Thoughts on Economics

Vol. 18, No. 01

Impact and Consequences of Globalization in

Bangladesh Insurance Industry
K.M. Mortuza Ali*

Globalization means the breakdown of boundaries. Every country rich or poor

would have access to the markets of other country. As a matter of right, the
rich will have access to the markets of the poor and the poor countries would
have access to the markets of the rich. This sounds quite fair as it will be a
borderless world. Everyone will be equal citizens of the globe. But what is
apprehended by many that this might lead to loss of the independence of the
poor countries. This is simply because the poor may lose their economic
independence under globalization. If there is only one global entity, there
can not be nations and or can not be independence of nations.
The entrepreneurs of developing countries can not compete successfully
with the market giants of the west. The effect of economic globalization
would be the demise of the small companies of the developing poor countries.
Large multinational companies in the developed countries will take over
everything. It is also apprehended that a globalized world is going to belong to
the powerful dominant countries. They will impose their will on the rest, who
will be no better off than when they were colonies of the rich. We are afraid,
that in the name of globalization, the process of re-colonization has begun.
Challenges and Opportunities
We are being repeatedly told by the proponents of globalization that the poor
countries like Bangladesh will be immensely benefited because of the free
flow of capital. It is true that for many developing countries, capital inflows
have brought about unprecedented economic growth. But it is also true that
capital can flow out and when it does, these countries can be bankrupted.
We observe from the present world market scenario that large banks, insurance
companies and corporations of the world are merging and acquiring each other to
become even bigger. It is very likely that these super giants will move into local
businesses of the poor countries. This will guarantee success for them because of
economies of scale. The poor countries are also likely to get benefits by way of
employment, cheaper products, quality products, better services etc.
*Managing Director, Prime Islami Life Insurance Ltd.

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Impact and Consequences of Globalization....

May be the quality of our life will improve, may be we will earn more pay.
But we will be servants of foreigners. It will be worse when super-giants will
control our economy and eventually our governments. Therefore, the real
challenge for us is to get benefits of globalization and at the same time to
protect ourselves from being exploited.
We shall have to reduce the chances of destroying our economy and
independence. We shall have to make rules, regulations, laws and policies to
guard ourselves. If we have to regulate trade and services, in order to get
benefit from globalization, we must do it. We need to change the concept
of globalization for our existence, so that it poses less danger or no harm.
Globalization and free trade is not synonymous. Liberalization and
deregulation is also not synonymous. What we need now is re-regulations. We
need new sets of rules and regulations to face the opportunities and
challenges of globalization.
In this respect, the poor countries need to work together. They should plan
and execute those for the betterment of their people. We need to
interpret the concept of globalization for the benefit of their common
people and for that matter we must insist on the rights of our people
to cross into the rich countries. We do not have capital to invest in
abroad, but we have human resources which should be allowed to move
freely around the world. By exporting manpower, we must try to have
our due share in the free market economy. If this is not done, we will be
faced with tremendous challenge. Globalization in the form that it takes
now is a threat against us, and we must help ourselves to get the
Devine help from our Creator.
What Strategies We Need to Adopt?
First of all, the developing countries must realize, that it is high time
we must be free to decide our future for ourselves. It is extremely
important for us to empower ourselves, to think for ourselves to ensure
that we have the will and wit to decide our own destiny. Our planners
and policy makers should be bold enough to reject those prescriptions of
IMF and World Bank, which are not conducive to our own environment
and strategies of mass development. We can not allow our economy to
grow in a fashion, which will create few hundred or thousand billionere
at the cost of the common people.

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45

Second most important thing that we need to do is to accept the hard

reality with firmness and boldness. Whether we like it or not the process
of globalization has began. There are many good and bad aspects of
globalization. We, therefore, should not simply turn our back or should
not embrace it blindly. We should be able to analyze the good and bad
effects of it.
We will have to embrace the good and eliminate the bad by rational
thinking and wisdom. We must have the far-sightedness, as well as strategies
to prepare ourselves. The impacts of globalization will be beneficial to us if
we are ready in all respect. We must prepare the standards of ethics, code of
conduct of all the players in the market. We must make the grounds ready for
accepting the giants. We need to strengthen the moral and financial
backbone of the local enterprises. We need to change the mental make
up of our entrepreneurs, professionals, bureaucrats, and consumers at large.
We should behave rationally and responsibly in the new era.
Furthermore, corruption need to be abated to full extent. Otherwise we will
lose in the game. If we fail to create, a corruption free society, the fruits will
be eaten up by the vested interest groups and mass people will be
deprived again. We must be cautious from the very beginning, because
the giants are ready but we are not. They are powerful not only financially
but also tactically. They know all the tricks to influence the so called
intellectuals. They can buy everyone-the politicians, the professionals, the
business community. They can pressurize the entire government
machineries to change and or make the laws in their favour, which will
be good for them and not necessarily good for us.
If we fail to create an awareness about the good and bad effects of
globalization, the waves of globalization will drive us in the deep sea.
Our minds will be invaded by them. They will change our thoughts, ideas,
values, and religious beliefs. If we want to avoid being swallowed up by
the giants, we must know well that globalization is not just about
material wealth, but also about values. We must understand the impact
of globalization and must realize that we shall have to face it with our will
power to overcome the odds.
The poor countries must unite not only to face the process of
globalization, but also to interpret it in its right direction. If
globalization is properly interpreted and practised, it can result in a more

