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    Thoughts on EconomicsVol. 21, No. 01

    Landscape of Micro Insurance in Bangladesh:

    Experience of Prime Islami Life Insurance (Takaful)

    K. M. Mortuza Ali

    Purpose

    The purpose of this paper is to report findings of the study into micro-insurancepractices in Bangladesh vis--vis of Prime Islami Life Insurance. The paper isorganized as follows:- a) Part one presents a brief overview of Bangladesheconomy and the insurance industry and the regulatory environment in which itoperates. b) Part two focuses on the extent to which commercial insurance

    providers and non-formal providers serve the needs of low-income people. c)Part three relates the findings from a cursory survey about provision of and

    perceptions of microinsurance. d) Final part of this paper deals with theexperience of Prime Islami Life Insurance Limited and future actions need to betaken to deal with micro insurance.

    IntroductionIn Bangladesh, micro-insurance started during late 1980s when the private lifeinsurance companies came into operation. Since then, its growth has been

    phenomenal. So much so that today a large part of the life insurance industrypremium comes from micro-insurance and it is still growing. The mainproviders of micro-insurance in Bangladesh are the commercial life insurancecompanies directly or through NGOs(Non-government organizations).

    Bangladesh has an agriculture based economy with majority of people living invillages where income per household is low with very little opportunity forsaving. Therefore, the prospect of micro-insurance in Bangladesh is very good.

    However, there are certain inherent problems associated with this type ofinsurance. If these problems can be solved micro-insurance in Bangladeshwould flourish.

    Micro-insurance refers to protection of assets and lives against specific perils oftarget population, usually low income households at affordable prices throughformal and informal institution. Microinsurance products usually provide

    Managing Director, Prime Islami Life Insurance Co. Ltd., Dhaka, Bangladesh.

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    68 Landscape of Micro Insurance in Bangladesh.

    coverage to health crises, death, accidental injuries etc. Endowment typemicroinsurnce is emerging in one form or other in recent years.

    Microfinance-non-government organizations (MF-NGOs) have been involvedin reducing poverty and creating opportunities for the poor to participate inincome generating activities for overall growth of the economy in Bangladesh.At the early stage, their activities were concentrated on mobilization of smallsavings from their members and offering a variety of loan products to them.Some of the MF-NGOs were primarily concerned about the vulnerability of thehouseholds against the risks such as death, disability, loss of property etc.

    There was a growing realization among the MF-NGOs that savings and creditcan not protect the poor households against those risks. As a result, the largeMF-NGOs gradually moved into the area of micro insurance and startedoffering insurance products to their members outside the umbrella of anyregulatory framework.

    One of the registered insurers started offering microinsurance products to lowincome households at affordable prices in the late 1980s. Following theastonishing growth of microinsurance program of this insurer during the late1990s, all registered insurers in Bangladesh except the state owned LifeInsurance Corporation and American Life Insurance Company have introducedmicroinsurance, and this has now become one of their major businessoperations.

    PART ONE

    Overview of Bangladesh

    Bangladesh is a country of South Asia situated between India and Myanmarhaving an area of 1,47,570 k2 Its estimated total population is 160 million.Bangladesh is one of the most densely populated land of the world having morethan 1000 persons per sq. k.m. Mortality rate of children under one year is 73

    per 1000. Life expectancy is 64.5 years for male and 66 years for female. Her

    per capita GDP is US$ 625 approx. The growth rate of national economy is 6%for the last few years.

    Bangladesh faces the challenge of achieving accelerated economic growth andalleviating the massive poverty that afflicts nearly 40% of its total population.However, sustained growth since the 1990s speaks of the resilience ofBangladesh economy. Continued rise in saving and investment played animportant role in achieving the high economic growth. Presently the rates of

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    domestic and national savings stand at 21% and 30% of GDP. Inflation rate has,however, increased recently between 7% to 10%.

    The monthly household nominal income is approx. taka 7200 (aprox. US$100.00) at the national level. However, it is taka 6100 in the rural area and taka10,500 in the urban area (US$ 150). Monthly household income had increased

    by 23% in 2005 over 2000 and 115% over 1990 in nominal terms. The averagemonthly household expenditure was estimated at taka 6150 in 2005. In acountry like Bangladesh, poverty is mainly caused by over all low averagefamily income resulting from extremely limited opportunities.

    Risk of the poor or that of under privileged people are either natural, social or

    economic. Unfortunately, the question of security of the poor people has drawn

    little attention of the policy makers. The poor in Bangladesh do not form a

    homogenous group. It has been estimated that the weakest in the rural areas

    consist of approximately 23% extreme poor, 52% moderate poor and 25%

    vulnerable non-poor.

    The most critical issues for Bangladesh at present are inflation in food and other

    commodity prices and sharp drop in business and investment activities. On an

    average food inflation is approximately 12% but this is much higher for low

    income marginalized groups. One N.G.O has found food inflation to be around

    as high as 22% for low income groups such as day laborers, factory workers,etc. This has certainly affected saving ability of low income groups in

    Bangladesh.

    Income level of the people, as a whole, depends on smooth and sound operation

    of trade and commerce which is positively correlated with the stable

    macroeconomic fundamentals of the country. Macro economic performance of

    the country has negatively been affected in the last few years due to

    mismanagement of caretaker government as well as economical meltdown of

    global economy. In the meantime internal and external shocks such as price hike

    of many imported commodities (doubled, in some cases trebled) in international

    market as well as damages caused by two successive devastating floods and the

    catastrophic cyclone SIDR and AILA.

