CITY UNIVERSITY

Assignment on

Analysis of impact of insurance act on the insurance

Business in Bangladesh
Course Title: Insurance
Course Code: FIN-405
Prepared for:

Udayshankar Sarkar
Lecturer

Department of Bachelor of Business Administration

City University

Prepared by:

Rezaul Islam
ID no: 181471524
Batch: 47
Campus: City Campus
Introduction: Bangladesh economy holds huge risk in every sector because the country often
faces natural disasters like flood, cyclone, draught, and hurricane. There are also other factors
like political strikes, and economic issues like inflation, high interest rate, tax policy,
deregulation, etc. that deepen the risks for the economy. However, Bangladesh’s, insurance
market is not very large compared to the degree of risk. For a better functioning of the insurance
industry and to attain good growth of this sector, it is worthwhile to know the factors which are
responsible for low growth of the insurance industry in Bangladesh. This paper presents the
results of an empirical survey highlighting the present scenario of insurance industry in
Bangladesh. In this study, many problems have been identified such as lack of trust, illiteracy,
improper claim settlement, lack of product diversification, lack of information, poor risk
management, absence of research and development cell, reinsurance problems etc. The study
offers recommendations to make the insurance market in Bangladesh vibrant and useful for the
economy.
Insurance Industry Scenario of Bangladesh
The insurance companies of our country perform a wide range of activities such as service
designing, preparing contract and policy, marketing and selling, underwriting, rating, reinsurance
and other services and claim settlement. The two government owned insurance companies i.e.
the Shadharan Bima Corporation and Jiban Bima Corporation get all the government insurance
business by virtue of the Insurance Act of Bangladesh. According to the rule, all insurance in the
government sector is done through these two nationalized insurance companies, so they enjoy a
monopoly. None of the private insurance companies is allowed to offer insurance services to
government organizations. Furthermore, these two corporations are also allowed to underwrite
private businesses, and people feel confident about their reliability. So they have not yet felt any
strong need to practice marketing properly.
Insurance is a form of risk management, used to hedge against the risk of a contingent loss. It
involves the transfer of the risk of potential loss from one entity to another, in exchange for a risk
premium. Given this role, the insurance sector fosters financial stability by enabling economic
agents to undertake various transactions with the facility of transfer and dispersion of risks. As a
crucial component of the financial system, life insurance plans are an important source of
savings and long-term institutional investments essential for the development and growth of
bond markets. The role of insurance as a financial intermediary is particularly important in
countries like Bangladesh with low levels of financial penetration. Overall insurance penetration
itself is also just 0.9 percent in the country; much lower than the regional average of 2 percent.
Problems of Insurance Industry in Bangladesh: The following problems of the insurance
industry in Bangladesh are identified in the present study:
Lack of Public Faith: Insurance agents are responsible for creating negative image of insurance
to the public. It shrinks the scope of insurance business. Poor public image is mainly responsible
for not expanding the sector. This opinion is held by 94.80 percent respondents in the study.
Lack of Public Awareness: Mass illiteracy hinders the growth of the insurance sector. A vast
majority of people especially in rural areas are left outside the insurance coverage. This mainly
results from the look of awareness among the people. This problem is supported by 93.60% in
the study. Even a large portion of people in the country have no minimum idea about insurance.
People are not aware of the benefits from the insurance policy and a good number of people
believe that insurance business is nothing but cheating and they assume that insurance policy is
quite unnecessary.
Centralization Policy: Most of the insurance companies in our country are located in urban areas
and there are few branches in rural areas. They think that they might have better opportunities for
their business in cites because the economic condition of the urban areas is better than in the rural
areas. They forget that the large number of our population reside in rural areas. Thus this
centralization policy acts as an obstruction to the growth of insurance business in our country.
Poor Economic Conditions: Bangladesh is one of the poorest countries in the world and most
of the people in this country live under extreme poverty. All of these people fight hard to earn
their livelihood. It is quite impossible for them to save some money for future need. Therefore,
they are quite unable to give the amount to the insurer which is called premium and regarded as
safety or precautionary measure against any accident. This problem is mentioned by 74.80%
people in the study.
Excessive Management Expense: Growing cost of business is a problem that insurance
companies are facing now a days. Most of the second and third generation insurance companies
are facing the problem of excessive management expense that is much higher than the prescribed
limit. Currently there are ten or more tiers in the field level. This is unsustainable in the long-run.
Political Instability: Sound and robust political environment is a pre-requisite for a country’s
development. Political instability is a serious problem for the insurance business. Moreover,
Bangladesh government formulates national policy, rules, and regulations on political
