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The state of insurance industry in Bangladesh

The government had undertaken financial sector


reform in the 1990s. Since reform is an ongoing
process, it has continued over the years, though at
times at a relatively slower pace. Furthermore, it
has been extended to non-bank financial
institutions in one form or other.
The government has now embarked on a reform
programme in the insurance sector to promote a
vibrant insurance sector in the country. As a first
step towards achieving the objective, the Insurance
Act, 2010 in replacement of the Insurance Act,
1938, and the Insurance Development and
Regulatory Authority Act, 2010 for establishing the
Insurance Development and Regulatory Authority
(IDRA), were passed by the Jatiya Sangshad in
March, 2010.

The newly established IDRA started functioning in


January, 2011. There are about 50 rules and
regulations to be framed under the Insurance Act,
2010. The IDRA have been working on the initial
drafts prepared under an Asian Development Bank
(ADB)-funded Technical Assistance (TA) project.
After making changes, wherever necessary, the
same has been put on the IDRA website to seek
opinion from the stakeholders.

A Review of the life insurance sector: The life


insurance sector has shown remarkable growth in
recent years. However, according to a preliminary
estimate, the life insurance penetration ratio
(insurance premium as per cent of gross domestic
product or GDP), which measures the level of
insurance activity relative to the size of the
economy in Bangladesh, was 0.8 per cent in 2010.
Average insurance density (per capita premium
income) in dollar terms for life insurance in
Bangladesh was US Dollar 5.5 only.
The life insurance penetration ratio and average
density in India were 4.0 per cent and 41.2 dollar
respectively in 2008. Thus, there is a great
potential for further growth of the life insurance
sector in Bangladesh. While growth of premium
ECONOMIC OBSERVER

M Shefaque Ahmed

income is very important for a life insurer to ensure


payment of claims as they fall due, other indicators
are also equally important to measure its long term
financial solvency. To review the business
operations and financial performance of life
Insurance business, a number of important
indicators have therefore been taken into
consideration.
Financial performance of Jiban Bima Corporation:
Jiban Bima Corporation (JBC), as per Insurance
Corporations Act, 1973 maintains paid-up capital
of Tk 50 million (5.0 crore) and does not have any
reserves, which can be treated as part of equity.
The existing equity capital is, therefore, very
inadequate to ensure long-term solvency of the
corporation. Since the corporation is a state-owned
entity (SoE), there is no major concern for the
protection of the interests of the policyholders.
Total premium income of JBC stood at Tk 3.388
billion (338.81 crore), on a provisional basis, in
2010 compared to Tk 3.3468 billion (334.68 crore),
recording a growth of 1.23 per cent only during the
year. Average growth of premium income during
the last five years was much lower than the growth
of nominal GDP.
First year premium income recorded declined in
both 2009 and 2010. There was no growth in
renewal premium income during 2010. Average
growth of life fund during the last five years was
much below the growth recorded by the life
insurance industry in Bangladesh as a whole. The
financial performance of JBC, in terms of trend and
growth of premium income and life fund, is not
satisfactory.
JBC's rate of return on investment of assets was
much lower than that earned by most of the life
insurers. This low return is partly due to a very
conservative investment followed by JBC and
partly due to maintaining 75 per cent of its fixed
deposits with the state-owned banks.
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JBC is in compliance with the provisions of the


investment rules as prescribed under the
Insurance Rules 1958, and, therefore, quality of its
asset portfolio is of excellent standing. However,
JBC needs to diversify its investment to maximise
return on its life fund.

current market environment. However, there is a


scope for reducing the lapse ratio to bring it in line
with the international standard. Since JBC's firstyear business procurement cost is very high, lapse
ratio has to be reduced in order to reduce the
overall management expense ratio.

Since the nature of its liabilities is long-term, it can


invest in long-term government bonds and
securities with a maturity of 10 to 15 years, the
rate of return of which is significantly higher than
that of the short-term government securities. JBC's
current rate of return on investment is very low,
and something needs to be done very quickly to
increase the rate of return to ensure reasonable
growth of its life fund.