    Despite the above setback in the economy, the country registered a 5.9% growth

    in 2009-2010. Inflationary pressure in the commodity market reduces the real

    income of the people which acts as an additional burden for prospective and

    existing policyholders.

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    70 Landscape of Micro Insurance in Bangladesh.

    Regulatory Framework

    After independence of Bangladesh, the Insurance Act, 1938 was adopted inBangladesh. The Insurance Act, 1938 and the Insurance Rules, 1958 wereamended from time to time to regulate and promote orderly growth of theinsurance business. The Department of Insurance, an attached department of theMinistry of Finance, is the regulatory authority of the insurance sector.

    The regulatory framework in Bangladesh have remained almost the same aswere in the days of undivided India. The only visible change is the change ofadministrative ministry from Ministry of Commerce to Ministry of Finance. In

    2010, new Insurance Development and Regulatory Authority Act has beenpromulgated and an independent Regulatory Authority is likely to be formedvery soon.

    There is no specific provision for regulation of micro-insurance business in theInsurance Act, 2010. While a very liberal insurance legislation can give rise tomassive expansion of insurance services eroding the long term viability of theinsurers, a very rigid legislation can restrict the growth of micro-insurance

    business. In the absence of appropriate legal infrastructure the interests ofpolicyholders cannot be adequately protected, and the institutional risks are veryhigh. The insurers, which started micro-insurance business did so on their own

    initiatives.The Insurance Act prohibits any one from carrying on any class of insurance

    business in Bangladesh unless certificate of registration for that class ofbusiness is obtained from the Insurance Regulatory Authority. Micro-creditRegulatory Authority Act, on the other hand, allows Microfinance Institutionsto provide insurance services to their members.

    Many NGOs in Bangladesh have been providing micro-insurance services inone form or other to their members outside the radar of any regulatoryframework.

    The government of Bangladesh had undertaken financial sector reform in the

    early 1990s, and, it is still continuing in one form or another. The insurancesector had been kept outside the preview of the reform process. Reform in theinsurance sector is now the need of the hour. We are hopeful that theGovernment would initiate the reform process in order to provide a stable andvibrant insurance sector in Bangladesh, which will ensure; (i) orderly growth ofmicro-insurance services, (ii) insurance business based on Shariah, (iii) level

    playing field for all insurance companies including state owned insurance

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    corporations, (iv) framing rules and regulations in line with the internationalbest practices, and (v) operational independence of the new regulatory authority.

    PART TWO

    Developing Micro Insurance Products

    There is considerable scope of developing life insurance products for the poorpeople, both as an instrument of saving and to cover the risk of prematuredeath. The micro-finance institutions and the banks providing micro credit may

    provide insurance coverage for the person to whom credit is given. It appearsthat life insurance companies have not so far made determined efforts toformulate appropriate micro insurance products and evovle marketing strategies to

    penetrate in this sector. A few possible approaches may be considered and arediscussed below.

    Emphasis has to be put on group sales. This is simply because contactingpersons individually, explaining the benefits and concluding the contract wouldbe a costly proposition. An attempt could be made to form groups through thehelp of N.G.Os and/or cooperative societies, social welfare organisations etc.For example, in Malayasia a large number of workers in palm oil plantations

    are covered through their union. In India, group of landless labourers,handloom weavers and members of milk cooperatives have been covered on agroup basis.

    For any insurance scheme for the poor, premium would have to be kept low sothat the coverage could be affordable by the persons concerned. A terminsurance based package or a policy with a low saving element may be moresuitable. The possibility of collection of premium on an easy weekly or monthly

    basis rather than on an annual basis, be explored further.

    There is no denying the fact that penetration of insurance in Bangladesh isvery low, and the image of the insurance sector is poor. Allthough, the rural

    sector offers substantial opportunities, the development of new products in anybranch of insurance in Bangladesh had been far from encouraging, even incomparison to India.

    Most of the non-life insurance companies in Bangladesh are unlikely to haveany worthwhile infrastructure outside the sphere of their primary activities.Private non-life insurance companies have so far not designed any product oncrops, livestock, poultry & aquaculture. There is substantial amount of untappedgeneral insurance business in rural areas such as:

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    72 Landscape of Micro Insurance in Bangladesh.

    a) Dwelling, stables, stores, shops,

    b) Pumpsets, harvesters, threshers,

    c) Handicrafts and household products,

    d) Personal accident and hospitalisation.

    Since micro-credit constitutes the central component of developmentprogrmmes of most N.G.Os in Bangladesh and it is getting more prioritythan any tools for alleviating poverty; it is envisaged that a ComprehensiveMicro-insurance Policy (C.M.P) for the micro-credit users will play an

    important role to achieve the desired goal.Some MFI-NGOs that are now offering insurance services to the micro-credit clients are in true sense self insurance. These are being providedmainly because of the following reasons:

    i) Non availability of appropriate product/services.

    ii) Non confidence on the insurers in general.

    iii) High cost of commercial insurance.

    These schemes of MFI-NGOs have some inherent weaknesses asmentioned below:

    i) The basic principle of spreading the risk is defeated.

    ii) The fund which is built up may not be sufficient to meetthe large and unusual losses.

    iii) There is no protection from reinsurance and absence ofpooling arrangement.

    iv) There is lack of executive talent needed for underwriting,claim and fund management.

    v) If insurance reserve fund is not set aside and only a bookreserve is made the purpose is defeated.

    Formal Sector Microinsurance in Bangladesh

    Microinsurance products may generally be divided into: life microinsurance,health microinsurance, disability microinsurance, property microinsurance, andcrop microinsurance. There are other kinds of micro insurance products but theyare not usually marketed by the insurance providers due to low demand by the

    prospective beneficiaries.