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Impact and Consequences of Globalization....

equitable world order. If it is badly interpreted, it can destroy the poor. For
example, if globalization implies integration of all countries (rich and
poor) into one single global entity, then workers, specially the
unemployed poor people should be allowed to move freely across the
borders. The advocates of globalization must understand that if money is
capital for the rich, labour is the capital for poor countries. If this is
allowed, cost of production and living of the rich countries would be
lower, and will also ensure more remittances to poor countries. The west
must realize that globalization must be for the good of everyone and it
must be proven to be good for everyone.
Finally, in order to ensure justice and to prevent interference in local
affairs, we need regulation. This is necessary because competition is not
between equals. Foreign owners are not interested in the social problems
of poor countries. They want to maximize profits. For that matter in
subtle ways or overtly they will try to interfere in local affairs to protect
their unabated right of making profit unless they are regulated. The
making of profit should not be regarded as a sin. But profiteering, the
exploitation of the poor should be made punishable. We need to be
pragmatic and flexible. Globalization should not be viewed as an end in
itself, but as a means to an end i.e. better life of our common people
and continued freedom from foreign domination.
Facing the Challenge
It is being argued repeatedly that the concept of free market should be
accepted by all religiously. However, we observe that the free market is
no more than a new name of capitalism. The free market is about
maximizing profits. It is not a social organization intended to cure social ills.
In the unregulated free market, the weaker and smaller groups will lose
and be destroyed by the stronger. Eventually, there can be only one player
in one industry. It must be realized that capital inflow can create wealth,
but at the same time it can bring about economic and financial disasters
as demonstrated by the Asian financial crisis of nineties. Therefore,
Globalization be regulated to minimize abuses of the system. A level
playing field is a term invented by the rich to employ fair competition.
But, what is forgotten is that the players on the field must also be
evenly matched.

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47

It seems that globalization is irresistible. But, this does not mean we should
just sit by and watch what is happening. All of us be prepared to accept it.
Globalization of course can bring about a better world, if we are ready
for it and ready to face the consequences prudently as well as
patriotically. We should always be on the lookout for adverse consequences.
We must be prepared to take corrective measures in order to ensure that
these adverse consequences will not befall us. We must proceed cautiously
with globalization. We should not reject globalization altogether.
The world is indeed getting smaller and we are all getting closer to one
a other. Nothing happens in one part of the world that does not affect
other parts. We can no longer isolate ourselves. No man, no nation, is an
island. Globalization is the inevitable consequence of information technology.
What is needed now is its careful management. We must now face the
challenge of globalization. No one is going to wait for us to get ready
for the challenge. So whether we like it or not, we have to face the
challenge. The only way that the weak can face any challenge is to
present a united front. Through smart partnerships, the poor countries can
strengthen each other. We are not without resources. By exchanging our
experiences with the other developing countries, we can learn to do
what is right and avoid the mistakes that any one of us may have made.
Impact of Globalization on Insurance
The main arguments for liberalization of insurance is that the new order
of free trade and services would speed up development and improve
the living standard and quality of life in the developing world. On the
other hand globalization is viewed as a new form of colonization by the
big multinationals and corporations because their home markets are
offering little for growth. Many may think that the impact of liberalization
in the insurance market will be positive as it means more choices for
consumers, who can chose from the different service providers. However,
the die hards argue that insurance being so fundamental to keeping the
wheels of the economy, it can not be fully liberalized to the foreign
sector.
The WTO rules for insurance do not lay down minimum capital
requirements, solvency margins, or if there should be a tariff. What is
required under market opening measures is that the rules should treat
local and foreign insurers uniformly. It further requires that foreign

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Impact and Consequences of Globalization....

