Bottom of the Pyramid — Bangladesh Insurtech potential for providing Insurance to SMEs

It was a great honour this month — and a great way to close the year — for me to be invited by UNCDF to facilitate and present to the great and the good of the Bangladesh insurance sector in Dhaka. We had the top management from the most forward-looking insurers and microinsurers in the country together with the regulator to run a workshop on how insurtech can bring the benefits of insurance to the bottom of the pyramid with a focus on small and medium enterprises (SMEs).

Delivering transparent pricing for insurance to SMEs in Singapore and Malaysia is our passion at Inzsure.com As CEO I was delighted to have the chance to explore the possibilities further afield.

It’s extraordinary how far Bangladesh has come since I was last there. (I’ve been helping and partly funding potable water projects for some time now). The future for the country is potentially amazing: Demographic fast facts — Population of 160 million with 65% under the age of 23!

But the challenges of using existing systems and infrastructure to bring insurance protection to this population are likely insurmountable, using traditional distribution means.

The answer must be technology — but it requires the whole eco-system around the sector to upgrade and facilitate change. It can be done and has been done in other countries already. The remainder of this article is a summary of the keynotes and findings which we hope can be a small part of the route map for insurtech change in the country.

Speed of Change : Insurtech, Microinsurance and Insurance

The lines between traditional insurance, insurtech and microinsurance are becoming increasingly blurred. Without doubt, the penetration of insurance through the use of technology and often microinsurance to individuals and businesses at the bottom of the pyramid is accelerating in several different countries.

Globally, there seem to be a number of standout jurisdictions. South Africa is very successful with something like 60% of the population now covered, particularly in the Life and Health space. In Asia, the Philippines is another stand out example with 21% of the population covered by microinsurance solutions.

Bangladesh has seen very significant growth in recent years with something over 6% of lives covered with microinsurance life solutions. However, and overall, general insurance penetration rates are still anecdotally in the range of 1% across the wider population. So there remains a huge protection gap in the country that needs to be addressed.

There is no doubt that successful programs have not been possible without the active support of the entire ecosystem in the jurisdiction concerned. This means that the right regulatory frameworks are required, coupled with creative solutions available from both incumbents and new players. There is some traditional scepticism amongst consumers regarding insurance and products — and particularly with respect to intermediaries and the lack of transparency in large parts of the industry. In order to overcome these preconceptions, extra effort is required. In addition, incumbents must be willing to invest in new systems and technologies before their existing distribution channels become too expensive.

Insurtech is likely the next big step for the industry and a way to improve penetration rates further. With mobile phone ownership at 74%, Bangladesh is well poised for a rapid expansion of the insurance sector through the use of technology. But it is not only about access, there is also a real need for education of buyers, financial facilitation to improve the buying experience online and providing quality service at the point of sale — whether facilitated by technology or otherwise. The industry itself has a major gap in professional training and development.

Policy Makers and Regulators

The fundamental underpinning to controlled industries such as insurance is always driven by the approach and attitude of the regulatory authorities.
Whilst the top regulatory consideration will always be the protection of consumers — whether personal, SME or corporate entities — in recent years many regulators have taken a much wider remit to drive improvement in the local jurisdiction.

Historically, rigid approaches, such as tariff-based systems, have been expected to provide to customers with strong protection from unscrupulous sales tactics. However, as individual markets mature, these very structures can become a serious drag on innovation essentially preventing penetration of insurance solutions into the broader community. Clearly, in Bangladesh, where microinsurance remains in its infancy — but is showing huge potential, the regulator has an opportunity to encourage and perhaps even facilitate an acceleration of insurance penetration, particularly to key targets at the bottom of the pyramid.

In the Philippines where great strides have been made in providing coverage for the disadvantaged, overcoming mistrust in incumbents seems to have been a key factor. A Business Insurance Asia article of 23rd May 2018 provides data on the rise of mutual microinsurance in new forms: Cooperative Insurance Societies (CIS), & Microinsurance Mutual Benefit Associations (Mi-MBAs) which are not-for-profit organisations with low-income individuals as members. As noted in the article:

“Mutual insurance accounts for 77% of the microinsurance market. Of that figure, Mi-MBAs comprise around 51% and CISs comprise around 26%. About 53% of the … market remains untapped and regulators continue to encourage the entry of new players. The market is estimated to expand to 73.3 million Filipinos by 2020.”

In other jurisdictions in Asia, such as Singapore and Malaysia, the regulator has taken a highly participatory role in encouraging new technology — generically known as ‘insurtech’. This has primarily been done by the provision of safe areas or ‘sandboxes’ for experimentation. The sandbox approach allows for new and interesting startups to enter regulated industries such as insurance without the heavy burdens of full regulation. Of course, if the business model proves successful, the fledgeling company must comply fully with industry regulation as it graduates from the sandbox and fully enters the market. The Monetary Authority of Singapore has gone even further building an entire ecosystem to encourage innovation in Financial Services with tens of thousands of attendees at it’s showcase week long Fintech Festival each year for the last three years.

The Insurance Industry — Insurance and MicroInsurance

With penetration rates estimated at around 1% in Bangladesh, it is clear that existing solutions and in particular distribution systems have failed to address the majority of the countries insurance needs. At the same time, the insurance industry in Bangladesh is experiencing strong growth. Within individual companies, busy with day to day growth plans, it may be difficult to appreciate that there is much more opportunity yet to be tapped. Whilst the industry is relatively fragmented with 78 private insurance companies, perhaps there will be unlikely to be much market-driven consolidation and consequent economies of scale, in the short term.

However, incumbents need to recognise that the target demographics in Bangladesh are changing rapidly. With the majority of the population in the tech-savvy, younger generation, the historical business models of face to face sales are unlikely to continue being cost-effective in the future. There will be inevitably a switch to technology-driven ecosystems in the near term. Incumbents need to keep their focus and relevance by leading this charge is possible. Otherwise, it is quite likely that current and new microinsurance entrants will come in and sweep up the market segments that are currently underserved by their solutions.

Conclusions

Clearly, the Bangladesh market is on the cusp of a major transition, not only in insurance but broadly across the business community. There is a huge opportunity in improving access of both consumers and businesses to the benefits of insurance. However, there is a need for policy makers, regulators and the industry to work together to facilitate technology, ecosystem and education improvements so that these benefits can be realised in a structured manner in the best timescale.