Thoughts on Economics 89
Thoughts on Economics
Vol. 21, No. 01
Landscape of Micro Insurance in Bangladesh:
Experience of Prime Islami Life Insurance (Takaful)
K. M. Mortuza Ali[(]
Purpose
The purpose of this paper is to report findings of the study into micro-insurance practices in Bangladesh vis-à-vis of Prime Islami Life Insurance. The paper is organized as follows:- a) Part one presents a brief overview of Bangladesh economy and the insurance industry and the regulatory environment in which it operates. b) Part two focuses on the extent to which commercial insurance providers and non-formal providers serve the needs of low-income people. c) Part three relates the findings from a cursory survey about provision of and perceptions of microinsurance. d) Final part of this paper deals with the experience of Prime Islami Life Insurance Limited and future actions need to be taken to deal with micro insurance.
Introduction
In Bangladesh, micro-insurance started during late 1980s when the private life insurance companies came into operation. Since then, its growth has been phenomenal. So much so that today a large part of the life insurance industry premium comes from micro-insurance and it is still growing. The main providers of micro-insurance in Bangladesh are the commercial life insurance companies directly or through NGOs(Non-government organizations).
Bangladesh has an agriculture based economy with majority of people living in villages where income per household is low with very little opportunity for saving. Therefore, the prospect of micro-insurance in Bangladesh is very good. However, there are certain inherent problems associated with this type of insurance. If these problems can be solved micro-insurance in Bangladesh would flourish.
Micro-insurance refers to protection of assets and lives against specific perils of target population, usually low income households at affordable prices through formal and informal institution. Microinsurance products usually provide coverage to health crises, death, accidental injuries etc. Endowment type microinsurnce is emerging in one form or other in recent years.
Microfinance-non-government organizations (MF-NGOs) have been involved in reducing poverty and creating opportunities for the poor to participate in income generating activities for overall growth of the economy in Bangladesh. At the early stage, their activities were concentrated on mobilization of small savings from their members and offering a variety of loan products to them. Some of the MF-NGOs were primarily concerned about the vulnerability of the households against the risks such as death, disability, loss of property etc.
There was a growing realization among the MF-NGOs that savings and credit can not protect the poor households against those risks. As a result, the large MF-NGOs gradually moved into the area of micro insurance and started offering insurance products to their members outside the umbrella of any regulatory framework.
One of the registered insurers started offering microinsurance products to low income households at affordable prices in the late 1980s. Following the astonishing growth of microinsurance program of this insurer during the late 1990s, all registered insurers in Bangladesh except the state owned Life Insurance Corporation and American Life Insurance Company have introduced microinsurance, and this has now become one of their major business operations.
PART ONE
Overview of Bangladesh
Bangladesh is a country of South Asia situated between India and Myanmar having an area of 1,47,570 k2 Its estimated total population is 160 million. Bangladesh is one of the most densely populated land of the world having more than 1000 persons per sq. k.m. Mortality rate of children under one year is 73 per 1000. Life expectancy is 64.5 years for male and 66 years for female. Her per capita GDP is US$ 625 approx. The growth rate of national economy is 6% for the last few years.
Bangladesh faces the challenge of achieving accelerated economic growth and alleviating the massive poverty that afflicts nearly 40% of its total population. However, sustained growth since the 1990s speaks of the resilience of Bangladesh economy. Continued rise in saving and investment played an important role in achieving the high economic growth. Presently the rates of domestic and national savings stand at 21% and 30% of GDP. Inflation rate has, however, increased recently between 7% to 10%.
The monthly household nominal income is approx. taka 7200 (aprox. US$ 100.00) at the national level. However, it is taka 6100 in the rural area and taka 10,500 in the urban area (US$ 150). Monthly household income had increased by 23% in 2005 over 2000 and 115% over 1990 in nominal terms. The average monthly household expenditure was estimated at taka 6150 in 2005. In a country like Bangladesh, poverty is mainly caused by over all low average family income resulting from extremely limited opportunities.