JBC could not allocate reversionary bonuses to the


policyholders for the year 2005 and 2006. Business
performance of JBC improved somewhat during
the year 2007 and 2008. As a result, it was possible
to declare reversionary bonuses for this period.

JBC's actual management expenses exceeded the


allowable management expenses in each of the last
five years. In fact, JBC's actual management
expenses exceeded the allowable management
expenses in almost all the years since the
commencement of its business operations in 1973.
Expenses incurred on commissions and other
forms of commissions for first-year insurance
business exceeded first-year premium income in
three years, out of the five years under review. A
similar picture would emerge if data for earlier
years are analyzed.
Also the actual renewal expense ratio exceeded the
allowable renewal expense ratio each year by a
significant margin in all the years under review.
The cumulative effect of very high expense ratios
over the years has affected adversely the
profitability of JBC. If the trend of high expense
ratios continues, then financial viability of JBC will
be at stake within a very short period of time unless
excess expenditure is offset by increasing the yield
on investment.
Reliable data on lapse ratios are not currently
available. An examination of data on first-year
premium income and renewal premium income
indicates that the lapse ratio is not high under the
ECONOMIC OBSERVER

Business performance of JBC during the year 2010


was not satisfactory and it has become uncertain
whether actuarial valuation as at December 31,
2010 would disclose adequate surplus to declare
reversionary bonuses at the prevailing rate. If this
trend continues, it would be very difficult for JBC
to maintain its market share in the face of stiff
competition from some of the life insurers which
allocate high rate of bonuses to the policyholders.
Quality of human resources has to be of excellent
standing to ensure high degree of efficiency in the
management of an organisation carrying on life
insurance business. In the case of JBC, some of the
regular staff who are working in mid- and lower
mid level positions do not have proper educational
background and reached their present positions
through promotion, starting from the level of
clerical staff.
Around 75 per cent of the regular employees are
staff of Class III and Class IV categories. It is
reported
that
JBC
does
not
have
professionally/technically qualified persons in the
area of underwriting, reinsurance, actuarial,
accounts and finance, and information technology
(IT). To strengthen these areas, JBC may consider
direct recruitment at different levels on a limited
scale.
Unlike Sadharan Bima Corporation (SBC) or stateowned general insurance business entity, the
Managing Director and the General Managers of
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JBC are government civil servants. They work in


JBC on deputation and did not have any
experience in life insurance, prior to joining the
JBC.

These officers work for a while in JBC on


deputation from the government, and by the time
they become accustomed to the work of JBC, to a
certain extent, they are transferred elsewhere.
Since life insurance is a very technical subject,
management of life insurance requires persons
with technical skills, knowledge and experience in
life insurance business.

The IDRA is of the view that the officers who are


working at senior positions may be withdrawn in
phases and these positions may be filled up by
promotion from amongst the eligible officers of
JBC.

A review of financial performance of private life


insurance companies: None of the private life
insurers has so far been able to raise the paid up
capital to Tk 300 million (30.0 crore) as per
provisions of section 21(3) and schedule of the
Insurance Act, 2010. The existing capital base of
the private insurers, except a very few companies,
is very low compared to minimum capital
requirement as per the Insurance Act, 2010.
Some have very meager capital compared to their
size, while a very few have raised their capital
through allocation of stock dividend over the years
and are almost on the verge of complying with the
regulatory limit of minimum capital requirement.

Delta Life has a paid up capital of Tk 30 million (3.0


crore), the lowest in the life insurance sector, but
has the highest business operation among the
domestic life insurers in terms of the size of the life
fund. The size of Metro-Life Alico is the biggest in
the country, but it is operating in Bangladesh
without any capital. The low capital base of all life
insurers is worrisome for the IDRA.
The amount of capital requirement, as specified in
the Insurance Act, 2010, is the minimum one that
ECONOMIC OBSERVER

