Insurance penetration, technology adoption, & economic growth in Bangladesh

By fiscal year 2021-22, Bangladesh remains a developing country with a per capita gross domestic product (GDP) at US$2,687 and the GDP growth rate at 7.10 per cent. The country aims to become a developed (i.e., a high income) country by 2041.To achieve this Bangladesh needs to increase its per capita GDP by more than US$12,700. Such monumental growth in (per capita) income will require large-scale investments. However, Bangladesh needs to develop its insurance sector because the nation is prone to natural disasters and capital investment-as well as people's lives-are not well protected. Developing a productive labour force requires reducing their risks-so that they focus on what they do best. For fixed capital investment and other assets, it is also important to bring them under coverage to mitigate risks from natural or man-made disasters. Moreover, investment often needs good insurance coverage so that investors feel safe to run their business. Bangladesh has an opportunity to attract more business since many (foreign) firms have shifted their sourcing from China after the Covid-19 situation. However, there remains considerable challenges which need to be handled carefully-such as raising awareness amongst its citizens about insurance services, better claim management by the insurance companies, and other regulatory and compliance issues.

Economic growth is a lingering concern for a developing country like Bangladesh. In macroeconomics, growth is an important measure that experts are always interested in. Economic growth reveals how the economy is doing and overall wellbeing of its citizens. It is difficult, however, to discuss economic growth in a brief manner because the issue often becomes complicated. The famous Nobel Prize winning economist Robert Lucas stated that "once you start talking about economic growth, it is difficult to think about anything else".

Economic growth may simply be determined by the growth of an economy's ability to produce goods and services using inputs like capital and labour. One of the most popular models of economic growth is that of Nobel Laureate economist Robert Solow. The Solow Model shows how economic growth may be spurred by the country's capital accumulation in the long run when savings (or investment) exceeds replacement investment or depreciation cost. The total savings of a country include both public and private savings.

Investors often buy insurance policies to cover some of the risks of investment-thereby reducing costs and saving more. The insurance savings ultimately go into further investment in various forms. Insurance is a system where people buy insurance products from the insurance companies against their life (health) or assets to cover risks where they pay certain amounts as premium. For example, if a road accident occurs then a person will get certain amount of monetary support from the insurance company against the damage caused by the accident if he or she is covered by insurance. It is a win-win situation for both the insurance clients and the insurance companies because not everyone will be a victim of road accident, so they need not pay to everyone. The insurance companies invest the (accumulated) insurance premium received from the policy holders which ultimately increase capital stock of a country. Bangladesh requires more investments in different sectors because of it will be graduating from the list of Least Developed Countries (LDCs) in 2026. The nation needs to continue its current economic growth trajectory-some 7 per cent on average-through a sustained growth in investments.

A look at the insurance penetration rate and its relation to investment in Bangladesh and any subsequent impact on its economic growth reveals an interesting scenario. There are 81 insurance companies in operation in the country. Amongst the 81 companies, 35 are life insurance companies, and 46 are non-life insurance companies. Two of these insurance companies (Jibon Bima Corporation and Sadharon Bima Corporation) are state-owned, while one (Metlife) is an international life insurance company. Although the nation has a good number of insurance companies, the insurance penetration rate remains low. Insurance penetration rate is the ratio of total insurance premiums by total GDP of a country in a particular year.

The Swiss Re Institute stated in their 2022 report that the insurance penetration of Bangladesh is only 0.40 per cent (14,392 crore taka)-which remains low compared to regional peers like India where the rate is 4 per cent. The insurance sector of the country, thus, remains in its infancy. However, the government is trying to popularise insurance policies among its citizens in various ways like observing March 01 every year as the National Insurance Day. However, there is room for improvement. Raising awareness (of citizens) about buying insurance policies is important since it manages policy holders' risks that bring economic stability of people's lives. Moreover, the accumulated funds by insurance companies help develop a country's financial system and investment possibilities. Furthermore, insurance covers risks of a business which is important in the current volatile global marketplace. As businesses need to adopt and adapt modern technologies to remain competitive in producing goods or deliver services, insurance might play an important role in covering risks of investing in new technologies in producing goods in an efficient manner and providing better services as well.