companies should be allowed to set up in the local market just as other

local companies and that any rules relating to insurance should not be
discriminatory in favour of local companies or against foreign companies.
In theory, this will promote greater efficiency, greater professionalism in
the market, introduction of more products and services and increase in
the size of the market. It is argued that multinationals can also help to
create more consumer confidence and improve market conduct practices.
They can also enhance the stability and image of the industry by
encouraging financial transparency and the adherence to internationally
accepted disclosure requirements.
However, the basic fear of liberalization is that it will affect the status
quo and local companies must fight to maintain their market shares, with
their survival being at stake. Cut throat competition can then threaten
the financial stability of local companies and hence will affect the health
of the insurance industry. The multinationals would have the advantage
of
an extensive global networking and of better access to the
international reinsurance market. Furthermore, large companies can offer
better services at cheaper cost, good staff will be lured away with high
salaries. As a result smaller insurers would need to consolidate, merge
or establish joint ventures and increase their efficiency.
What We Need to do
To compete and survive, local insurers can not continue to follow past
practices. They must be proactive, before the time to act expires. The local
insurers should prepare themselves by making out and executing a
realistic set of initiatives that will position it for long term success. The
basic pre requisition to succeed in the market are :
a) Consumer Awareness
b) Harnessing the power of computer technology.
c) Professionaling the Sale Force.
d) Highly skilled professional regulatory body.
e) Branding and sticking to niche markets and products.
f) Forming strategic alliances with local or foreign players.
It is high time that we recognize the rights of the customer and we
change our attitudes. Customers will be guided by two important

Thoughts on Economics

49

considerations i.e. price and quality of the service. High level of services
are required. At the same time, for the buyers price is important. Customers
are keen to understand what they are buying, why they are buying and
just what they are getting for their money. This growth in customer
sophistication poses problems for insurers. The profit margin if any, will
be squeezed as we shall have to provide more services. Therefore, local
insurers must become more efficient and one way of attaining this, it is
thought, is to achieve economies of scale through merger and
acquisition.
Information technology is transforming our industry more than anything
else. It will do so at an accelerating pace. We can have now access to plenty
of information data, statistics. But it does not help us unless we know
how to analyze it. It is the analytical power of computers that can lead
us to the creation of new products. The internet, presents us with a
remarkable ability to communicate and to exploit the results of our
information gathering. But communication is not all one-way. Our customers
can take the initiative and communicate with our competitors and with
each other. They have in their finger tips, information from neighboring
countries and from the world at large.
Insurance business is completely driven by knowledge and technology. The
business of selling insurance products requires assessing the profile of
the customer and designing the right policy. The process is facilitated by
data base and data warehousing. The emergence of information and
communication technology can capture and disseminate large quantities
of data and information for managerial judgment in insurance and
learning about customer needs and behavior. Therefore, upgrading the
computer technology can help the local insurers more sound and
sustainable.
Insurance agents and brokers provide a very vital links between the
insurers and insureds. It is essential that the agents be professionally trained.
They must be trained prior to their appointment and continuous training
be given to them in order to make them competent and with the changes
in the market dynamics. Unethical practices now prevailing in the Insurance
industry can be minimized if the market players follow the code of
conduct. It is necessary to appoint professional brokers. Developing
technically qualified person is very important. Chief executives should also
have a recognized professional qualification in insurance or related areas,

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Impact and Consequences of Globalization....

plus several years post qualification experience. The emphasis in professional

qualification and experience is to engender professionalism and to ensure
that the organizations are manned by technically competent people. It is
necessary to ensure that Brokers, Agents, Surveyor, Loss Adjusters meet the
standard set down by the regulatory authority and obtain a certificate of
proficiency from the recognized Institute.
Consequences in the Insurance Market
Under a liberalized environment competitive pressure may lead insurance
companies to unsound practices in order to obtain market share. In such
a situation insolvencies are likely to happen. Therefore, systems should be
geared to asses effectively the actual financial soundness of insurance
companies. It is also necessary to establish mechanism for intervention and
for safeguarding interests of policy holders. It is the responsibility of the
regulator to set the enabling environment for the healthy development of
the insurance industry. Regulator should ensure that market develops towards
optimal effectiveness and efficiency. Market conditions should be transparent
and all relevant information should be made available to consumers.
In an open market, one of the highest priority areas in insurance
regulation currently is Solvency Regulation. The financial strength of the
insurers must be carefully monitored to ensure their ability to pay claims. In a
market economy, regulation is essential to halt destructive competition.
To avoid destructive competition, regulators have to ensure that premium
levels are adequate and equitable. When insurers engage in destructive price
cutting, the result can be insolvency of some insurers and a severe contraction
in the insurance market to the detriment of all.
One of the reasons for low insurance penetration in the developing countries
like Bangladesh has been the limited type of insurance products currently
marketed. If and when our markets are opened to foreign operators, they
would be initially focusing on the major industrial and commercial risks,
which are already well developed, and do not need much investment in
product development and promotion. In such a situation, small local insurers
will be left with insuring tedious and less profitable or non-profitable lines.
The growth potential for small local insurers will, therefore, lie in
identifying and developing niche markets including insurance for the
informal sector and life insurance in the rural areas. To do so, however,
local insurance companies need broad market net work, market information
and related support services.