a life insurer will have to maintain to carry on its


insurance business. However, as the size of the
insurer increases more and more capital is
required to maintain its solvency.
A fixed amount of capital requirement is necessary
to establish a life insurance company, but is not
sufficient to maintain its solvency with the increase
of its size.
A company with a life fund exceeding Tk 10 billion
(1000 crore) and its assets valued properly, will
have to raise its capital base much higher than the
minimum fixed amount of regulatory capital to
comply with the solvency margin requirement.
According to our preliminary estimates, at least
three companies will have to raise their capital to
Tk 600 million (60 crore) or more. Metro-Life Alico
will probably have to bring capital amounting to
not less than Tk 1.0 billion (100 crore).
Two companies have been incurring losses and
have not been able to pay dividend to their
shareholders as well as bonuses to the
policyholders from the date of commencement of
their business in 2000. The policyholders have lost
their trust and confidence in these companies. As a
result, they are spending much more than the
regulatory limit for procuration of insurance
business putting them in more and more trouble.
Average growth of premium income during the last
five years was 24.56 per cent, much higher than
the growth of nominal GDP. Life fund of private life
insurance companies, taken together, stood at Tk
134.9268 billion (13492.68 crore), on a provisional
basis, at the end of 2010 compared to Tk 105.154
billion (10515.4 crore) at the end of 2009, showing
a growth of 28.32 per cent.
However, the life fund of private life insurance
companies is expected to grow, on an average, by
around 20.0 per cent during the next 10 years, and
three to four percentage points higher than the
growth of nominal GDP thereafter. It is reported
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that some of the companies had high exposure to


investment in stocks and shares, and land and
properties violating the exposure norms as
specified in the Investment Rules.
The IDRA has undertaken investigation into the
affairs of a company including its investment
activities. Most of the life insurers are investing
their assets as per provisions of the Act and the
Rules made under it. The quality of assets of most
of the insurers is generally very good. A few
companies have failed to comply with the
regulatory requirement.
The IDRA has initiated punitive action against the
offenders. Assets default risks are in general
minimal. The investment yield of private life
insurers vary from company to company. It varies
from around 5.0 per cent to more than 20 per cent.
The company which earned more than 20 per cent
on investment of assets, invested heavily in shares
and stocks. But such a rate of return is not
sustainable in the long run.
There are no reliable data on lapses of insurance
policies. However, an examination of data on
insurance business of some of the life insurers
reveals that lapse ratios of insurance policies,
particularly micro insurance policies, are quite
high. Surrender of policies are also quite common.
The number of paid-up policies as percentage of
total number of issued policies is also very high.
In the case of private life insurers, some of the
companies have declared dividend @ 40 per cent or
more. Such high rates of dividend were possible
due to low level of capital base. These companies
will have to increase their capital base significantly
to comply with the solvency margin requirement.
The rates of dividend would then probably decrease
to around 20 per cent. The rates of dividend,
declared by some other companies, are between 10
per cent and 20per cent. Three companies have not
been able to earn any surplus since
commencement of their business operation in
ECONOMIC OBSERVER

2000. As a result, they could not go for initial


public offering. One company could not declare
dividend on regular basis even after 15 years of its
business operations and could not get listed in
stock exchange.
Two more companies could not raise capital
through public subscription even after 10 years of
their registration with the regulatory authority,
although they were required to go for public
subscription within three years of commencement
of their business operation. Companies that have
declared bonuses to the policy holders, are not very
attractive, because of the low level of surplus
emerging out of their business.
A review of insurance sector in Bangladesh

The premium income of Sadharan Bima


Corporations (SBC) - the state-owned entity
engaged in general insurance business - from the
reinsurance business is, on an average, more than
70 per cent of its total premium income. The rest of
its premium income comes from its direct
insurance business. A major portion of premium
income from direct insurance business is earned
from the public sector.
SBC's performance cannot be compared with the
private insurance companies because of its
reinsurance business and virtual monopoly of
direct insurance with the public sector entities.
Total gross premium income of SBC increased to
Tk 5745.2 million (574.52 crore) in 2010 from Tk
5406.1 million (540.61 crore) in 2009, showing a
growth of 6.27 per cent during the year. Average
growth of total gross premium income during the
last five years was 10.07 per cent.
The SBC has a paid-up capital of Tk 100 million
(10.0 crore), which represents less than 4.0 per
cent of its net premium income. This amount of
paid-up capital is very inadequate, particularly
when SBC is predominantly engaged in
reinsurance business which accounts for more
than 70 per cent of its overall premium income.
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Since SBC, like Jibon Bima Corporation (JBC) the


