We all know insurance helps us in various ways, it acts like a backbone for a family facing financial problems. Insurance types include life insurance, health insurance, etc. Insurance can cover you when you lose your job or when you meet with an unexpected accident. BRAC is a well-established micro-financial Institution that set up its bank in Bangladesh to provide low-cost insurance.
There were many challenges faced at the beginning though, however, the operation that BRAC has conducted became a huge success. Let us see in this article how BRAC bank in Bangladesh ran a successful microinsurance model.
What is Credit Shield Insurance?
In the case of Credit shield insurance, insurance money is given to cardholders who applied and paid premiums against the insurance. This type of insurance is offered by banks and some financial institutions in the case of unfortunate circumstances.
Now, this option should be known by every cardholder, and the bank staff should clearly state the conditions of credit shield insurance.
Generally, the loan covers these things: any kind of outstanding balance on the credit card, in the moment of sudden death, chronic disease, and partial or complete disability. There is even an option where the insurance company will assist you in paying back the installment if you suddenly become unemployed or you got hospitalized.
What are the Aspects of the Insurance Covers?
There are certain conditions that the insurance company covers. Some of them are:
In the case of loss of job, the insurance company will pay 10% of the total outstanding balance of the card or credit limit fees, and the company will choose based on which one of them will be lower. There is a limit till which the company will cover of course. Even there is a limit to the unemployment time as well. A person who is unemployed can’t be without a job for more than 12 months, and until those 12 months, the insurance company will cover the premium payments for the insurance.
- Critical Illness:
When an insurance holder is critically ill while paying his insurance money, the insurance company will cover the money according to the card type. When a person applies for insurance, the card type determines the indemnity limit, according to your card the insurance company will give the benefit.
- Top-Up Life Cover:
In this type of insurance, the company has to pay the money at the time of the untimely or natural death of the insurance holder. The money will be given to the beneficiary that the insurance holder stated at the time he applied for the loan. The amount of money also depends on the card type, depending on the card the indemnity limit is set.
What are the Benefits of Insurance?
There are multiple benefits of insurance, apart from covering some of the uncertainties in your life. Some of the primary advantages are listed below:
- Provides Protection
Insurance protects families in rough financial situations. Having insurance is like having support at bad times in your life. It provides the necessary funds for reimbursing the loss that has taken place. Supporting an individual during a time of a bumpy financial situation reduces the stress that an individual has. Individuals using mobile money’s newest outpost can conveniently make payments without any traditional work.
- Provides Certainty
Having insurance gives you a sense of support. If you lose your job or have an emergency, you will have the assurance that the insurance that you have applied for will help you come out of that situation. You don’t have to worry about the premium payments, if you lose your job, in some cases the insurance company covers that amount until you get a job.
- Risk Sharing
The way an insurance company works is similar to that of cooperative societies. Everyone that have applied for the loan pays money in the form of a premium and that money is stored with the insurance company. In the case of an emergency for any of the insurance holders, the insurance money is paid from the money stored by the insurance company. In this way, all the members are sharing the risk of that member who needs the money for their losses.
- Value of Risk
In the case of insurance, the company evaluates the value of risk for you. It asses all the possible uncertainties or emergencies and comes up with the value for the insurance. Based on that insurance, a premium amount that must be paid monthly or annually is set. Now, you can set a premium amount according to your convenience based on your income level.
- Economy Generation
The funds that we pay in the form of premium is stored by the insurance company. A certain amount is set aside for investigation in money markets for earning returns on investment which will eventually lead the company to grow. The money earned even plays as a safeguard to the company in the case of any loss. By investing money in the money market the insurance company helps grow the country’s economy.
- Saving Habits
When you have to pay a set amount in premiums, you create a habit of saving money out of your savings to pay premiums. You pay the premiums for any future uncertainties. Many Insurance schemes come up with saving features or investment features as well. All these help you understand why saving money is important for having a stable financial life.
Why BRAC was Started?