Production takes place when a firm successfully transforms inputs into outputs. When production occurs in an efficient manner in an economy and the total savings exceed the replacement costs, then capital per worker and output per worker increases. This is simply what Robert Solow explained in his growth model. Later, Nobel prize winning economists Paul Romer and Robert Lucas augmented the model including technology which explains why some of the developed nations sustain their economic progress using technology. Technology has the power to break the production possibility frontier and produce more than before using the same inputs. For example, if an individual earns more than what they spend in a month, then the money could be used in personal and professional development which could help the individual earn more in the future. However, beyond a certain threshold, output does not increase proportionally to that of inputs due to diminishing (marginal) returns to the latter. In such a situation, technology might provide a breakthrough since modern technology might allow a greater level of production using the same level of inputs. For example, we can send a letter quickly using email than do it by post.

So, economic growth in the short run could be done in many ways including foreign direct investment or so on but economic development in the long run depends on increasing the net capital stock of a country and usage of modern technology. Capital accumulation might happen from insurance premium (funds) along with other forms of investments such as foreign direct investments, taxation and so on. However, to sustain economic growth, Bangladesh needs to adopt cutting edge technology that might come from improved knowhow (higher studies) as well as from research and development, technology transfers, and other ways of acquiring new technologies. Insurance companies could cover some of the risks of investment in research and development and technology. Because investing in technology may incur a high risk of failure, insurance could divert some of the risks.

In the current global landscape-i.e., in the aftermath of the Russia-Ukraine war, insurance coverage has become even more important. To cite a recent example regarding insurance benefits, we have come to know that the Bangladesh Shipping Corporation lost one of its ships in Ukraine in the ongoing Russia-Ukraine war. Fortunately, the ship was insured by the Sadharon Bima Corporation (SBC) and reinsured by some companies abroad. The Bangladesh Shipping Corporation is going to receive compensation for their loss from the SBC. It would have been extremely costly if the ship was not properly insured.

Bangladesh needs to develop insurance sector not only because of transfer of risks of people's lives and assets, but also to increase capital per worker. Moreover, insurance creates a new class of quality investments accumulating large capital stock(s) and repayment is done after a relatively long period of time, especially in the life insurance sector. Chien-Chiang Lee, Chi-Chuan Lee, and Yi-Bin Chiu find in their 2013 research on 41 countries with data from 1979 to 2007 that a 01 per cent increase in life insurance premium leads to a 0.06 per cent increase in real GDP of a country. So, it is a fact that insurance helps capital accumulation and economic growth. Furthermore, a conducive economic environment where financial institutions like insurance companies abide by the rules reflects a safe investment environment where its citizens feel encouraged to be more productive. Investors will feel safe about the financial institutions as well as their own lives. Eventually, they will strive for a good life and devote themselves to become smarter and technologically advanced to produce more efficiently.

A 2000 paper by Rudolf Enz published in the Geneva Papers on Risk and Insurance stated that insurance penetration often follows an S-curve with the GDP growth. Since Bangladesh's insurance penetration is low compared to the global average, it is expected that its insurance sector will grow in the same manner as the nation achieves further economic growth.

Bangladesh's GDP has averaged 7 per cent in the last decade which drastically raised the number of middle-income educated citizens. Rapid industrialisation is also ongoing in the country which is a fertile period of higher insurance penetration. The nation is expected to see a rise in the insurance penetration. Tax cuts/rebates, appropriate legislation(s), and suitable policy framework(s) are required to be put in place against the backdrop of increasing insurance penetration rate in the country.

In summary, investment is essential for economic growth and when investment surpasses its replacement cost, economic growth soars. This economic growth converges to a certain point which is called a steady state, since inputs have diminishing returns to output. To progress further from such a steady state and to sustain economic growth, countries like Bangladesh require greater investments in the technology. Technological progress can augment the nation's production possibility frontier and bring further efficiency(ies) in production. However, investment is a risky venture in Bangladesh, especially when it comes to new technologies. Here, insurance could play a vital role in minimising that risk. If sophisticated technological investments are secured through insurance policies, then more investments will come in the (economic) sector. This has the potential to enhance Bangladesh's economic growth in the long run. To do so, the country needs proper policy in place, raising citizens' awareness about the insurance benefits, and innovative products and good practice from the insurance companies.

Shihab Uddin Ahmad is a student of Master of Science in Applied Economics at the BRAC University. [email protected].

Muhammad Shafiullah, PhD is an Associate Professor of Economics at BRAC University.
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