state-owned life insurance business entity, is
owned by the state, there is no major concern for
such a low capital base. However, SBC had a
general reserve of Tk 773.9 million (77.39 crore) as
on December 30, 2009, and this reserve may be
treated as part of equity.
Loss ratio (net claims/net premiums) reflects
soundness or otherwise of the company's
underwriting policy. SBC's loss ratio in respect of
fire insurance business was very high in 2010.
Loss ratios for other classes of business do not
show any stable pattern but vary widely from year
to year.
Management expense ratio of SBC is very low. As
mentioned earlier, more than 90 per cent of its
gross premium income comes from reinsurance
premium and premium income from public sector
business. Thus, there is little business procreation
cost.
The combined ratio is the sum of management
expense ratio and loss ratio. A combined ratio
provides a measure of the profitability of a
company's insurance portfolio. A figure of one (1)
[or 100 per cent if expressed in percentage term] or
more would indicate company's total reliance on
investment income to provide profit.
Management expense ratio (management expense
as a percentage of net premium) of SBC is very low
compared to private non life insurance companies.
The combined ratios of SBC are well below 100 per
cent due to very low management expense ratios,
indicating thereby that SBC has been making
overall underwriting profits in each of the year
under review.
SBC's gross profit increased to Tk 1255.2 million
(125.52 crore) in 2010 from Tk 1015.0 million
(101.50 crore) in 2009, showing a growth of 23.67
per cent during the year. Its net profit after tax
increased from Tk 737.58 million (73.75 crore) in
ECONOMIC OBSERVER

2009 to Tk 981.0 million (98.10 crore) in 2010,


registering a growth of 33.02 per cent during the
year.
Of total income of SBC amounting to Tk 1360.0
million (136.0 crore) in 2010, underwriting profit
accounted for Tk 724.7 million (72.47 crore), the
rest came from investment income. It incurred
losses from its fire insurance business for the last
five years. SBC's gross profit in 2010 was Tk
1255.2 million (125.52 crore), which was almost
three times the gross profit earned in 2006. Net
profit after tax which was Tk 240.0 million (24.0
crore) in 2006 increased to Tk 981.0 million (98.10
crore) in 2010.
A review of financial performance of private non life
insurance companies: Gross premium income and
net premium income of private non life insurance
companies stood at Tk 12.284 billion (1228.4 crore)
and Tk 6.67 billion (667.1 crore) during 2008 and
2009 respectively. Gross premium income and net
premium income were Tk 14.9143 billion (1491.43
crore) and Tk 8.2554 billion (825.54 crore)
respectively in 2010. The average growth of gross
premium income and net premium income during
the last five years were 16.45 per cent and 15.88
per cent respectively.
All private non life insurance companies, except
two companies, have not been able to meet the
minimum paid-up capital requirement as per the
Insurance Act, 2010. Some of the companies are
very close to meeting the requirement, while others
are way below the level of minimum requirement.
A sizeable number of companies could not even
comply with the minimum capital requirement as
per the repealed Insurance Act, 1938. To comply
with the solvency margin requirement, large-sized
companies may be required to raise their capital to
above Tk 400 million (40 crore).
The overall loss ratio of private sector non life
insurance companies is below 25 per cent. This
result reflects that either a large percentage of
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claims is being repudiated or tariff rates are too