BRAC Bank began its services in the year 2011; it was started by an NGO (Non-governmental organization) BRAC. Today BRAC bank has around 456 SME unit offices, 1.3 million users, and a year-on-year growth of 43%. Well, it started in Bangladesh because of the high mortality rate. Initially, BRAC was experimenting with some financial products that would help clients in rough financial situations. They had the plan to deploy the life insurance model but were not able to find an appt place to start this model.
Although Bangladesh had some of the highest mortality rates in the world, that made BRAC officially start its journey there. If we look today, BRAC has around 2,067 branches set up all over Bangladesh, these branches work as microfinancing institutions. According to reports in the past 4 years, there were 63,000 deaths in the family member of clients or clients themselves.
BRAC provided financial assistance to all of the clients that had mishappenings. They had even aimed to proving financial assistance to the unbanked population, which they did by tackling five challenges to accelerate financial inclusion.
What Were the Challenges Faced by BRAC Initially?
In a country such as Bangladesh, the rural population and low-income individuals are hesitant towards purchasing insurance products. They believe it is a waste of money as the services guaranteed are not given by the insurance company. On top of premiums that are needed to be paid for the insurance, there are sometimes many hidden charges that are not disclosed by the company at the beginning.
Lack of knowledge is also sometimes a reason for selecting insurance If someone does not understand the benefits of insurance why would he bother to take one? Some insurance companies do not understand their client base and impose certain regulations that need to follow for getting insurance, this also hinders accepting insurance in lower-income families.
Due to this the overall SMEs that were emerging face massive problems in growing, in Bangladesh SMEs (small and medium enterprises) contribute around 25% to the over GDP of the country. Despite this contribution to the country’s economy, SMEs find it difficult to get affordable loans.
Loans are needed for SMEs to grow, hire new employees, generate revenue, etc. If a small business grows, the area also develops as it generates revenue that goes to countries economy, it generates employment, and the country’s youth gets an opportunity to work and earn money which they will spend, resulting in overgrowth of the economy. Some of the reasons that BRAC has identified why SMEs (small and medium enterprises) find it difficult to get loans are:
- The loans that are available charge high-interest rates, so repaying the loan becomes a heavy burden for the business owner.
- The lack of business knowledge, business owners do not have a key financial education.
- Informal loans give less credit to women entrepreneurs compared to men entrepreneurs. Due to this lots of local women face difficulty in growing their businesses.
- There are very less options for business owners to find good loan options. That is why they have to settle for high-interest rates loans.
How Did BRAC Tackle Challenges?
BRAC initially knew that the product that they were going to introduce would be tuff to scale, however, they had faith in the system that they were building. The overall process took into consideration the people of the communities and even the BRAC officials. The idea was simple, they would introduce the product as a straightforward tool for the clients. The initial challenge was to spread awareness among the people about the product, the people over there didn’t know how insurance works, what are its benefits, etc.
So to make this happen, BRAC heavily invested in customer relations. The distribution of services was made easy by using leaflets that the customers could take with them, the leaflets contained all the features that BRAC would offer. In the BRAC centers, there were designated persons set for understanding the whole process to the clients who came into the center to enquire.
The designated officers would assist the client throughout the process until he had taken the loan. The officer not only shared the services they provided but also the benefits of insurance, and how they would support them in times of harsh situations.
Secondly, the challenge was to make the product user-friendly, and the settlements should be executed smoothly. The main aim of BRAC was to reduce the hesitation the local people had for accepting insurance. They reduced the complexity around terms and conditions for making more and more people into the program.
There was a concept among the local people that bid institutions do not care for local people, and the overall process would seem a lot more complex for people who did not have basic financial knowledge. BRAC had connections with hospitals for making the insurance claims get cleared at a faster pace.
The officers over there were well-trained in communications, and they would cooperate with the clients in terms of any life insurance claim. Having partners in hospitals solved the problem of delayed drafting of death certification.
The team at BRAC has successfully found they way to not give away risky loans and even proving affordable loans at the same time. According to reports between the time of November 2014 and November 2015, around 69,000 people applied for BRAC credit shield insurance. Out of 131 claims around 113 claims were settled by BRAC. the claims were cleared within a record time of 2 weeks.