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    Benefits under life microinsurance products vary greatly depending on thedesign of the products, which range from fairly simple to extremelycomplicated. One of the common life microinsurance products is credit lifeinsurance, which repays a loan if the borrower dies with an outstanding balance.There could be a number of variants of these insurance products of which onecould be credit life integrated with some kinds of savings so that in the event theinsured dies the outstanding balance of the loan goes to the lender and an agreedamount goes to the beneficiary nominated by the insured.

    In Bangladesh, a few MFI offer this insurance product to their members, but nosuch product has so far been developed and marketed by the commercial

    insurers. Microinsurance products that are commonly provided by thecommercial insurers in Bangladesh are endowment type products.

    Health insurance provides coverage for illness and accidents arising fromphysical injuries. Health insurance usually provides coverage for limitedhospitalization benefits for certain illnesses, and for costs of physicians andmedicine. MFIs in many countries including Bangladesh provide healthinsurance cover to their members.

    Crop insurance typically provides policyholders protection in the event theircrops are destroyed by natural calamities such as flood or droughts. However, itis very difficult to come up with a good program design taking into account

    covariant risks and other risk elements inherent in crop insurance, and, as aresult it has not yet been introduced in many countries. Some of the countriesincluding Bangladesh where crop insurance coverage was provided had toabandon it because the expenditures had far outstripped the revenues.

    Microinsurance Schemes of Life Insurance Companies

    Encouraged by the phenomenal growth of microinsuance of Delta lifeinsurance, life companies except Jiban Bima Corporation and American LifeInsurance Corporation introduced microinsurance products similar to those ofDelta.

    The most popular microinsurance plan launched by the life insurers is depositpension scheme. This plan gained popularity not because of the benefits itprovides in relation to its premium rate but mainly because of the familiarityamong the common people of a deposit scheme introduced by some of thecommercial banks earlier with the same title.

    Premium rate of PILILs deposit pension scheme is determined by dividing theamount of sum assured with the number of premium installments payableduring the term of the insurance. At maturity total amount of premiums paid

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    74 Landscape of Micro Insurance in Bangladesh.

    during the term is payable together with the accrued bonuses. A policyholderinstead of receiving the total amount of premiums at maturity may exercise theoption of pension benefit, which has not been specified in the scheme a priori

    but will be fixed only at maturity. On death, total amount of premiums paid upto the date of death together with bonuses accrued thereon is payable to thenominee.

    Premium rates of PILILs micro Insurance Products are not age specific butuniform for all ages for all microinsurance plans. Premiums are usually payablemonthly, but in many cases frequency of payment has been kept flexible.Maximum sum assured is generally fixed at Tk. 1,00,000.00 but in a few cases

    it exceeded the prescribed maximum. Premiums are collected in most casesfrom door to door through pass book. Documentation has been made simplerthan what is required under the traditional insurance plans.

    Distinguishing Features of Microinsurance Schemes and

    Traditional Insurance Schemes

    Microinsurance schemes innovated in the late 1980s and the early 1990s are nolonger marketed. In substance, microinsurance products now being marketed bylife insurers are not very different from the traditional ordinary endowmentinsurance products. However, some of the distinguishing features are given

    below:

    Premium rates for microinsurance products are uniform for all ages atentry, whereas for traditional insurance products premium rates are agedependent.

    Mode of premium is monthly/quarterly/half yearly/yearly, whereas inthe case of traditional insurance products premiums are paid lessfrequently;

    In most cases, premiums in the case of microinsurance schemes arecollected from door to door through pass book.

    Maximum sum assured is usually fixed at Tk. 1,00,000. Policies aboveTk. 1,00,000 may be issued whereas there is no uniform policy withregard to prescribing celling on sum assured for traditionalmicroinsurance products. In general average sizes of the sum assured ofmicroinsurance products are lower than those under traditional insurance

    products with similar benefits but the difference is gradually diminishingover the years.

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    Commission rates for new business and other forms of remunerationsfor marketing of microinsurance products are lower compared to thosefor traditional insurance products. However, micro insurance productshigher than ordinary traditional life products.

    Administrative expenses are higher in micro infurance than thoseincurred for traditional insurance products because of small sizes ofmicroinsurance policies.

    Premium rates of microinsurance plans are lower than those oftraditional insurance plans with similar benefits.

    Documentation is relatively simple compared to the requirement undertraditional insurance business.

    Main feature of microinsurance products offered by the formal sector insurancecompanies in Bangladesh is endowment type life insurance of small amout the

    premiums of which are collected monthly from door to door from thepolicyholders whose family income are less than below certain amount asspecified by the respective insurers. Some of the life insurers also provide healthcoverage, accidental injuries and accidental death in combination with lifeinsurance coverage but such schemes are very rare. However, the distinction

    between the life micro insurance products and the traditional life insurance

    products is eroding over the years.