high in relation to claims experience or both. The
Insurance Development and Regulatory Authority
(IDRA) has started monitoring claims settlement
practices of insurers and, at the same time, is
examining feasibility of restructuring the tariff
rates.
Some of the insurers' revenue account and balance
sheet have been examined. It has been observed
that the combined ratio of some of the insurers,
included in the sample, are more than one (1) [or
more than 100 per cent], implying that
management expense ratios are very high. These
insurers are not managing their business
efficiently. These companies are earning profit out
of the income earned on investment of their assets.
Recommendations based on the findings of the
paper: Life Insurance Companies: There are 18
insurers including JBC and Met-Life Alico
operating in the life insurance market. Of the 16
domestic life insurance companies, 11 companies
were given licences in 2000. A substantial increase
in the number of life insurers in 2000 has resulted
in substantial growth in premium income,
competition and improvement in services,
introduction of new and innovative products, and
the expansion of insurance business in the rural
and semi urban areas.
Insurance has now become an integral and growing
part of the financial sector and is poised to
contribute significantly to economic growth and
efficient allocation of resources through transfer of
risks and mobilisation of savings, particularly
mobilisation of small savings from rural areas
through marketing of micro insurance products
among the low income households.
Despite phenomenal growth in total premium
income and assets constituting life fund, insurance
penetration ratio and density remained low
compared to many developing countries. Therefore,
there is a great scope for further expansion of life
insurance business by issuing a few more licences
ECONOMIC OBSERVER

in the private sector. The IDRA is of the view that


licences, preferably two to three, may be given to
transact life insurance business in the private
sector.

Non life Insurance Com-panies: Although


Bangladesh non life insurance market had shown
double-digit growth, its expansion has been low
when compared with the life insurance sector.
Premium income of private non life insurance
companies increased by 10.4 per cent in 2009
which was lower than the growth of nominal GDP.
Insurance penetration rate has almost remained
static over the years.
Bangladesh non life insurance market comprises
43 insurance companies excluding Sadharan Bima
Corporation (SBC), which is practically operating
as a reinsurer. Of the 43 private non life insurance
companies, nine companies have not been able to
get listed in the Stock Exchange.
Management expense ratio of a number of
companies is very high. Net loss ratio, defined as a
ratio of net claims to net premium, for many
companies is very low reflecting either most of the
claims, are repudiated or the tariff rates are high or
a combination of both. Management expenses of
most of the non life insurance companies are
higher than the regulatory limits. Under the
circumstance, IDRA is not in favour of allowing
more companies to transact non life insurance
business in the private sector.

Insurance by microfinance and non governmental


organisations: Microfinance non government
organisations (MF NGOs) have been involved in
reducing poverty and creating opportunities for the
poor to participate in income-generating activities
for overall growth of the economy in Bangladesh. At
the early stage, their activities were centered on
mobilisation of small savings from their members
and offering a variety of loan products to them.
However, some of the MF NGOs gradually moved
into the area of micro insurance and started
offering insurance products to their members
outside the umbrella of any regulatory framework.
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The core activities of the Microfinance Institutions


(MFIs) are to provide loan and savings products to
their clients. Insurance business is altogether a
different business, which requires, among other
things, highly specialised risk management
techniques for its sound management and proper
governance. Most of the MFIs may not have that
level of expertise which can ensure the
sustainability of their insurance business.
The insurance Act 2010 prohibits anyone from
carrying on any class of insurance business in
Bangladesh unless a certificate of registration for
that class of business is obtained from the IDRA.
Microcredit Regulatory Authority Act, on the other
hand, allows microfinance institutions to provide
insurance services to their borrowers and members
of their families.
The relevant provisions of the MRA Act and the
Insurance Act are mutually inconsistent. IDRA is of
the view that MF NGOs should not enter into any
form of micro insurance business on their own;
rather they could form partnership with registered
insurers for transacting such business.
Role of Bangladesh Insu-rance Association: The
role of any insurance association is to assist the
insurance supervisory authority in its endeavour to
promote and develop an efficient insurance
market. The role of Bangladesh Insurance
Association (BIA) in promoting orderly growth of
the insurance sector, in so far as activities of the
concerned companies, does not appear to
promoting orderly growth of insurance sector. The
IDRA is always ready to work closely with all
stakeholders in developing a stable and vibrant
insurance sector.
The preamble of the IDRA Act, 2010 states that the
Act has been enacted to supervise the business of
insurance industry, to ensure the protection of the
interests
of
insurance
policyholders
and
prospective policyholders and beneficiaries under
the policy and to promote orderly growth and
regulation of the insurance industry.
ECONOMIC OBSERVER

