Linking insurance with microfinance could ensure greater financial inclusion

Financial Inclusion (FI) has for long been an important element in Bangladesh's development strategy. Programmes under FI are focused at increasing access to financial services of marginal population through technology and innovation. This has been reflected in various regulatory reforms and policy changes directed towards inclusive financial service. Experiences of Microfinance Institutions (MFI) in the country suggest that tagging insurance with lending allow borrowers to guard against potential repayment failures occurring from unforeseen shocks. It also helps MFIs to adjust their balance sheets when segments of their clients fail to repay. While lending to marginal population in Bangladesh found institutional setup by MFIs, they undertook tagging quasi-insurance policies to their lending programmes. This was partly due to the failure of insurance companies in extending their net with appropriate products and the absence of desired regulations in the insurance market. One needs to trace the development of the two segments in order to appreciate the need for regulatory changes.

If properly addressed, the insurance sector has potential to collaborate with MFIs and contribute towards financial inclusion.

Historically, insurance business emerged in the South Asian sub-continent during the British regime that primarily confined it to life insurance policies. After the partition, insurance business gained momentum in erstwhile East Pakistan, with the establishment of first insurance company 'Homeland Insurance Company' in 1958. After the independence of Bangladesh in 1971, the government of Bangladesh nationalised insurance business and after a few successive events, it established two national insurance corporations: Jibon Bima Corporation (JBC) - for life insurance, and Shadharon Bima Corporation (SBC) - for non-life insurance service, through Insurance Corporation Act, 1973. These two state-owned companies were sole providers of insurance services till the mid-80s. In 1984, through the decree of Insurance Corporation Ordinance, private insurance companies entered the market that led to an expansion of insurance service in Bangladesh. In 2010, the government of Bangladesh enacted Insurance Act 2010 which dissolved the earlier act of 1938, with minimal differences. It has also established Insurance Development and Regulatory Authority (IDRA) under IDRA Act 2010 to supervise the insurance business and protect the policy-holders.

Till the late-80s, non-life insurance service aimed at providing marine insurance and fire insurance, while life insurance service was mainly focused on ordinary life insurance policy. In order to expand the service, the mainstream insurance companies introduced small life insurance policies to target the low net-worth households. In 1988, Delta Life Insurance Company, with Grameen Bank, pioneered in providing micro-life insurance policy namely Grameen Bima (for rural households) and Gono Bima (in urban slums), which expanded rapidly among the marginal population even though the cooperation between the two agencies was split shortly thereafter.

In the meantime, MFI/NGOs started offering 'credit type micro-insurance products' which generally covers the outstanding loan balance, disability and in some cases one-time monetary benefits to their clients. The MFI/NGOs rapidly expanded client welfare fund (five per cent of loan amount was deducted) in the name of insurance service to help its clients in loan repayment as well as to improve their resilience in covering risks associated with various shocks, such as death and natural disasters (e.g. flood, drought). MFIs and NGOs continued to improve and came up with innovative insurance policies as per their clients' needs and demands. Currently, they provide various insurance services coined 'micro-insurance', 98.75 per cent of which are loan insurance. The rest includes livestock and crop insurance and health insurance that are currently being piloted in collaboration with insurance companies. Though, both the insurance companies and MFIs provide insurance policies packaged as 'micro-insurance' targeting poor and marginal population, yet, unlike India, the term has no legal connotation. Moreover, the size of insurance policy and premium largely define micro-insurance in the Indian context, whereas, 'composite insurance' (various shades of mix of life and non-life policy) and its innovative applications tied to micro-lending to the marginal people is important in Bangladesh context.

Insurance Act 2010 states that, to provide insurance service in Bangladesh it must be registered with IDRA and comply with insurance related law and IDRA guidelines. However, the MFIs/NGOs neither registers nor comply with the IDRA regulations as they follow the Microcredit Regulatory Authority (MRA) Act, 2006 where a major disparity arises within the Acts. In absence of overwriting clause in either of the Acts, two separate agencies are providing the same service in different regulatory frameworks. To bring consistency between the laws, it is necessary to make amendments to the Acts.

There are 32 life insurance companies and 46 non-life insurance companies presently operating in Bangladesh.  They are providing various services such as life insurance, non-life insurance, reinsurance, micro-insurance, and Islamic insurance. As of 2017, the nominal premium income in life insurance was Tk 80.97 billion according to the IDRA. From this, ordinary life insurance accounts for about 65 per cent of it. Income in non-life insurance premium was Tk 36.26 billion, where fire insurance accounts for nearly half of the share of total income. 

Insurance Act restricts life insurance companies in providing non-life insurance products and vice versa. It is argued that, allowing life insurance licensee to run non-life insurance business (and vice-versa) will make the market more unruly. As a result, insurance companies are reluctant to bring variations in their (insurance) policies and to introduce innovative insurance products. However, IDRA has allowed the testing of few potential innovative products as pilot projects following issuance of No Objection Certificates (NOC). Under INAFI initiatives, Pragati Insurance is partnering with several MFIs to market insurance policy for the marginal population. This challenge fund project of Business Finance for the Poor in Bangladesh (BFPB) unfolds an opportunity for insurance companies to expand the service by using MFI networks. Taking such regulatory sandbox approach will encourage greater variation in insurance policies as well as to introduce composite insurance products. There are however many hurdles, one of which is to ensure adequate incentives for MFIs to appreciate the need to share risks by partnering with insurance companies. Since authoritarian approach in imposing rules on MFIs may make the latter vulnerable, IDRA along with MRA may develop guidelines for revenue-sharing and bring changes in the current investment guideline for insurance companies to allow "lending to MFIs". IDRA along with MRA should actively work on revising regulations, increase consumer's literacy and building capacity (i.e. mitigating Actuaries shortage, improving database) to accommodate new insurance products to expand insurance company's network linking with MFIs and increase the share of Insurance sector's contribution in country's GDP.

A word of caution regarding all new financial services: While providing financial services, monitoring and increased transparency and supervision are pre-requisites to minimise risk, consumer rights may not be adequately protected. Unfortunately, Consumer Protection Act, 2009 does not apply to financial services. Inclusion of financial services in the said Act is essential to build consumer trust as well as to ensure consumer protection.

The author has drawn upon the experiences of BFP-B and from research undertakings of ERG and acknowledges the support he has received from both organisations.

K M Masnun Hosain is a Research Associate, Economic Research Group (ERG).

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