Insurance Density Meaning

Insurance Density Meaning – Anwar Hossen, who holds an MBA, works in a private company and earns a salary of over Tk 60,000 per month. But he did not take out life insurance, even though private sector workers in Bangladesh are not entitled to pension benefits and his family of four would face problems if he died suddenly.

The reason is that many people do not have trust in the insurance industry because they do not receive insurance profits from insurance companies.

He is just one of the millions of educated and uneducated people in Bangladesh who have no faith in insurance. As a result, life insurance penetration is very low.

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In fact, there are 35 life insurance companies and 46 non-life insurance companies in the life insurance sector, but life insurance penetration has almost halved over the past 10 years.

Life insurance penetration, measured as a ratio of gross premiums to GDP, was 0.5% in 2021, compared to 0.94% in 2010, according to data from the Insurance Development Regulatory Authority (IDRA).

This means most Bangladeshis are uninsured and premiums are not rising to keep pace with an economy that has averaged more than 6% growth over the past decade.

Insurance provides protection against financial losses and insurance coverage against losses acts as an insulator, especially in times of crisis.

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But most people in Bangladesh are excluded from coverage, mainly due to low savings rates and poor financial literacy, the central bank said in a report last week.

“The main reason for low penetration is cancellation of insurance products,” said SM Ibrahim Hossain, director, Bangladesh Insurance Academy.

In recent years, the number of insurance cases has reached approximately 1.75 million. A 2017 World Bank document cited data from the International Monetary Fund (IMF) and put the 2014 figure at $1.71 billion.

That means the number of new policies purchased each year is usually equal to the number of policies canceled, Ibrahim said.

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“Some insurers do not continue to pay premiums months or even years later due to lack of awareness of agents and poor management after a year. As a result, premium income grows at a slower rate than GDP growth.”

A few years ago, first-year delinquency rates for private insurers were 60 to 70 percent, according to IDRA.

Ibrahim also cited low investment returns and lack of product diversification in the insurance sector as major reasons for low penetration.

Ala Ahmad, managing director of MetLife Bangladesh, the only foreign-owned insurer in Bangladesh, said life insurance penetration is decreasing as many insurers do not pay premiums after purchasing policies.

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“This can be improved by better needs-based selling, informing people about their insurance benefits and making premium payments, claims or maturity payments easy, hassle-free, timely and transparent.”

In 2020, life insurance premiums decreased by more than 1% year-on-year to Tk9.51 billion. According to IDRA data, it increased by about 8% to Tk 1,026 billion in 2021.

Life insurers hold more than two-thirds of total insurance premiums and more than three-quarters of total insurance sector assets, according to the Central Bank’s 2021 Financial Stability Report.

“There is a lack of trust among the public in insurance companies as many insurance companies do not process claims properly,” said Jalalul Azim, managing director, Pragati Life Insurance.

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Overall, the claim payout ratio of life insurance companies fell from 88.32% in 2020 to 68.79% in 2021, which is not encouraging for life insurance policyholders, BB said.

Azim added that there has not been much product diversification in the sector and that life insurance coverage needs to be expanded.

The World Bank document also noted that most insurance products available in Bangladesh lack quality in terms of price and coverage.

Azim added that many government enterprises are still uninsured and the government has many uninsured assets.

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Nasir Uddin Ahmed, first vice-president of the Bangladesh Insurance Association, said people in Bangladesh still consider life insurance as a savings tool.

“However, the savings trend has slowed in recent years. As a result, premium income has not grown faster.”

However, the insurance density ratio, which measures the average expenditure per capita over total premiums, increased from Tk 600 in 2013 to Tk 885 in 2021, the BB report said.

Life insurance penetration in Bangladesh lags far behind the new market average of 3.3%. In 2020, life insurance penetration in India was 3.2% and in China it was 2.4%.

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Joy Shaha, a Bangladeshi living in Canada, says no one in the North American country can spend a day without insurance.

“It gives me peace of mind because I don’t have to worry about myself or my family if a disaster happens,” the 35-year-old said.

“In fact, no one in Canada can live a day without insurance, and insurance documentation is needed in every area of our lives.”

IDRA Chairman Mohammad Jainul Bari said people’s trust in the sector remains low as some insurers lag behind in processing claims.

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“We are working on this. We have already had conversations with insurers who are struggling to maintain good governance, resolve claims and maintain financial health.”

“We are working to increase public confidence in the insurance sector. We are focusing on awareness,” he said, adding that IDRA has set up a hotline where customers can lodge complaints. The gap in insurance coverage is generally defined as the difference between the total cost of the loss and the cost of insurance. Globally, losses from natural disasters in 2021 were estimated at approximately $280 billion, of which approximately $120 billion, or 43%, were (re)compensated by insurance. (1) This gap was smaller than in previous years due to higher penetration rates and higher loss rates occurring in the United States, one of the most developed insurance markets in the world.

Protection gaps vary widely between high-, middle-, and low-income countries. Based on historical records and analytical analysis, the average protection gap in Asia is estimated to be 90%. Lloyd’s report on the protection gap (2) ranked several Asian countries top-ranked based on estimates of the relative cost of the insurance gap, with Bangladesh, Indonesia and the Philippines each making the top three.

The figure below shows insurance penetration expressed as a percentage of gross domestic product (GDP), including property damage insurance premiums per capita. The chart shows the different levels of protection in the Asia Pacific region. South Korea was excluded due to its highest insurance penetration rate (nearly 5%), which is an exceptional figure in the Asian environment.

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Climate change is likely to have a significant impact on many countries in Asia as natural disasters become more frequent and the intensity of certain risks increases. Urbanization and subsequent unplanned urban development and expansion are increasing in many Asian cities. These dynamics are expected to increase challenges associated with protection gaps.

The most appropriate approach to measure this protection gap is to use the non-covered portion of economic loss due to lack of data and details. However, it is worth noting that in reality this gap may be smaller, as some of these economic losses may not be desirable or economically reliable to consider for insurance coverage. Accordingly, such losses are excluded. These loss portions may include risk retention, deductibles, and coverage limits associated with the insurance policy. Additional components of these losses include immeasurable risk, moral hazard, and adverse selection, as well as more appropriate self-funding approaches for high-frequency and low-severity losses.

The size of the insurance penetration gap can vary across sectors depending on the exposures affected, as shown in the figure below. For example, businesses and manufacturing industries typically insure physical assets and production sites as part of their risk management framework. However, the size of the protection gap tends to be much larger, as homeowners view insurance as an additional cost or simply unable to provide adequate protection.

However, governments and taxpayers may have to cover a significant portion of the losses that are not covered by insurance. The public sector accounts for a larger share of climate costs globally, especially in developing countries where private insurance for businesses and individuals is less widespread. If the fiscal gap is not addressed, it could lead to long-term financial instability for the government. It is important to understand the key challenges associated with the protection gaps prevalent in Asia and come up with innovative solutions to address them.

Insurance Penetration Rate By Country 2022

There are a number of challenges associated with protection gaps. In general, these can be divided into political, economic, technological and social fields.

Political challenges include limited will and incentives to implement the policies needed to close protection gaps. In an economic context, affordability varies from person to person.

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