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51

Perhaps the best strategic options for local insurers lie in working
among themselves and others in the region and even outside of the
subcontinent/continent. Local insurers are small and in many cases under
capitalized. Often they could find partners with their peers both locally
and regionally. Should they decide to follow the path of
mergers
nationally and regionally, there is a great chance that they could create
mutually beneficial alliances. From a solid national position they will
also be better placed to choose international partners that would add
value to their operations.
Pros and Cons of Mergers and Acquisitions
The bigger players in the larger markets want to be the biggest players
in all markets. As a result of their entry, insurers in the domestic market
will be facing competition from new international insurers. Pursuit of
globalization leads to pressure for liberalization and to open domestic
insurance markets to foreign competition. The pressure seems to be
ultimately irresistible. So, there will be intense competition between
insurers, both domestic and foreign. Moreover, there is also increasing
competition from other, new competitors such as banks and nongovernment micro finance institutions. Therefore, the pertinent question is
how the local small insurers will survive in this environment.
It is generally believed that merger and acquisition is a panacea to face
the impact of globalization. As the world becomes unavoidably more
globalised, where mergers, acquisitions and alliances become more the norm
rather than the exception. This is simply because, size is a competitive
advantage. The pursuit of growth through acquisition is evident everywhere.
However, pursuing growth through acquisition can be a dangerous strategy,
if the acquirer does not have the skills to manage the integration of the
existing and acquired businesses. It has been experienced that many of
the acquisitions fail to deliver increased shareholder value. If growth
through acquisition is not possible, or desirable for some reason, similar
cost ratio advantage may be possible through a joint venture with an
insurer, who is not a competitor.
Mergers and acquisitions are one of the most important growth options
available to local insurers. They tend to provide the quickest way to
grow, to compete in the market place and allow the company to acquire new
skills, customers and products. Among the most difficult task in the process
of M&A is assessing the market value and finding the partner. Once we find a

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Impact and Consequences of Globalization....

suitable partner, lot of aspects need to be negotiated. Legal and financial

aspects need to be examined critically. Valuation and financing frequently
becomes a central issue for the failure of the initiatives. The ability to
quickly and effectively integrate any type of affiliation must be
completed with a reusable set of process i.e. organizing, planning and
executing the integration effort.
Merger and alliance management activities should be managed as an
integrated program. Many M & A transaction fail because the acquirers
do not identify clearly the sources of value within the deal, or because
the expected value is not extracted and maximized. Even if the values
have been accurately identified and calculated, accessing these values
can be difficult. Planning ahead for the post merger integration at an
early stage of the merger life cycle is of paramount importance, if the
full value of the M & A transaction is to be obtained. The value
generated from merger is inversely related to the time it takes to merge.
The faster the integration occurs the more likely the transaction will
generate the maximum value and achieve the strategic benefits. If the
merger integration is delayed, the cost of managing redundancy can
grow, setting away the merger savings. The factors for the high rate of
failure of merger and acquisition initiatives are as follows;
a) Over optimistic estimation of synergistic values.
b) Lack of strategic rationale
c) Misunderstanding of the cultural mismatch between the two
organizations.
d) Loss of key employees and customers
e) Poor post-merger integration.
The complexity, due to interdependency of the thousands of decisions, that
will be needed must be tightly integrated to understand and to manage
the business impacts. If and when this is done, for the insurance industry
as a whole, will result in larger and well capitalized insurers. With better
expertise and capacity, the merged entity will be able to withstand
adverse economic conditions and fend off competition from abroad.
Consolidation will also assist market participants to improve financial
structures and help reduce unhealthy competition by weeding out small