Risk of the poor or that of under privileged people are either natural, social or economic. Unfortunately, the question of security of the poor people has drawn little attention of the policy makers. The poor in Bangladesh do not form a homogenous group. It has been estimated that the weakest in the rural areas consist of approximately 23% extreme poor, 52% moderate poor and 25% vulnerable non-poor.
The most critical issues for Bangladesh at present are inflation in food and other commodity prices and sharp drop in business and investment activities. On an average food inflation is approximately 12% but this is much higher for low income marginalized groups. One N.G.O has found food inflation to be around as high as 22% for low income groups such as day laborers, factory workers, etc. This has certainly affected saving ability of low income groups in Bangladesh.
Income level of the people, as a whole, depends on smooth and sound operation of trade and commerce which is positively correlated with the stable macroeconomic fundamentals of the country. Macro economic performance of the country has negatively been affected in the last few years due to mismanagement of caretaker government as well as economical meltdown of global economy. In the meantime internal and external shocks such as price hike of many imported commodities (doubled, in some cases trebled) in international market as well as damages caused by two successive devastating floods and the catastrophic cyclone ‘SIDR’ and ‘AILA’.
Despite the above setback in the economy, the country registered a 5.9% growth in 2009-2010. Inflationary pressure in the commodity market reduces the real income of the people which acts as an additional burden for prospective and existing policyholders.
Regulatory Framework
After independence of Bangladesh, the Insurance Act, 1938 was adopted in Bangladesh. The Insurance Act, 1938 and the Insurance Rules, 1958 were amended from time to time to regulate and promote orderly growth of the insurance business. The Department of Insurance, an attached department of the Ministry of Finance, is the regulatory authority of the insurance sector.
The regulatory framework in Bangladesh have remained almost the same as were in the days of undivided India. The only visible change is the change of administrative ministry from Ministry of Commerce to Ministry of Finance. In 2010, new Insurance Development and Regulatory Authority Act has been promulgated and an independent Regulatory Authority is likely to be formed very soon.
There is no specific provision for regulation of micro-insurance business in the Insurance Act, 2010. While a very liberal insurance legislation can give rise to massive expansion of insurance services eroding the long term viability of the insurers, a very rigid legislation can restrict the growth of micro-insurance business. In the absence of appropriate legal infrastructure the interests of policyholders cannot be adequately protected, and the institutional risks are very high. The insurers, which started micro-insurance business did so on their own initiatives.
The Insurance Act prohibits any one from carrying on any class of insurance business in Bangladesh unless certificate of registration for that class of business is obtained from the Insurance Regulatory Authority. Micro-credit Regulatory Authority Act, on the other hand, allows Microfinance Institutions to provide insurance services to their members.
Many NGOs in Bangladesh have been providing micro-insurance services in one form or other to their members outside the radar of any regulatory framework.
The government of Bangladesh had undertaken financial sector reform in the early 1990s, and, it is still continuing in one form or another. The insurance sector had been kept outside the preview of the reform process. Reform in the insurance sector is now the need of the hour. We are hopeful that the Government would initiate the reform process in order to provide a stable and vibrant insurance sector in Bangladesh, which will ensure; (i) orderly growth of micro-insurance services, (ii) insurance business based on Shariah, (iii) level playing field for all insurance companies including state owned insurance corporations, (iv) framing rules and regulations in line with the international best practices, and (v) operational independence of the new regulatory authority.
PART TWO
Developing Micro Insurance Products
There is considerable scope of developing life insurance products for the poor people, both as an instrument of saving and to cover the risk of premature death. The micro-finance institutions and the banks providing micro credit may provide insurance coverage for the person to whom credit is given. It appears that life insurance companies have not so far made determined efforts to formulate appropriate micro insurance products and evovle marketing strategies to penetrate in this sector. A few possible approaches may be considered and are discussed below.