In the case of life insurance business, policyholders


are entitled to 90 per cent of profit (surplus), but
they do not have any representation in the Board.
The IDRA is under obligation to protect the
interests of the policyholders. While the IDRA is
conscious about its obligations under the Act and
attaches more importance to promote orderly
growth of the insurance sector and protect the
interests of policyholders, the role of BIA, as
appeared to the IDRA, is mainly to protect the
interests of the owners. This is where the problem
lies.
Insurance Association of India operates through
two councils, namely, Life Insurance Council and
Non life Insurance Council. The executive
committee of each council consists of sixteen
members, two officials, one as the chairman and
the other as a member, and six others are
nominated by the Insurance Regulatory and
Development Authority (IRDA) of India and the
remaining eight are elected from amongst the
representatives of the members of the Insurance
Association of India. Thus, IRDA has a greater role
in the affairs and activities of the councils.
The main functions of the councils are:
A) To aid, advise and assist insurers carrying on life
insurance business or non life insurance business,
as the case may be, in the matter of setting up
standards of conduct and sound practice and in
the matter of rendering of efficient service to the
holders of life insurance policies or non life
insurance policies as the case may be.
B) To render to the IRDA in the matter of controlling
the expenses of insurers in respect of their life
insurance business or non life insurance business
as the case maybe; and
C) To bring to the notice to the IRDA the case of any
insurer acting in a manner prejudicial to the
interests of the holders of life insurance policies or
non life insurance policies as the case may be.
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In summary, the main functions of the Insurance


Association of India are to assist the IRDA to
develop a sound insurance market and to protect
the interests of the policyholders. The IDRA in
Bangladesh expects the BIA to play a similar role,
which will pave the way to create an environment
conducive to the growth of vibrant insurance
market.
The IDRA so far finalised seven regulations and
three rules and these have been sent to the Banks
and Financial Institutions Division, Ministry of
Finance for gazette notification but approval of only
two regulations have so far been received. On
August 08, 2011, the IDRA has put more five draft
regulations prepared by it on to the IDRA website
(www.idra.org.bd) for stakeholders' comments and
observations, and a good number of comments and
suggestions from stakeholders have already been
received.
It has come to the notice of IDRA that Bangladesh
Insurance Association desires that no rules or
regulations should be approved without its
concurrence. As mentioned earlier, the draft
regulations prepared by the IDRA are put on the
IDRA website for soliciting comments and
observations from the stakeholders. The drafts are
finalised taking into consideration the feedback
that the IDRA receives from the stakeholders. The
association is free to give its views on the drafts,
and more importance will certainly be attached to
their views before finalising them.

ECONOMIC OBSERVER

Role of Bangladesh Insu-rance Academy:


Bangladesh Insurance Academy (BIA), the apex
training institute in the insurance sector, was
established in November, 1973 through a
resolution of the Ministry of Commerce.
Although the number of insurers increased from
two in 1973 to sixty two as of now, the number of
regular faculty member decreased to one. It is
inconceivable how an apex training institute can
run with only one faculty member. Training
facilities of the BIA are poor, and nowhere close to
those of Bangladesh Institute of Bank Management
(BIBM), which caters to the requirement of the
banking sector.

To develop a vibrant insurance sector in the


country, it is of paramount importance to have in
place a training institute capable of providing
training programmes of high quality. Thus, there is
no alternative to strengthening the capacity and
governance of BIA.
The IDRA has received a report on BIA prepared
under a ADB TA project, which now is under
examination, and soon a programme of actions
including redesigning its constitution and
restructuring its organisational structure will be
initiated. The IDRA will seek assistance from the
government in due course to accomplish the tasks.

The writer is Chairman, Insurance Development &


Regulatory Authority or IDRA.

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