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53

insurers with non-viable business basis. For most of the insurers, mergers
and acquisitions can be a means of gaining instant access to market share. The
merged entity will be able to enjoy substantial cost saving by shedding
duplicates in Head Office functions as well as reducing branches. With lower
expenses and a larger revenue base spread, insurance companies will be
able to drive their cost/income ratio down and achieve greater efficiency.
Concluding Remarks
Globalization has profound implications for Bangladesh. It creates new
opportunities and threats. The increased competition that is driving
globalization will always produce both winners and losers. For some people,
it is a great threat, and others view it is an opportunity. It is no denying
of the hard truth that liberalization of insurance makes it a game of
survival of the fittest. It is clear that those who are able to add capital,
underwriting and management strengths to their arsenal are in a stronger
position than those who do not. Therefore, it is very essential that the
local insurers should strengthen their competitiveness in order to survive
in the liberalization process.
We must not forget the fact that local insurers are lagging behind in
terms of information technology, financial resources and human resource
development. The process of liberalization is a challenge and stimulus to
local insurers to reach international standard. However, it must be
remembered that reckless opening of unsound insurance business to
foreign competition can lead to costly failures in the domestic insurance
sector. In order to have an equal footing, the insurance industry of
Bangladesh need to be protected from foreign competition until the
local insurers develop sufficient financial capacity and insurance expertise
to compete with foreign insurers.
In a liberalized market, local insurers must take measurers to compete more
effectively. The pertinent question is how quick we can prepare ourselves
and how effectively we handle the situation. In case, we fail to move fast,
the market is likely to be threatened with more fierce and unethical
competition. On the other hand, if we move too fast, it is likely that some
of the insurance companies will lead to insolvency. It is, therefore, prudent
to choose a mid way.
Much of the developments in our market will depend on how insurance
is being regulated. For this matter, we need to build regulations in tune with

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Impact and Consequences of Globalization....

the changing times. The new regulations ought to be formed for sound
growth of the industry as a whole. This places the regulatory authority in a
position of immense responsibility. It is necessary to devote attention to
professionalise the regulatory body and to ensure a broad form of continuity in
terms of skilled personnel. This would ensure the continued good health of the
insurance sector.
The most important in this respect is cooperation between the industry
and the regulator. The development of regulation should be advanced through
an open and enjoying dialogue between industry and regulator with input from
consumers, intellectuals, and legislators. We need an alliance between the
regulator and the industry to examine in a constructive and transparent
way those areas where regulation is necessary. We need to adopt a culture of
cooperation and free communication. There is the need for partnership in the
planning of regulation. If the supervisory authority and the market jointly
develop a regulation there is a much greater probability that it will achieve
the purpose. Dialogue is also important for identifying the true and real
problems of the industry.
The industry people ought to be sincere to dig out the problems. Liberal
regulation gives increased freedom and independent decision making
power to the players in the market. The players, therefore, must be prepared
to act in a responsible way. Responsible freedom includes knowing the
technical options for dealing with a business problem and the proper way
of dealing fairly with clients, agents, regulators and competitors in the
market. This is possible only when we are keen to follow good business
ethics along with useful knowledge and technology. The Regulatory authority
therefore, must promote professional education and training, and the industry
must get ready to face the challenges only by developing themselves
professionally. For this we need a positive shift in attitudes of the
insurance industry and the regulator.

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55

REFERENCES
1. Ali Mortuza K.M. Growing Insurance Industry of Bangladesh &
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Annual Conference of APRIA, July 1999 at Hong Kong.
2. Camerdella and Watson Introduction to International Business, Insurance
and Risk Management, in The Global Environment of Insurance (GEI 203);
McGraw Hill Higher Education 1999.
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Insurance Markets Paper Presented in M.I.I. Conference on New Direction
in Insurance and Risk Management July 1997, KualaLumpur.
4. Davison, Jenkins & Watson Industry Convergence (Chapter 7 in GEI 203),
McGraw Hill 1999.
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and Governments in Emerging Markets; Paper presently in International
Conference for Emerging Insurance Market in a Globalizing Economy,
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6. Don Ball and McCulloch Wendell The Challenge of Global competition;
(7th Edition), McGraw Hill Companies 1999.
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9. Kawai Yoshihiro Globalization: Regulation & Supervisory Tools which can
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Crossborder Levels; Paper presented in international conference for
Emerging Market in a Globalizing Economy, July 1999, KualaLumpur.
10. Mahathir Mohammad- Globalization and the New Realities; Pelanduk
Publications Malaysia, 2002.
11. Malaysian Insurance Institute- An International Perspective on Corporate
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12. OECD Insurance Solvency Supervision: OECD Country Profiles, 2001.
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14. Watson, Leonard J.- The Global Environment of Insurance; The McGraw Hill
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