    Non-formal Microinsurance in Bangladesh

    Most of the large MF-NGOs in Bangladesh offer a variety of microinsuranceproducts to their clients. These MF-NGOs had several thousand clients, stronginformation-tracking capabilities through their large network of branchesthroughout the country, and a stable saving and credit portfolio before theydeveloped insurance product on their own. Insurance coverage reduced thevulnerability of their clients against unforeseen risks on the one hand andenabled the MF-NGOs to run their credit programs without undertaking undue

    risks of loan default due to death of the borrowers on the other.Typically these MF-NGOs form groups of village poor, encourage the groups tomake small weekly savings, supplement these savings with MF-NGOs ownfunds and arrange disbursement through the groups to pursue different forms ofincome generating activities. The borrowers are required to repay the loan insmall installment at short intervals, usually on weekly basis. Microinsurance

    products offered by MF-NGOs in Bangladesh cover the outstanding loanbalance, health, disability and provide, in some cases, an additional one-timemonetary benefit to the clients designated beneficiary. These MF-NGOs

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    76 Landscape of Micro Insurance in Bangladesh.

    appeared in the microinsurance scene in the late 1990s and early 2000s exceptGonoshashtho Kendro, which developed health micro insurance product in1978.

    Grameen Bank and BRAC (Bangladesh Rural Advancement Committee) havealso health microinsurance provision. ASA, one of the largest MF-NGOs hasnot yet entered the health microinsurance market. However, many other MF-

    NGOs have provisions of health insurance schemes in their agenda. Healthinsurance coverage for some of the organizations is provided partly by donorssupport. It is not clear how the pricing of health insurance would be changedafter withdrawal of donors support in order to make the scheme financially

    viable.

    The micro-finance market in Bangladesh is big and wide, with plenty of roomfor many players. There are more than 1000 NGO micro finance institutions(MFIs). Several banks, government agencies, and cooperatives are also active inthe micro finance sector of the country. Apart from credit and savings,insurance is an important product of micro-finance services for both formal andinformal financial markets for mobilizaing capital funds and ensuring incentiveand encouragement for investment.

    Some MFIs have introduced insurance products for their clients in order toextend benefit to them in case of death. Some MFIs offer insurance benefit forcrops and livestock. The mode of operation varies between different MFIs. Wewill examine few schemes of MFI NGOs in Bangladesh.

    BRAC (Bangladesh Rural Advancement Committee) is one of the largest NGOsin the world. It maintains big micro finance programs which includes groupformation, savings mobilization, credit support, skill training, technical supportand insurance benefit to its members. More than five million poor people so farhave been organised by BRAC through its micro finance who deposit savingsregularly with BRAC. All these members are eligible to receive loans fromBRAC. Out of the total mobilized group, three million group members haveloans with BRAC.

    It has been offering insurance benefit to its VO (Village organization) membersin the case of death since 1990. Working with the rural poor over the yearsBRAC has realised that the poor people are vulnerable to any emergencysituations. A sudden death of an earning member of a family under povertyconditions can jeopardize a family. The benefit of insurance has been fixed atTk. 5000. This money is given to the nominee of the insured member after her/his death.

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    The BRAC insurance service cover is only for death of all active members whohave renewed their membership. It is not linked with receiving a loan. Membershaving no loans with BRAC are equally eligible to receive the benefit ofBRACs insurance service. Members do not have to pay any amount as

    premium. BRACs insurance service provides a capital sum of Tk. 5000 to thedependants of the deceased, the money rescuing such dependants from acutefinancial hardship following the death, and allowing them to continue theireconomic activities.

    If the member is a borrower, with a loan from BRAC, the outstanding loan isalso written off. As BRAC does not collect insurance premium either by

    collecting a fee from the members or by deducting an amount from the loanduring the disbursement, BRAC manages these insurance funds from theinterest earned from the loan made to VO members. It is estimated thatapproximately 2% of the total service charge earned on a loan is required tocover total expenses of the insurance benefit.

    ASA(Association of Social Advancement) has managed life insurance by itself

    without any linkage with conventional insurance companies. Before a loan is

    disbursed, 0.3% of the total credited amount (Tk. 3/100) has to be paid as

    premium, in cash, to the Life Insurance fund. In case of death of the general

    loanee, a maximum amount of Tk. 8,000.00 will be paid and for the borrowers

    of personal loans or small entrepreneurship developer, a maximum amount of

    Tk. 12,000.00 will be paid.

    For general members the credited amount will be refunded. If the loanee dies

    after taking a loan (credit) of Tk. 3000 or 6000, he will be refunded for the same

    amount only. Similarly for the loanee who dies after taking an amount of Tk.

    20,000.00 his nominee will be given a maximum of Tk. 12,000. If any members

    of the group dies, then the other members of the group will select his/her

    successor. If the group fails to select the successor, then the successor will be

    selected on the basis of succession certificate.If payment for a loan amount for the previous term is completed, and the

    borrower is waiting to receive his next term of credit and at this stage dies, then

    the claimant will receive an insurance claim according to the earlier credited

    amount. As suicide is a social crime, a member will not receive any insurance

    compensation if he willfully commits suicide.

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    78 Landscape of Micro Insurance in Bangladesh.

    PART THREE

    Findings of Field Study

    The author of this article conducted a cursory survey to assess marketability ofmicro insurance products among the poor of Bangladesh.

    This study had been designed as three steps for collection of information,monitoring of operation, and obtaining ideas from the following group ofstakeholders.

    a) Micro-Credit providers, mainly NGOs and governmentagencies.

    b) Leading insurance professionals.

    c) Micro-Credit beneficiaries.

    For each group, separate questionnaires were designed and personal visits weremade to interview key officials at various NGOs involved in Micro-Creditoperations, leading insurance professionals and beneficiaries. The importantfeatures revealed from the analysis of these data of the different group aredescribed in the following paragraphs.

