Bancassurance in Bangladesh: Renewed version of risk mitigation tool

Insurance product is invented to provide an assurance or protection against different perils and thereby to serve peace of mind in favor of the respective insured or beneficiaries. Insurance industry as such became very critical for maintaining the balance in overall financial service industry.

'Bancassurance' on the other hand is not a new arrangement globally but for Bangladesh, its relatively newer version of insurance product offered to clients who are also banking clients. Bancassurance is a kind of financial facility offered by banks that integrates both banking and insurance schemes. In this structure, banks often offer two forms of guarantee i.e. life insurance and general insurance or non-life insurance.

The regulatory authority of insurance business in Bangladesh is IDRA. Earlier, they did not permit insurance companies to allow banks to sell their products. Hence many banks , despite having very good prospects , could not sell insurance products to their banking clients. As a result, few banks in Bangladesh used to offer this product in different packaging like bundled (as opt-in/opt-out) with other core banking products like credit card with credit safety shield , which is basically payment protection insurance against the credit card outstanding loan/credit. It means, in case of death of the cardholder, insurance company will pay-off the total outstanding of card account. Similarly, such bundled arrangement was available for other retail/business lending products like home loan, personal loan, auto loan, business loan etc. For home loan, the insurance arrangement was named MRTA (Mortgage reducing term assurance) product, for auto loan ARTA (Auto loan reducing term assurance). Reducing term assurance means, the assurance of loan o/s for the entire term or tenor of the loan life and total insurance premium is paid in advance by client, which is subject to return back proportionately in case of loan gets early settled. Under such arrangement, banks used to work as service provider and premium collector rather than agent of the insurance companies. Such arrangement was in place for current or savings account also.

Besides that, banks used to take Credit guarantee scheme/credit swaps/credit derivatives as part of their portfolio risk management strategy. Such insurance arrangement at corporate level helps the bank to minimize their portfolio credit risk. The insurance premium is either borne by banks or factored in the pricing of loan product, to be borne by the borrowers.

As opposed to the situation mentioned above, now banks are allowed to act as agent of the insurance companies and they can sell insurance products as standalone basis instead of bundled (with opt-in/opt-out options). Such opening of the gateway, will not only enhance the scale of the insurance business manifold but also help build the culture of opting in insurance product as a critical component of risk management.

People in Bangladesh are more risk neutral or indifferent. Invariably, it can be said , they are less literate about the risk and it's different impact in their lives. This means they are not cautious about predicting uncertainty factors that may impact their lives and hence not taking proactive measures to mitigate the magnitude of uncertainty. As a result, we see people here are less bothered about structured financing or investment plan. Sometime, they are exposed to uncalculated risk due to the investment in schemes not commensurate to the outcome or return of the investment amount. One of the core reasons of such attitude is their lacking in proper education and training upon level of vulnerability and complexity that are shaping up their daily lives. Another good reason can be the expectation of higher profit or return as quickly as possible. Insurance on the other hand, since provide assurance or protection of compensation of some unexpected event in future, they take the risk premium of those events in advance or adjust the return as such so that the risk of future event (did not take place yet) is properly provisioned in the price of insurance. As a result, the monetary returns ideally do not work like other traditional investment vehicles. However, if we talk about value for money, insurance schemes provide more value than other typical investment schemes or savings scheme do. With the same amount of investment, if anyone goes for insurance investment, it would pay off better value in most cases.

So as i talked about risk, insurance products have always been considered as very good tool for risk management, specially financial risk mgt e.g. payment protection insurance, fraud insurance, credit guarantee insurance scheme, credit derivatives, cargo insurance, general insurance etc. Any individual or entity if they foresee how their hard earned money can better serve in terms of value, it's really important that they count or assess all future possible risks coming in the way to hit them. These risks are now taking different shape and size as far as their impact is considered; we hardly knew about pandemic (i.e. covid19) but now it's reality to all. Pandemic took many lives and put other lives at unforeseeable risks like unavailability of future cashflow of deceased family, inability to repayment of unsettled loan, unpaid bill etc. Besides that, the level of mental health risk is now taking heighted shape. This is a concern for many corporates also on how they can contribute in minimizing the impact of deteriorating mental well-being of their staffs.

Amidst the level of different risks, bancassurance can play a pivotal role in managing those risks or reducing the impact of those risks. Specially, since banks can now pitch this product to their clients, it will get more traction since people tend to trust banks more than insurance companies. Bancassurance, can now help to build the culture of proactive and forward-looking approach amongst Bangladeshis as how they may perceive different types of uncertainty. This product will also help to strengthen the quality of loan portfolio of the bank since insurance companies can now pay-off loan o/s in case of borrower's death.

It's important for banks to evoke research and innovate different utilities and arrangements around insurance with banking products so that they can offer even better value for the clients in coming days. For an example, digitalizing on-boarding, claim settlement, premium collection, heath risk assessment process, providing price advantage to clients, explore more aggregators & products etc. Regulators like Bangladesh Bank, IDRA & BSEC, should explore other innovative avenues to facilitate such industry to grow more effectively & efficiently.