After a decade of discussions, banks will be selling insurance products referred to as “bancassurance” – a practice that has been prevalent throughout the world for decades and is expected to boost the local insurance industry with many other prospects.
The government has taken the initiative to introduce bancassurance for the first time in the country in an effort to provide insurance coverage for ordinary residents via banks. The central bank has already finalized the bancassurance guidelines, which explain how banks can embrace the trend. The Ministry of Finance will now need to approve the guidelines for further processing.
A Bangladesh Bank official stated that a one-year trial program will commence in July prior to the arrangement’s full implementation.
What is Bancassurance?
Bancassurance is a financing facility offered by banks that integrates banking and insurance. In this structure, banks often offer two forms of guarantee. They include both life insurance and other types of insurance. The first group includes plans such as whole-life, term-life, living benefit, and others. Non-life insurance often consists of credit, marine, property, travel, and other insurances.
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In several areas, particularly Asia-Pacific and South America, banks have emphasized the bancassurance channel for marketing life insurance products, which have higher average sale prices and profit margins than the majority of non-life products. By adopting this business model, banks in Austria, France, Germany, Italy, Portugal, Spain, and the United Kingdom have achieved extraordinary success during the past 50 years. Together, these nations hold between 40 and 50 percent of the worldwide Bancassurance industry. In recent years, the regions where bancassurance has gained prominence are East Asia and South America.
According to Allied Market Research (AMR), the worldwide bancassurance sector produced $901.5 billion in 2021 and is projected to reach $1.8 trillion by 2031, expanding at a compound annual growth rate (CAGR) of 7.4% between 2022 and 2031.
How bancassurance can add value in Bangladesh?
Bancassurance is a relatively recent idea in Bangladesh, having been established by private commercial banks.
Benefits in economy and banking sector
Bancassurance will give the stagnant local insurance industry new business opportunities and help the banks make more money through the partnership. Banks have anticipated that after the launch of bancassurance, the insurance penetration, which remained below 0.5% of GDP, would increase considerably.
Under the system, bank depositors will be able to obtain insurance policies and pay premiums through the country’s 10,803 bank branches. There are currently 12.35 billion bank accounts, and the process will benefit the banks.
Hasina Sheikh, the head of Dhaka University’s Banking and Insurance Department, thinks that customers will be more interested in buying insurance policies through bancassurance because they trust banks more than insurance companies.
According to data from the Swiss Re Institute, the ratio of premiums received by Bangladeshi insurance companies to the country’s gross domestic product is barely 0.4%, while it exceeds 4% in India. In 2020, clients who purchased insurance paid premiums of Tk 11,300 billion. In the next couple of years, the government intends to increase the premium-to-GDP ratio to 4%.
Emranul Huq, managing director of Dhaka Bank, asserted that banks, in addition to insurance businesses, will get a percentage of the fees obtained from the insurance products if they provide the services. “This means the non-funded income will push up the profitability of banks,” he added.
As there is no bancassurance in the country, no research has been conducted on it. A paper by Mohammad Z. Mamun, a professor at Dhaka University’s Institute of Business Administration (IBA), found out that banks in the United Kingdom, France, Italy, Germany, Spain, and the Netherlands sell insurance products in addition to their own. It also has enormous potential in Bangladesh. As banks have a huge customer base, they are capable of offering insurance products to their customers. Initially, banks with a greater number of corporate clients and company wages may be more likely to offer insurance products.
Sheikh Kabir Hossain, the head of the Bangladesh Insurance Association, stated that bancassurance had been a long-standing demand. “The insurance sector will grow tremendously thanks to the latest initiative of the government,” he added.
As bancassurance in Bangladesh is convenient, users can acquire insurance products while doing normal banking transactions, removing the need to visit an insurance agency. This saves time and makes the process of purchasing insurance much simpler and faster. Moreover, bancassurance enables banks to provide insurance products to customers who may not have access to insurance services otherwise.
As bancassurance is provided by the bank, it can be a source of trust for individuals. Customers need not visit the insurance provider for this; they can simply visit a bank branch. Hence, the bank will sell both banking and insurance goods to its own consumers. Prominent items include pension, health, accident, education, Umrah Hajj, and others. The possibility for greater financial knowledge is a further advantage of bancassurance in Bangladesh. Banks can educate their customers on insurance products and their benefits, thereby increasing the general population’s awareness and comprehension of insurance. This is especially crucial given the country’s relatively low insurance literacy levels.
What are the criteria for banks?
In order to approve bancassurance, the bank must meet the following requirements-
- Capital to risk-weighted asset ratio (CRAR) with capital conservation buffer (CCB) of at least 12.5%.
- Must have a minimum credit rating of Bangladesh Bank (BB) rating grade 2 as stated in the Guidelines on Risk-Based Capital Adequacy [Revised Regulatory Capital Framework for banks in accordance with Basel III].
- Shall meet the Bangladesh Bank’s minimum CAMELS rating of 2.
- The proportion of net nonperforming loans (NPL) must not exceed 5%.
- Shall have generated a net profit in each of the previous three years.
- Shall have a viable business plan and review process for bancassurance.
Bancassurance in Bangladesh does face certain difficulties, nevertheless. The sector’s lack of monitoring and regulation is one of its greatest obstacles. This may lead to improper insurance product sales and a lack of consumer protection. In addition, some clients may not fully comprehend the terms and circumstances of the insurance products they are acquiring, which may result in unneeded setbacks in the future.
Moreover, the requirements prohibit a bank from simultaneously signing contracts with more than three life insurance companies and three non-life insurance businesses.
For local banks and insurance providers to successfully adopt the bancassurance business model, it is vitally important for them to alter their approach. They must replace conventional corporate procedures with data- and technology-driven methods.
Banks could also utilize their existing customer information to identify new business prospects without jeopardizing consumer data security or privacy. To identify prospective clients and increase the efficiency of agents and reps, insurance companies must implement innovative technological solutions. An insurance provider may collaborate with a bank to use the new information. They can map prospects’ financial status in order to establish customized premium pricing that will benefit new clients.
With the right approach, adequate information and financial protection, bancassurance is likely to play a key role in boosting the financial sector and providing insurance services to people and contribute the nation in going digital.