    Fifteen leading NGOs in terms of cumulative loan disbursement and two otherMicro-Credit oprators such as BRDB and Grameen Bank were selected. Thedata indicated that most of the NGOs, BRDB and Grameen Bank provide creditfor small scale trading, livestock and poultry raising, for purchasing ofrickshaws, babitaxies (three wheeler motor taxi), crop production and otherincome generation projects such as micro enterprise development, paddyhusking etc. Only two NGOs provide credit for housing, health and sanitation

    programmes, improvement and the development of childrens education. Onlyone NGO provides credit for sericulture and psiculture development schemes.Only four have some kind of insurance scheme of their own. These schemes aremainly designed to cover the life of the borrowers. Only Proshikha has some

    kind of insurance coverage for the loss of livestock.All the NGO representatives strongly supported the idea for the introduction ofappropiate insurance scheme for their borrowers. It was suggested thatintroduction of an insurance scheme, particularly for the partial or full damageto property will bring confidence and revolution in the Micro-Credit operationsystem. Most of the NGOs suggested that the premium rate should be between1% and 2% of the total sum borrowed. When asked what type of risks need to

    be covered, most NGOs recommended that insurance scheme should cover both

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    life, health and partial or full damage of properties by any natural or man madecalamities against which the money has been lent.

    The Government of Bangladesh should not provide any premium subsidydirectly to the borrowers, instead the total annual premium of a particular NGOcan be directly paid to the respective NGO as a lump-sum grant. This will helpin establishing a good relationship between the NGO and the Government.Moreover, the Government will have some kind of monitoring control over the

    NGO activities.

    Users View Point

    One hundred beneficiaries from seventeen locations of BRAC, ASA,PROSHIKA, GRAMEEN BANK, BURO, AND SOCIETY FOR SOCIALSERVICES (SSS) were personally interviewed through a pre-designedquestionnaire written in Bengali to assess the extent and nature of the micro-credit market and to determine the need for insurance services for these micro-credit borrowers. The beneficiaries were either interviewed at the unit office ofthe respective NGOs in presence of the Branch or Unit mangers or at thevillages of the respective borrowers accompanied by the NGO representatives.The major findings are described below.

    Of the 100 micro-credit borrowers interviewed, 85 were female and

    housewives. Their ages ranged between 20 and 50 years coming from the lowincome, landless and economically poor class of society. Some of them werewidows with 3-4 children. These women took credit mainly for their husbandsand sons. Only a few of them do the trading by themselves. The amount of loanmainly depends on the requirement and repayment capabilities of the borrowers.Of those interviewed, the amount ranged from TK. 2100 to Tk. 70,000.

    Each NGO has its own system for recovery of the credit. BRAC and Proshikacollect their installment on a bi-monthly or monthly basis. Proshika collects by11 or 22 installments up to an amount of Tk. 10,000 and beyond which theycollect by 36 monthly installments. Some NGOs collect their installment on a

    weekly basis by 46 installments. When the amount exceeds TK. 20,000 thenumber of installments also increases up to 100. The borrowers usually come tothe branch or unit office to pay the installment but in some special occasions theCredit Officer goes to the houses of the group leaders and collects installments.Some NGOs have been successfully operating their micro-credit system for along time. Graneen Bank, for example, provided credit to one of its

    beneficiaries for the 12th term. But most of the NGOs provided credit to theirbeneficiaries from 3rd to 8th term.

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    It appears from the responses that the purpose of borrowing money differs fromlocation to location. For example, irrespective of the micro-credit source, mostof the borrowers of Rupganj (Narayangonj) and Madhabdi (Narsigdi) areas tookcredit for cloth trading or production of cloth items, whereas the borrowers ofTangail, Muradnagar and Belabo areas took credit mainly for trading of rice,fertilizers, and buying of rickshaw or van etc. and also for production of cane,

    bamboo items etc. They paid their installment from previous savings reservedfor emergency crisis. In some cases, the other members of the family alsohelped them to repay their installment. Some micro-credit providers,

    particularly ASA and Grameen Bank, rescheduled their installment by

    extending the repayment period and also by reducing the amount of installment.When asked whether there is a need for insurance coverage of the creditedamount in case of emergency resulting from various natural calamities likeflood, cyclone, illness or death of the borrower etc. and also whether they arewilling to pay a premium for this insurance converge, 99 out of 100 answeredthat there was an urgent need for an insurance coverage to meet emergencycrises and they are prepared to pay a premium for insurance coverage.

    PART FOUR

    PILIL at a Glance

    Prime Islami Life Insurance limited (hereinafter referred to as PILIL) a thirdgeneration life insurance company, was incorporated on July, 2000 as a publiclimited company under the Companies Act, 1994 with the vision to become oneof the best private life insurance company in Bangladesh and in South-East Asiaas a whole by maintaining utmost integrity, responsibility and transparency.PILIL was subsequently converted into full fledged Islami life insurancecompany(takaful) from April, 2002.

    Marketing Strategy

    Since incorporation, the company follows moderate marketing strategy which isbeing reflected in increasing trend of market share. The total number of agentand employer of agent stood at 16,186 and 16,034 respectively in 2009. Besidesgetting direction from the top level officials, agents provide door-to-doorservice for collection of new policies as well as for renewal of policies underspecific guidelines. However, all the agents are employed on the basis ofcommission. In addition, the agents get non-monetary benefits subject to theirachievements of certain consistent performance record on premium collection.

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    Market and Competition

    Micro insurance market is spread out all over the country covering the urban,sub-urban and rural areas of Bangladesh. The competitive environment in theinsurance industry in Bangladesh is quite complex. There is one nationalizedinsurance corporation having extensive branch networks, holding huge premiumdeposit and enjoying certain prerogatives. There is one leading internationalinsurance company branches with focused business objectives, experiences andhighly skilled human resources. Further, there are the first generation privatelife insurance companies having comparative large branch networks, reasonableaccess to technology and market.

