Seminar On How to Raise Standard of Bangladesh Insurance Market?

Transcription

1 Seminar On How to Raise Standard of Bangladesh Insurance Market? Speech of Honorable Chief Guest: Dr. Atiur Rahman, Ex-Governor, Bangladesh Bank. Recently I had an occasion to share my mind on how to develop the standards of the insurance industry so that it too can contribute towards more inclusive finance. Bangladesh Institute for Professional Development (BIPD) organized a seminar on this issue where I had the opportunity of giving the keynote address as the chief guest. I shared my thoughts to the stakeholders of the insurance industry including some foreign participants. As a former regulator of the central bank I have always been keen on developing all components of the financial sector. Unfortunately, insurance industry was beyond my regulatory reach and could not do much except presiding over a quarterly coordination meeting of all the regulators related to the financial sector. Below, I am going to share what I said in the above mentioned seminar where I emphasized the need for more pro-active insurance industry to contribute towards sustainable development. It is needless to say that Bangladesh today stands as a role model for the rest of the world in terms of inclusive and sustainable development. Our achievements in economic and human development indicators speak for us. We have come a long way, from a test case of development to an emerging economy with a lot of potential, recently attaining lower middle income and developing country status simultaneously. Indeed, this has been a heroic journey from ashes to prosperity, thanks to the relentless contribution of our hard working entrepreneurial ordinary people. Mind it, this is the country which was damned as a bottomless basket case at its infancy by Henry Kissinger. But the fighting spirit of the newly emerged nation helped make this amazing macroeconomic transformation. Yet, we must also remember that the path ahead in particular towards further sustainable growth may not be easier either. There are numerous challenges to overcome including a constantly changing global environment to cope with. Our government under the prudent leadership of Honorable Prime Minister Sheikh Hasina has come up with praise-worthy medium and long-term macro-economic goals and plans. We must be able to efficiently implement/operationalise these plans. We are committed to remain focused and consistent in attaining the SDGs as we have aptly demonstrated earlier in achieving MDGs.

2 Despite some unwarranted recent challenges mainly due to governance deficit leading to undesired imbalances between deposit mobilisation and credit disbursement ratios and bulging current account deficit, our financial sector is still expected to play a pivotal role in achieving the desired outcomes. Bangladesh Bank with potent support from the Government has been spearheading a comprehensive (and exemplary) financial inclusion drive over the last decade which has, on the one hand, brought in the previously unserved or underserved under the umbrella of formal financial services, and on the other hand, strengthened the base of the financial sector. While this drive is naturally being acclaimed at home and abroad, it must also be acknowledged that we still have a lot of work to do. Other critical components of the financial market of Bangladesh still remain underdeveloped, e.g. the capital market, and the insurance market. It is in this context, we are focusing here on how to raise the standards of the country s insurance industry in the context of global campaign for sustainable finance. It should be noted that this sector contributes only a meagre 0.6 per cent to GDP which is significantly lower than that of our nearest neighbors. Before discussing about what we have to do to improve standards of our insurance industry, we must take note of the changes that have already taken place in the global insurance industry during the last three decades or so. In the aftermath of the last global financial crisis, it has been realised that the shoring up of flagging growth did not happen as expected, quantitative easing has, in fact, created more deflation risks, the BRICS countries have not taken over growth stewardship, and trade growth has slipped below sluggish output growth. The situation has further worsened due to BREXIT and other protectionist measures across the world, in particular since President Trump took office who has been threatening to withdraw from the global agenda of liberalisation. In brief, all these have made an enabling future for the financial sector more challenging. Given this global context, on the one hand, we are now emphasising more socially responsible finance and pro-active role of financial sector in attaining inclusive and sustainable development. And on the other hand, it is also being recognised that the financial sector is now facing increased challenges in the aftermath of global financial sector which requires special policy attention. The way forward is, indeed, to combine short-term business cycle fluctuation management with long-term sustainability agenda. Reflecting on the local context and the global challenges the financial service providers need to embark on ingraining a socially and environmentally responsible financing ethos. And this is true for all types of financial products, including those of the insurance sector. Indeed, we are now witnessing a paradigm shift in finance related thinking in the global arena. While the developed world is attempting a shift in paradigm, e.g. linking insurance with sustainable development agenda, we in Bangladesh have an insurance industry, to say the least, which is critically underdeveloped. For example, we are still relying on foreign insurers for our flagship mega projects such as the Padma bridge project. The re-insurance segment of the insurance market is equally dependent on foreign insurers. However, this should not demoralise us. The challenges in this sector can as well be turned into opportunities as it is still young. As has been said already, in the developed world insurance industry is going through a paradigm shift. They are now shifting from a focus on just short-term safeguarding to long-term sustainability and social responsibility of the businesses, particularly in the context of challenges arising out of overwhelming climate change. We in Bangladesh can do this reshaping with much lesser effort, as the industry is still in its infancy. There is, therefore, a