Emphasis has to be put on group sales. This is simply because contacting persons individually, explaining the benefits and concluding the contract would be a costly proposition. An attempt could be made to form groups through the help of N.G.Os and/or cooperative societies, social welfare organisations etc. For example, in Malayasia a large number of workers in palm oil plantations are covered through their union. In India, group of landless labourers, handloom weavers and members of milk cooperatives have been covered on a group basis.
For any insurance scheme for the poor, premium would have to be kept low so that the coverage could be affordable by the persons concerned. A term insurance based package or a policy with a low saving element may be more suitable. The possibility of collection of premium on an easy weekly or monthly basis rather than on an annual basis, be explored further.
There is no denying the fact that penetration of insurance in Bangladesh is very low, and the image of the insurance sector is poor. Allthough, the rural sector offers substantial opportunities, the development of new products in any branch of insurance in Bangladesh had been far from encouraging, even in comparison to India.
Most of the non-life insurance companies in Bangladesh are unlikely to have any worthwhile infrastructure outside the sphere of their primary activities. Private non-life insurance companies have so far not designed any product on crops, livestock, poultry & aquaculture. There is substantial amount of untapped general insurance business in rural areas such as:
a) Dwelling, stables, stores, shops,
b) Pumpsets, harvesters, threshers,
c) Handicrafts and household products,
d) Personal accident and hospitalisation.
Since micro-credit constitutes the central component of development progrmmes of most N.G.Os in Bangladesh and it is getting more priority than any tools for alleviating poverty; it is envisaged that a Comprehensive Micro-insurance Policy (C.M.P) for the micro-credit users will play an important role to achieve the desired goal.
Some MFI-NGOs that are now offering insurance services to the micro-credit clients are in true sense “self insurance”. These are being provided mainly because of the following reasons:
i) Non availability of appropriate product/services.
ii) Non confidence on the insurers in general.
iii) High cost of commercial insurance.
These schemes of MFI-NGOs have some inherent weaknesses as mentioned below:
i) The basic principle of spreading the risk is defeated.
ii) The fund which is built up may not be sufficient to meet the large and unusual losses.
iii) There is no protection from reinsurance and absence of pooling arrangement.
iv) There is lack of executive talent needed for underwriting, claim and fund management.
v) If insurance reserve fund is not set aside and only a book reserve is made the purpose is defeated.
Formal Sector Microinsurance in Bangladesh
Microinsurance products may generally be divided into: life microinsurance, health microinsurance, disability microinsurance, property microinsurance, and crop microinsurance. There are other kinds of micro insurance products but they are not usually marketed by the insurance providers due to low demand by the prospective beneficiaries.
Benefits under life microinsurance products vary greatly depending on the design of the products, which range from fairly simple to extremely complicated. One of the common life microinsurance products is credit life insurance, which repays a loan if the borrower dies with an outstanding balance. There could be a number of variants of these insurance products of which one could be credit life integrated with some kinds of savings so that in the event the insured dies the outstanding balance of the loan goes to the lender and an agreed amount goes to the beneficiary nominated by the insured.
In Bangladesh, a few MFI offer this insurance product to their members, but no such product has so far been developed and marketed by the commercial insurers. Microinsurance products that are commonly provided by the commercial insurers in Bangladesh are endowment type products.
Health insurance provides coverage for illness and accidents arising from physical injuries. Health insurance usually provides coverage for limited hospitalization benefits for certain illnesses, and for costs of physicians and medicine. MFIs in many countries including Bangladesh provide health insurance cover to their members.
Crop insurance typically provides policyholders protection in the event their crops are destroyed by natural calamities such as flood or droughts. However, it is very difficult to come up with a good program design taking into account covariant risks and other risk elements inherent in crop insurance, and, as a result it has not yet been introduced in many countries. Some of the countries including Bangladesh where crop insurance coverage was provided had to abandon it because the expenditures had far outstripped the revenues.
Microinsurance Schemes of Life Insurance Companies
Encouraged by the phenomenal growth of microinsuance of Delta life insurance, life companies except Jiban Bima Corporation and American Life Insurance Corporation introduced microinsurance products similar to those of Delta.