consideration that, too, restrict the normal growth of insurance in the country.
Lack of Supervision from the Government: Lack of surveillance from controlling agency of
government encourages many insurance companies to follow some unethical practices like delay
in claim settlement, harassment to policy holders and showing fake financial statement. This is
not only destroying the reputation of the insurance companies but also creates negative impact in
the mind of the people about insurance. This problem has been mentioned by 80.80%
respondents of the study.
Legal Complexity: The current Insurance Act is lacking in several aspects of determining
margins of solvency, investment of funds, accounting standard, morality table and protection of
the interest of the insured. This problem is identified by 80% people of the study. To take an
insurance policy there is a lengthy procedure and so many complexities are faced by the insured
person. Therefore, the people are discouraged to take insurance policy because they think that the
complexities will create extra pressure on their mind, which may hamper regular activities.
Lack of Qualified Officials: Insurance companies perform their activities by recruiting
marketing agents. They try to convince the people to take a policy. Most of the agents are not
properly trained and they do not know the right process to catch potential policy holders. 68% of
people opined in the study that the insurance companies lack in efficient workforce. Therefore,
these field level agents are unable to fulfill their target.
Lack of Training for the Employees: Spread of insurance business in Bangladesh failed for
lack of proper training of the employees, especially the field employees of insurance companies.
Still there is not enough training centers to provide proper training regarding insurance activities
for the officials of insurance company. This problem is cited by 81% respondents of the study.
Lack of Exposure: Another main problem in the country is that the media is unconcerned to
send the right message regarding insurance to the people. As a result, a large segment of the
population is completely unaware about the insurance policy. Another problem is that the
insurance company does not provide adequate information in the company’s websites which can
meet the queries of their potential customers and encourage them to buy insurance policy.
Absence of Business Ethics: In a competitive market, some insurance companies use some
business tactics that violate the business standard and the provision of insurance acts. Some
insurance companies create harassment to the policy holders when they want back their money
after death or maturity. The insurance companies show different causes for not settling the claim
timely. Besides this, some field officials also often try to give false information to the people for
buying a policy. Such kinds of illegal acts create bad reputation to the insurance companies and
hinder the development of the overall insurance business in the country. Those customers that
are harassed by the insurance companies normally try to discourage other people to buy any
insurance policy.
Lack of Motivational Program towards Public: According to our survey, the people of the
country are not much motivated by the company to take insurance policy for safeguarding
themselves against any kind of risk. They fail to understand that insurance policy makes their life
risk free. For lack of motivation among the people, insurance companies are always lagging
behind their expected target.
Lack of Information Technology: Automation facilities prompt service and paves the way of
cost and time savings but the insurance sector in Bangladesh is still conducting its operations
manually (or on conventional method). They do not use any web address, which is essential for
an insurance company. They can provide more information to its client by using web site. But
still the operations of insurance companies are not automated. The clients of insurance sector are
deprived of the convenient use of e-insurance, online business, internet, Web and computerized
system. This problem is cited by 78.40% people of the study.
Insufficient Service: Insurance people failed to provide better services to the mass people of the
country. That’s why the people who want to take the insurance policy they lose their interest
from insurance. This problem is mentioned by 66.60% people of the study. As can be seen in a
foreign country, insurance workers go to customer’s house and offices regularly to influence
them to take insurance policy, but in Bangladesh insurance people seldom provide this service.
Lack of Marketing Policy: One of the major problems in an insurance company of this country
is the lack of proper marketing policy. Management is not taking initiative to increase their
marketing expansion. They spend tiny amount in advertisement, which is not sufficient for
increasing business development.
Lack of Information: Lack of information about the insurance policies to the potential insured
is a problem for making decision to buy insurance policies. They are not aware of the benefits of
insurance policies. The insurance companies do not have adequate arrangement to make the
people understand about different policies, opportunities, benefits etc. This opinion is shared by
78.4% respondents of the study. The accurate and sufficient information does not reach the
public doors. The government, too, did not still constitute any institutional information cell to
educate the people or provide prompt information in this regard.
Delaying in Claim Settlement: Insurance companies suffer from the poor public image due to
their failure to properly settle customers’ claims in time. There is an uncertainty about getting