The amount of work that BRAC had done is comparable to any startup that has got the Forbes India awards FINO – Startup of the Year. BRAC is trying to increase its efficiency even more through constant innovation. By controlling the risky insurance, they are reducing a lot of money by avoiding losses.
Following this BRAC wants to expand its services even to a larger extent of areas. BRAC even plans on expanding its services to women of the backward class to become self-sufficient by establishing their own businesses.
Steps Were Taken By BRAC in Bangladesh
BRAC had visioned not only to give insurance to people but also to include all these people in the financial system financially. The aim was to make the unbanked population banked. BRAC took the following steps:
- They started to bring affordable loans to the local SMEs in the area to help set up small-scale businesses.
- The business is set on these three principles, the principles being People-Planet-Profit. The principle would cover the entire target group.
- They strategized, a new action plan for including SMEs that didn’t have access to insurance from the formal banking system.
- BRAC planned to significantly impact the lives of the women living in that society, by allowing them to start their own ventures and become self-sufficient.
- BRAC even focused on the preservation of the environment; they only helped businesses grow that worked towards sustainable development of our environment. They do not invest money in companies that negatively impact society eg: tobacco, and brick industries. This is somewhat similar to impact investment to know about this read this topic time to ditch impact investing unproductive self-analysis.
How Does Credit Shield Insurance Work?
The insurance provided by BRAC in the following way, any cardholder can opt for credit shield insurance. That person has to pay a one-time premium of 0.3 percent for an individual person and 0.7 percent for a couple, of the whole insurance. There is also a condition, where the insurance holder dies naturally or by accident (avoiding death by suicide) their family does not have to pay money for the remaining amount left.
The family will receive the principal amount that they have completed paying. On top of that the insurance company will give $64 to funeral practices so that the family does not have to spend extra money from their savings. BRAC also gets covered for their losses by third-party insurance companies.
At the time of retrieving insurance, customers should have to submit the supporting documents that will be checked by the BRAC officials present at the center. The officers present in the office take around six to seven business days for verifying the document. Insurance holder can claim their insurance and receive the money at their nearby local branch.
Frequently Asked Questions
Q1. What are microinsurance products?
Micro-insurance products offer affordable insurance rates to low-income families, BRAC bank in Bangladesh has started this and has helped over 1.2 million people. These products have low premiums compared to other insurance. This insurance has features such as injury and unemployment coverage.
Q2. What are micro-credit and micro-insurance?
Microcredit is meant affordable loans that are offered by various microfinance institutions that are present all over the globe. They aim to uplift small business owners by giving them affordable loans and business education. Now, they have started to focus on helping women entrepreneurs and making them self-sufficient.
Q3. What is credit shield insurance?
Credit shield insurance is insurance that is given to an individual who has a card from that company and has paid a premium for that insurance. This type of loan is based on the type of card that the cardholder has.
Insurance helps individuals have a stable financial life; insurances provide necessary support in a rough financial situation. They not only provide financial assistance, but it also helps you save money, as you will be saving a certain amount of money by paying the premiums monthly.
That’s when BRAC was started with the aim to not only provide financial products but even to educate local people about financial decision-making. Initially, BRAC had to face a lot of challenges in scaling up, as they had misconceptions about insurance at the beginning. They had a hard time trusting insurance companies as previously insurance companies did not clearly mention terms and conditions, and used to charge hidden charges.
This is why BRAC in Bangladesh used different strategies to build awareness and gain the trust of local people. BRAC invested huge amounts of money in customer relations, they used to distribute leaflets to the people which contained necessary pieces of information about insurance. They made the terms and conditions easier for the local people to understand. They followed the principle of People-Planet-Profit.
This means they would invest in companies that had a positive impact on the environment, They would not invest in companies that polluted the environment. Today, BRAC has successfully led its operation and has around 69,000 active clients. Around 1.2 million people have been positively affected by this institution.
- Jonas Taylor is a financial expert and experienced writer with a focus on finance news, accounting software, and related topics. He has a talent for explaining complex financial concepts in an accessible way and has published high-quality content in various publications. He is dedicated to delivering valuable information to readers, staying up-to-date with financial news and trends, and sharing his expertise with others.