    Besides, the second-generation private insurance companies (started operationsin 1996) make the insurance business more competitive. The relative position,focus and competition are so diverse that it is difficult for any new insurancecompany to make a favorable market entry and day-by-day the competition isincreasing. Although there are more competition in the insurance sector, PrimeIslami Life Insurance Limited a third generation company (2001) has earned anotable position within a short time in this risky market through its

    performance, reliabilities, efficient management and wide acceptance by itsclients.

    Micro Insurance Schemes of PILILAt present, Prime Islami life insurance is marketing three micro insurance

    products. Small saving assurance plan, the first micro insurance product ofPILIL was introduced in 2002 and total number of policies sold under this plancomes to 3,00,958 at the end of 2009. The second micro insurance product(PIDPS) was introduced in 2004. Total number of polices sold under this plan inthe first year of operation was 6000 only. Total number of policies under this

    plan comes to 76592 in 2009. The third micro insurance product- Two paymentDeposit Scheme (Kalyan Bima) was introduced in 2006. In the first year thenumber of policies sold was 6200. But at the end of 2009 total number of

    policies sold was 88608. After the introduction of PIDPS; share of small savingsplan decreased substantially. With the introduction of Kalyan Bima (anticipatedendowment policy) the demand for this product is continuously increasing.This means people are more keen to buy short term anticipated endowment typeof plan.

    Features of Micro Insurance Products of PILIL

    Small Savings Assurance Plan (Mukto Bima)

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    It is an endowment assurance plan where the assured is given back the moneydeposited in his Mudaraba fund (participants account) with accrued bonus. Atmaturity of the policy, nominee will get the full sum assured along with the

    profit. At the death of assured during policy period, full sum assured is paid.

    Prime Islami Deposit pension Scheme (PIDPS)

    It is an endowment plan with alternative option of annuity (pension). Aftercompletion of policy term, the assured can take the benefits of the policy aslump sum with accrued profit, alternatively the assured can take the benefit inthe form of pension. Pension is given for 5, 10 or 15 years at the option of

    policy holders. The nominee gets full sum assured with accrued bonus orpension for fixed period at the death of the assured during policy period. Thepolicy term is 10 to 15 years. Minimum monthly installment is Tk. 200. DoubleIndemnity Accidental Benefit (DIAB) cover is inclusive in this plan without anyadditional premium.

    Features of two-payment Kalyan Bima

    It is an anticipated endowment plan with the alternative option of pension. Fiftypercent of sum assured is paid on the completion of half of the policy term.Balance 50% is given at maturity. But the nominee gets the full Sum assuredirrespective of receipt of installment of 50% sum, at death of the assured during

    the policy period. At the maturity of the policy the assured can take the benefitin the form of pension for ten years.

    The comparative features of three micro insurance products are given below:

    Features Small Savings

    Assurance Plan

    (Mukta Bima)

    Prime Islami

    Deposit Pension

    Scheme

    Two-payment Deposit

    Scheme (Kalyan Bima)

    1. Marketedsince

    2001 2004 2006

    2. Mode ofpayment

    Monthly Monthly,Quarterly, half-

    yearly, yearly.

    Monthly, Quarterly, half-yearly, yearly.

    3. Policy term 10 years (fixed) 10 to 15 years 08,10,12,14,16,18,20

    4. Nature of theproducts

    Endowment plan Endowment planwith option of

    annuity

    Anticipated endowmentplan

    5. Benefit DIAB (Doubleindemnity &

    accident benefit) isnot covered.

    DIAB is includedwithout anyadditionalpremium

    DIAB is not included

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    6. Min-Max ofmonthly

    Installments

    Minimum: taka100

    Maximum:taka1500

    Minimum: taka200

    Maximum: Nolimit

    Minimum: taka200

    Maximum: taka10000

    7. Commissionstructure

    1st year 58% of 1st

    year premium forrest nine years 13%

    of total premiumpayable in the

    period.

    1st year 58% of 1st

    year premium forrest nine years 5%of total premiumpayable in the

    period.

    1st year 58% of 1st yearpremium for rest nine years

    5% of total premiumpayable in the period.

    Underwriting Features

    a) About 45% policies are below taka 25000 sum assured.

    b) Average Sum assured of micro polices is Taka 43792.

    c) Only 7% policies Sum Assured is taka 1,00,000 or above.

    d) 53% of policyholders are female.

    Death Claim Experience

    Total number of up-to-date death claim intimated was 364. Number of claimspaid so far 254. Death claim ratio of micro insurance is more in relation topremium in comparison to ordinary life polices.

    Out of 364 death claims, 37 were caused by accident, which is approximately10%. It case of ordinary life the percentage of accidental death is 6%.

    The main reason for declination of death claims is breach of utmost good faith(non disclosure of material fact) false documentation and misstatement of facts.

    Proposed Group Cover for the poor

    To cover the financial risk of the poor people on group basis, PILIL hasdesigned and developed a group micro insurance product in the name ofSamajik Nirapatta Bima. (Social Security Insurance) which will be marketed in2011. The main features of the plan are:

    * It is a group assurance plan where premium is refunded at maturity.

    * Term of plan is 10 years.

    * Yearly mode of payment.

    * Amount of group premium: minimum taka 5,000/-(five thousand) forthe group.

    * Number of members of a group:- Minimum 10, Maximum unlimited.

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    * Age of the member at commencement of policy: Minimum 18 andmaximum 50 years.