insurance claims after the maturity of the policy. 83.40% customer of insurance industry had
opined that insurance companies made delay in claim settlement. This problem makes insurance
business unpopular to the people.
Customs of Commission: Practice of commission is the main motivational factor used to make
sales of insurance product. It is being badly practiced in the insurance market for which
insurance companies are involved in unhealthy competition. They are offering very high
commission rate even 55 to 60 percent of premium received to procure the business even if that
violates the Insurance Act. It erodes the potential profitability and risk coverage.
Absence of Research and Development Cell: A systematic organization requires an effective
research and development cell. It is very conducive to diagnose industry sickness and analyze the
problems. It is a process of creating, building, improving, adopting and bettering, but the present
study finds that 88.80% of insurance companies have no research activity.
Poor Risk Management: Most of the sample insurance companies have used traditional
methods in evaluating comprehensive risk. The shortage of skilled and experienced professionals
in the insurance companies has the consequence that most of sample enterprises are unable to
underwrite and manage their risks on a scientific basis. They underwrite and retain risks
indiscriminately without considering what results they may subsequently face. Lack of
professional knowledge misguides these companies with regard to risk assessing, claim handling,
and risk managing, consequently weakening their financial strengths.
Constrained Investment: Zonal and local branches of insurance company do only premium
collection activity and have no authority to invest the fund as per their choice. As a result, the
insurance industry in the unit level is not becoming a potential and ideal sector as the banking
sector. A part of the funds of the insurance sector is kept in the form of Fixed Deposit Receipt
(FDR) in different banks, which is mandatory. If these funds were invested in tangible assets of
land, building, machinery and manufacturing projects, that would make the investment more
profitable.
Lack of Product Diversifications: Insurance companies usually offer some common and
traditional products. Generally, customers always demand innovative products. The study finds
that the insurance market was not exploring product diversification. The problem is observed by
69.40 % of the respondents. The pattern of risk is always changing and ever-increasing. The
insurance market demands new products to cover the risk arising from changing and growing
needs of society.
Tax Constraints: Insurance officials say that the high corporate tax restricts the growth of the
insurance sector. Now the insurance companies pay a corporate tax rate of 42.5 percent which is
higher than in other countries.
Reinsurance: At present the insurance law requires that all general insurance companies must
compulsorily place 50% of their reinsurance with SBC and the balance 50% is optional, which
can be placed either with SBC or other re-insurers at home or abroad. It is on record that most of
the private general insurance companies obtain their reinsurance from SBC. Historically, due to
its monopolistic position SBC was a direct insurer under writing both public and private sector
insurance business. However, after 1985 the position gradually changed, and, as it stands now,
SBC has become by and large a reinsurance company. An analysis of SBC’s Annual Account
reveals that 75% of their premium income is derived by way of reinsurance cession from private
insurance companies, 20% from public sector business, and 5% from private sector insurance
business directly (Roy, 2008). It is found that there is an inherent clash of interest between the
role of an insurer and a re-insurer. A reinsurance company cannot and should not compete with
its own reinsuring clients in respect of direct insurance business. Though SBC has come to play
the role of a re-insurer in Bangladesh, its services have continuously deteriorated over the years,
which has adversely affected the operation of the private sector insurance companies.
Prospects of Insurance Business in Bangladesh: There are many good signs for the insurance
business in Bangladesh. The factors that can facilitate the insurance business in our country are
discussed below.
Large Population: There is a big opportunity for the insurance companies as the population of
our country is increasing day by day. The growth of population opens greater scope for every
kind of insurance business.
Higher GDP: The GDP of our country is increasing which results in the increase of per capita
income. With the growth in the income more, people are now willing to take an insurance policy
for safeguarding themselves against any danger.
Micro Insurance for Poor and Rural People: Insurance services need to be redesigned to meet
the needs of different classes of people. We should have consistent product development to meet
emerging needs of the poorer class and the rural class. Distinctive product innovation relevant to
indigenous conditions of the poor and especially for the borrowers of micro-credit is the need of
the time. Micro insurance can be a great prospective area for the insurance business in
Bangladesh. Most of the people of the country are unable to have costly and long term insurance
policies. Micro insurance can be provided to individual persons or to small business owners
against low insurance premiums and with easy terms and conditions. When people will afford to
minimize their risks at a lower price, more and more people will take that opportunity. A huge
portion of the society can thus be a prospective target market for this business.
Investment Scope: Bangladesh has large scope of investment in trade, commerce and industry.