3 huge scope of reforming the sector. We can incorporate this paradigm shift early on and reap the benefit in the long run. But for that to happen we need to strengthen the regulatory regime for the sector. And this is possible if we can transform this sector into more knowledge-based and anchored on the global goals of sustainability. To improve the standards of our insurance industry, of course, we need to learn from international best practices as well. A critical point, however, deserves to be noted here is that we can learn a lot, perhaps more, from regulatory experiences from our own country as well. Our insurance industry may not be as developed as we want it to be, but still insurers have been here for a long time by now. There was a time, nearly a half a century ago, when global insurance giant like Lloyd used to operate successfully in this part of the world. However, political crisis leading to division of the sub-continent put an end to the dynamic evolution of this sector. But it is also true that we now know what works and what does not and why so. If we share this knowledge among ourselves and work together to come up with desired solutions, we are sure to succeed in transforming this sector as well. Again, the farsighted regulatory architecture with stronger evidence-based policy innovation capacity has to be encouraged for that to happen. Despite some recent challenges as indicated earlier, the banking sector of Bangladesh has a lot to offer regarding innovations to reach new customers with more befitting products and services. If we look at the evolution of the country s banking sector, especially if we focus on the changes that have taken place over the last decade or so, we will see that a quiet revolution has indeed taken place in Bangladesh around the theme of financial inclusion. Our banking services have reached new customers who did not even think about going near a bank only a few years ago. The farmers, school children, rickshaw pullers and even beggars are having a taste of banking, be it conventional or mobile financial services. The customers are satisfied, the banks are doing good business, and the macroeconomic impact is also clearly visible. What factors have contributed to this positive change? The major factors are- (i) coming up with contextualised services and products that meet the demands of the diversified client base, (ii) going beyond conventional approaches to reach new clients and enhance business, (iii) using ICT to serve the new clients in a cost-effective and safe manner, particularly through mobile and agent banking, (iv) prudent regulatory oversight and advisory services, (v) encouraging partnerships between banks and MFIs and (vi) potent support from the government and the central bank. The insurance industry can follow similar path to further improve the standards. In fact, it should be easier for insurance industry, as historically and naturally- the insurance people have been reaching out to the clients instead of the clients looking for them. Of course, there are inherent reservations against any change. Yet, we must embrace change and cope with that instead of resisting it. Embracing change will work in our favour. A few examples from the banking sector of Bangladesh can be helpful to understand this. I am bringing forward these examples as a former regulator who was deeply involved in this gradual change making journey. This was indeed a caravan and not a hundred meter sprint. Till today almost half of our workforce is engaged in agriculture. And over 80 per cent of our workforce is employed in the informal sector. Conventional wisdom would suggest that this makes expansion of insurance business in Bangladesh very difficult or there is a very little scope for viable business. But the banking sector has already proven that with contextually developed services/products and strategic outreach through partnership with relevant actors surely there can be good business. Let us consider the loan for sharecroppers program. Many thought since the sharecroppers do not own land, it will be very difficult to develop and run a credit program for them as they have nothing to give as collaterals. But Bangladesh Bank came up with an innovative strategy to serve the sharecroppers. It partnered with the largest NGO in the world (BRAC) and