    * Age at maturity: Maximum 60 years.

    * Target Group: workers of factory, offices, club, professional groups etc.

    At maturity, the assured will get the amount deposited in mudaraba fund andmaximum 90% of surplus of tabarru fund (if any). In case of assureds deathwithin policy period; in case of normal death, nominee(s) will get 30 (thirty)times of individual yearly contribution. At accidental death; nominee(s) will get60(Sixty) times of assureds individual yearly contribution. In case of

    permanent disability, assured will get 30(thirty) times of his individual yearlypremium.

    Proposed Group cover for the local and non-resident workers of Bangladesh

    (Karmajibi Kalyan Bima)

    In order to bring various communities of the society under social securitysystem in Bangladesh. Prime Islami Life Insurance has developed recentlyintroduced Karmajibi Kalyan Bima for labourers.

    It is a group term insurance which provides full face value of Insurance atnormal death and other additional benefit like accidental death benefit,

    permanent disability benefit, repatriation of body from abroad/funeral cost ofthe deceased assured and stipend at death & disability. This product is speciallydesigned for low income people working in home and abroad.

    This product is a unique example of providing maximum benefits to customersof low income group of the society at the least amount of premium. People

    belongs to various income group in Bangladesh, such as weavers, industrialworkers, employees of government and non-government offices, members ofvarious trade and professional organizations. agricultural workers, fishermen,craftsman, teachers and employees of small enterprises are the main targetgroup of this product.

    Observations and Suggestions

    It is observed that insurers have been offering micro-insurance in rural areasbecause there is demand for this type of product and because the multinationalcompetitor is so strong that the local Insurance companies are unable tocompete successfully in the urban areas. Community based micro-insuranceoperator in Bangladesh do not follow insurance principles and they areunregulated. The MFI-NGO operators primarily provide health care and orcredit insurance. They are practicing micro-insurance as an ancillary service on

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    the rule of thumb method. It appears that if and when micro-insurance schemesare not regulated or monitored properly; anarchy might prevail in the marketand unethical practices can destroy the whole system.

    Unfortunately, in Bangladesh, mutuals have not developed because of lack ofawareness and initiatives by the incumbents. It is likely that Micro-financeInstitutions and NGOs will be forming mutual associations in near future inorder to provide insurance covers (Life/Credit/Health/Property) to theirmembers.

    Success story of micro-health insurance is very rare in this part of the world,because of lack of experience, lack of proper support services and high moralhazard inherent in the system. Agriculture micro-insurance seems to be a far crywithout initiative and or subsidily from donors/international agencies,government.

    In Bangladesh, composite insurance companies are not allowed to operate.Therefore, it is very difficult to offer bundle/package product (Life and non-lifetogether). It is felt that the Regulatory Authority should wave the legal barrier atleast for micro-insurance schemes in order to promote combined/package planfor the poor householder/microenterprise. Donors/International Development

    partners for promoting Micro-insurance are not usually available. They shouldbe keen to grant providing funds to develop and operate micro-insurance

    schemes.

    Insurance Regulatory Authority in Bangladesh in not a member of IAIS andsimilar international bodies. Therefore, they are not updated with thedevelopment in micro insurance sector. Moreover, the Chief Executive of theAuthority being a Govt. high official is frequently transferred to otherdepartments within short span of his duration. Obviously, long and short term

    planning is absent in the Regulatory Body.

    It is not always true that unregulated micro-insurance providers can not protectconsumers interest. One of the largest Micro-credit Institute in Bangladeshnever asks for any premium from the insureds, other than membership fee. This

    has been possible because of their ability to generate huge fund by charginghigh rate of interest ranging between 25/30% against credit to poor people. Theyhave in built mechanism and sufficient reserve fund to meet claims of theirmembers.

    It is urgently necessary to provide guidelines and support services to all micro-insurance operators (both formal and informal) by the Insurance RegulatoryAuthority. It will be unwise to allow informal insurers to continue theiroperation without having Prudential Regulation. Regulatory Authority need to

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    86 Landscape of Micro Insurance in Bangladesh.

    formulate separate Rules, Regulations and guidelines for micro-insurance.Under no circumstances, customers interest be overlooked.

    If and when actuarial valuations may not be feasible and cost worthy theRegulatory Authority should at least scrutinize the accounts of all micro-insurers and may have to inspect the insurers office on a regular basis or as andwhen required. A separate department in the Regulatory Authority may beentrusted to supervise, inspect, scrutiny of accounts and to provide guidelines toall micro-insurers (both formal and informal).

    The core principles of insurance including essential criteria and advanced

    criteria should form the basis of future work on the Regulation and Supervisionof micro-insurance. However, the pertinent question is how these principles willbe adopted. In a developing country like Bangladesh, the Regulatory Authorityis very weak because of lack of professionalism, lack of man power and lack totechnology. Until and unless the Regulatory Authority is made strong enoughand they adopt core principles for formal regulated insurance, we can not expectthose to be applied to micro-insurance. We need to formulate strategies so thatwithin a specified time frame, the core principles are adopted in Bangladesh.

    Unless we have full understanding about the core principles and action plan tostrengthen the Supervisory Authority, we can not implement the conditions foreffective supervision and determine the supervisory process. The SupervisoryAuthority must be an independent powerful and capable to determine and fulfillthe objective.

