial services under one roof.
Banks can offer a wide range of insurance services, and the resulting competition will significantly increase their profits while enhancing their reputation for offering a broader range of services. Banks will also generate more income from commissions earned by selling insurance products and by securing their loans with insurance coverage.
Insurance companies have difficulty reaching grassroots levels due to various limitations. However, insurance companies can also benefit from this partnership platform. It will reduce the operational costs for both banks and insurance companies. Insurance companies will see higher sales revenue and an improved brand image. Additionally, they can focus on developing innovative services based on customer demand. The companies will be able to use ATMs, point-of-sale terminals, and other technologies used by banks.
For bancassurance to succeed, proper attention must be given to customer behaviour, market image, legal frameworks, product diversification, risk assessments, partner selection, training, and remuneration.
According to Swiss Re data, a leading global reinsurer, Bangladesh’s overall insurance penetration stood at a meagre 0.57 per cent in 2018, the lowest among emerging Asian nations. In 2017, the penetration rate was 0.55 per cent. Of last year’s penetration rate, 0.41 per cent was contributed by life insurance and 0.19 per cent by non-life insurance. In 2018, insurance penetration in Thailand was 5.27 per cent, Malaysia 4.77per cent, China 4.22 per cent, India 3.70 per cent, Vietnam 2.42 per cent, Indonesia 1.95 per cent, the Philippines 1.82 per cent, and Sri Lanka 1.15 per cent.
One study has found that the growth of MSMEs and employment in the MSME sector is higher than in other sectors in Bangladesh. However, credit disbursement to the SME sector has been gradually decreasing over the years. Banks are unable to finance MSMEs due to a lack of collateral, with the International Finance Corporation (IFC) estimating a sizable financing gap for MSMEs, which amounted to Tk23,700 crore ($2.8 billion) in 2016.
Bangladesh urgently needs to increase insurance coverage and credit to MSMEs. The insurance sector is unable to reach clients at the grassroots level, and banks are unwilling to lend to MSMEs without collateral. Bancassurance products offer a solution to both the low insurance coverage and the lack of credit, particularly for MSMEs.
The author is a legal economist and the CEO of Bangla Chemical. He can be reached at [email protected]