4 launched a specially designed credit program for the sharecroppers using a refinance strategy. And this program has been doing very well (to say the least). The programme is now serving over 300 thousand sharecroppers, mostly women across the country (spread across 35 districts). This programme took into consideration the actual need of the sharecroppers and involved a tested NGO to ensure its viability. And consequently, not only good business is taking place but also the customers are being served better. The beneficiaries of this programme have reported that they were enjoying improved living standards compared to MFI clients. The implication here is that if the insurers invest in designing appropriately customised and/or contextualised products and delivery channels they can also do good business and reach new customers who are not being reached now. The lesson from sharecropper credit programme can be particularly useful in developing insurance services for farmers, i.e. crop insurance for them particularly for products like insuring fish-ponds, live-stocks, flash flood affected crops etc. Next, comes the issue of taking non-conventional approaches. Here also an example from the banking sector can be helpful. Only a few years back, we had numerous MFIs spread across the country with vast experience in serving the low income households. But they could not meet all the financial needs of the rural poor due to lack of funds. At the same time there were banks with excess liquidity who could not reach the rural customers as they did not have enough outreaches. Realising the compatibility of these two actors, Bangladesh bank initiated the Bank-MFI linkage programme, where MFIs take money from the bank on wholesale basis and then provide the same as micro-credit to the low income households. Today, credit from commercial banks stands as the largest source of external fund for MFIs in Bangladesh for providing credit to the farmers and farmrelated non-farm small enterprises. Insurance industry can also come up with similar innovative partnership ideas to ensure enhanced and safe outreach to customers who are plenty in our vibrant rural economy. As far as partnerships are concerned, the Bangladesh insurance industry can take critical advantage of partnering with the banks as they have been doing very well during the recent decade particularly in the area of financial inclusion. Banc assurance can be a way forward here. There can be arrangements between the banks and the insurance companies allowing the insurance companies to sell their products to the clients of the Banks. This partnership can be a real win-win solution. Banks will be earning additional revenue through selling insurance products, and the insurance will be reaching out to new clients. As a regulator, I allowed insurance customers to have 100 taka no-frill accounts and this has laid the foundation for a joint business for both the sectors. Agent banking and MFS are examples of how use of ICT can facilitate reaching low income customers in a cost effective manner. These ICT-based services have become very much part and parcel of lifestyles of our people within only a few years. Following the examples set by the Banking sector the insurance industry should also focus on such ICT based services. Digital technology will not only help reach customers easier, it will also ease the process of identifying potential clients and tracking their financial behaviour. Behind the recent success of the banks in Bangladesh, the regulator (central bank) has played a crucial role. As said before, Bangladesh Bank was determined to promote financial inclusion and hence promoted innovation, leveraged new partnerships, and maintained regulatory oversight effectively. The central bank received potent support from the government as well. We could develop so many refinancing products mainly because of the desired fiscal policy support of the government. Hence, it is beyond doubt that insurance industry of the country will also need such support from its regulator and the government, if they are to expand fast and to expand sustainably.

5 Having the right kind of human resources will be pivotal in improving the standards of our insurance industry. Tomorrow s insurance industry will require both organisational and human capital to make the best out of globalisation and financial technology or fin-tech. Technology has to be harnessed. In other words, the new human resource needs to be tech-savvy. The human capital development has to be focused on market leadership, policy leadership, and regulatory innovations. In a human capital-intensive industry like insurance, the skills make competitive edge. And we must remember that a competent workforce is one that is flexible, team-centric, tech-savvy, and diverse (socio-culturally). The insurance industry need to work together with the educational institutions and its regulator to develop such human resource. Here, the tertiary academic institutions can play the role of mid-wives and help the insurance sector to source well-developed human resource. The insurance industry must make climate change related consideration an integral part of their business strategy. There are two broad types of climate change related risks that need to be taken into account. First, there are physical risks (for example, increasing frequency and severity of droughts, floods and storms). And then, there are transition risks. These are risks associated with the process of adjustment towards a lower-carbon economy (for example, climate policy, new disruptive technology, or shifting investor sentiment). We must consider the bias of both national and international stakeholders when considering these risks, because the sustainable insurance agenda for regulators and supervisors is emerging with the initial focus on climate change risks. Finally, the insurance industry with support from the regulators and the government must focus on raising customer awareness. The customers need to be aware of the benefits of insurance and their misconceptions about the insurance system must be clarified. Sensitising the customers is a job that has to be done altogether by all stakeholders involved. No single company can do it effectively. They all must come together. In addition, like Bangladesh Bank, the insurance regulator should also develop a customer interest protection centre with a dedicated hotline to address the grievances of the customers with needed transparency and dedication. Ours is an economy with an enormous potential. A major challenge for us in the coming years is to formalise the informal sector. The financial sector in general and the insurance industry in specific have to play crucial roles in this regard. This will benefit the economy and ensure better business for the insurers at the same time. Certainly, the insurance industry can help accelerate financial inclusion as well. The neighbouring India has diversified insurance products to a great extent. They have also been working closely with the banking sector for promoting joint products. Why then we will not be able to do the same? What we need now is a concerted effort with open minds. In fact, we must be ready to learn from others and innovate wherever possible if we really want this sector to attain global standards. The writer is an eminent economist and a former Governor of Bangladesh Bank. He can be reached at dratiur@gmail.com