    In Bangladesh, micro-insurance is basically designed to cater to life insuranceneeds of the poor and the marginal poor people. Micro-insurance in Bangladeshis distinct from the conventional live insurance on several basic issues such as:-

    a) The premium or the contribution is collected on flat basis irrespective ofage of the insured. Entry age is limited to maximum 45 years to 50years.

    b) Premium payment mode is usually monthly and the insurance is written

    on non medical basis.c) In case of micro-insurance, in contrast to conventional insurance

    renewal commission is paid at higher rate regardless of the subsequentyears for which premium is paid under the policy.

    d) Overhead expenses and lapse ratio of micro-insurance are more thanthose under conventional life insurance schemes.

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    Thoughts on Economics 87

    PILIL as micro-takaful operator are facing similar problems as that ofconventional micro-insurers. Takaful is based mainly on the concept of donation(tabarru) where participants (policyholders) donate to a pool of funds for the

    purpose of providing mutual protection among all members. Takaful is moreakin to mutual insurance. It is strongly felt that the regulator will address the

    problems of micro-takaful and micro insurance operators. It is felt thatRegulatory Authority should address the problems and provide specificguidelines for micro-insurance operators of Bangladesh.

    Concluding Remarks

    The frequency and severity of disasters have increased sharply in the recentdecades. In Bangladesh, the major causes of deaths and damages to propertyfrom natural disasters are droughts. cyclones and floods. For obvious reasons,

    poor people are much more exposed to disasters than are rich ones. InBangladesh, natural disasters as well as man made disasters are an integral partof poverty cycle.

    In Bangladesh, NGOs are increasingly involved in the implementation ofschemes for reducing poverty. They are providing credit. A few of them are alsoextending insurance services to their members and credit users. These servicesare being provided more or less on rule of thumb basis. Since insurance is a

    scientific way of dealing with risks and providing security to people it isnecessary that this is handled professionally.

    It has been observed that micro credit programmes are to some extent effectivein fighting poverty. However, it is unlikely that micro-credit alone can be thesolution to poverty reduction. The government/donors and micro-credit

    providers must find ways to extend micro-insurance services to the poor.

    It is felt that micro insurers should offer group policies for the poor. Groupinsurance enables a large number of people being covered under one contract. Incase of individual insurance, the contract is with the individual policy holder.The decision to take out the policy is voluntary and the amount as well as plan

    of insurance is decided by the individual. On the other hand, in case of groupinsurance, the contract is with the group/association. A single master policy isissued covering all the members, as per agreed terms. Therefore, group policyfor micro-credit borrowers, can be issued. The premium will be paid by therespective MFI/NGO or whoever represents the group and takes out the master

    policy.

    Group term insurance is renewable every year and is the simplest and cheapestof all the schemes that a life insurance operator can offer. Under this scheme, a

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    88 Landscape of Micro Insurance in Bangladesh.

    fixed sum is paid on the death of a member covered under the scheme. Thisscheme would be also appropriate to meet the outstanding loans. MFIs,therefore, should take such policies to cover borrowers at least to the extent ofoutstanding loans.

    When a micro insurer offers group-term insurance, the premium will be chargedaccording to the loss experience of the group. In case of favorable experience,

    premiums may be brought down or the surplus that emerges can be passed on tothe members of the group.

    Apart from micro-credit borrowers, group term insurance cover can be made

    available to other poorer sections of society like landless agricultural laborers,handloom workers, rickshaw pullers, artisans, taxi drivers, cooperative milkproducers, tailors, barbers, masons, carpenters etc. In this respect, SocialSecurity Fund need to be created by the government with the help of donors inorder to meet emergency. Social Security Fund could be utilized in times ofneed for providing reinsurance cover of micro insurance.

    It is no denying the fact that the lack of access to insurance is one of the reasonsof our inability to achieve any sustainable and substantial increase in livingstandards for the poor. On the other hand, we must remember that IslamicShariah prohibits conventional insurance in its present form and methodology.As a result, penetration of insurance in Bangladesh has been very negligible. Itis primarily limited to the urban elite sector. However, Muslim Jurists of recentage have concluded that insurance schemes comprising the elements of sharedresponsibility, joint guarantee and solidarity is permissible. The fundamental

    philosophy of Islamic Insurance (Takaful) and Mutual Insurance is the same.

    Theoretically, Takaful is perceived as cooperative insurance, where memberscontribute a certain sum of money to a common pool. The purpose of thissystem is to uphold the Islamic principles of bearing one anothers burden.Takaful, from the practical point of view means mutual guarantee provided by agroup of people living in the society against defined risks of life and property. ATakaful scheme aims at undertaking a joint responsibility towards financially

    safeguarding the widows, orphans and helpless ones in the society, and also theone who faces unexpected loss or damage. therefore, conceptually mutualinsurance is in harmony with the central philosophy of Takaful.

    The fundamental principles of Takaful may be summarized as follows :

    a. Policyholders cooperate among themselves, for their common good.

    b. Policyholders contribute to help those who need.

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    Thoughts on Economics 89

    c. Liabilities are spread out according to the community poolingsystem.

    d. Transparency, fairness, equity and justice is maintained in theoperation.

    e. Shariah based investments are made on the basis of profit andloss sharing.

    The basic idea of Takaful system has stemmed from the principle of Tabarru(donation), whereby each participant of the scheme contributes to a fund that isused to support one another. The objective of Takaful is to pay a defined loss

    from a common fund created by all the members of the scheme.It is, observed that in Bangladesh micro takaful products are more in demand.Therefore PILIL based on its last eight years having experience in individualmicro-takaful, has decided to launch group micro takaful products for the poor

    people of Bangladesh. This will help to minimize very high lapsation ratio andreduce distribution cost and management expenses. The poor people will bethen having their risks covered at the minimum cost.