The insurance fund is now invested in government bonds, ICB projects, marketable securities,
and FDR which are not much profitable. The private insurance companies are realizing this fact.
There are opportunities to enhance profit through effective and efficient money management by
employing capable and experienced personnel. There is scope of investment expansion in the
areas leasing, housing, health and money market.
New Business’s Individual Insurance: There are so many new businesses starting every day
with a booming global demand. Every business is insured under an insurance company to protect
itself from any kind of accident. Therefore the growth of industry, mills, and factories is creating
better scope for the insurance companies to flourish their business.
Extent of Market: There is a great scope of facility to explore the insurance market. The market
is big but a large part of it is still unexplored. The insurance sector should take step to introduce
innovative and diversified products to cover risk in the unexplored areas of the economy.
Government Aid: Government is the key player of all development. In order to boost the
growth of the insurance sector, the government should frame a liberal tax policy, reform the legal
structure and set up a strong regulatory body. Since the government is liable to ensure the safety
and security of people, it can obligate the people to take policy in some cases and also attract
investors in this sector.
Developing Mass Awareness: People are now much more conscious about their safety and
security. Government and the industry can easily draw their attention regarding the significance
of insurance in their life so that they can be encouraged to take an insurance policy for making
their life free from any unexpected situation. The increase in literacy rate is also helping to create
awareness among the people regarding taking insurance policy. Besides, insurance companies
are also trying to alter the negative attitude of people towards insurance by organizing various
programs such as seminars, programs including social responsibilities etc.
Furnish Modern Services: The technology should be used in operating system to reach services
promptly to the customer. These comfortable and soft services attract the customers and enhance
the volume of sales. The insurance sector till now does not use modern tools providing services.
So the insurance sector should introduce e-insurance, online insurance, e-mail, Web and ATM
booth that facilitate transactions in withdrawing their claim, depositing their premium and
knowing the balance sheet etc.
Strict Application of Rules and Regulations: Due to strict application of rules and regulations,
anarchy is prevailing in this sector. The regulations should be aimed to reduce, not increase, the
problems of the insured and to protect them from any kind of deception. The Controller of
Insurance should closely monitor the insurance company’s functions and obligate them to follow
the current Insurance Act 2010. By enforcing law, this sector can come back in a systematic
manner.
Developing New Insurance Products: In course of time, there is a great change in climate and
atmosphere over the world that adds new pattern of risk in trade and commerce. The insurance
should add new products to cover the additional risk and to meet the new tastes of entrepreneur.
There is considerable scope of developing new product and service in insurance sector to cover
all sectors of our economy. In our study, some insurance companies are being advancing in
product modification and attempt to introduce new products. This action of generating new
product and service will considerably expand the demand for insurance products.
Service Diversification: Insurance is not just a tool of risk coverage. It is also an attractive
instrument of savings. The combination of risk coverage with savings gives the opportunity for
innovative product designing which means service diversification. So far very little efforts have
been taken to innovate and introduce need oriented insurance services in response to existing
threats. The prospect of the insurance business in agriculture and business sectors appears bright,
as described blow:
Agriculture Sector: The economy of Bangladesh is predominantly agrarian, with most people
engaged in farming and fishing. The uncertainty of agriculture due to crop failure is caused by
climate variation, drought, cyclone, and flood and pests, which affect farmer income as well as
government revenue. Furthermore, in the last few years commercialization has occurred in some
sections of the agricultural sector. Increasing investment in the agricultural sector is creating a
new opportunity for the insurance industry. Various agricultural insurance services are becoming
common these days. Demand for insurance protection against crop loans, livestock loans,
fisheries loans and equipment loans are also increasing day by day.
Business Sector: Nowadays in Bangladesh the SME plays an important role in the economic
development. But they are deprived from taking loans from bank for a large amount. If insurance
business focuses this service in Bangladesh they will able to contribute more in the economy.
Thus, insurance business has a bright prospect in business sector in Bangladesh.
Suggestions for Policy Implications:
The concerned policy makers of insurance sector should adopt the following measures in order to
make the best use of the opportunities and to tackle the threats for ensuring the growth and
development of the insurance industry in Bangladesh.
Regain Popularity with Appropriate Marketing Strategy: To regain and maintain a positive
public image, the insurance companies should practice appropriate marketing strategy and
provide better service to its customers. To create people awareness, insurance companies should
also arrange on regular basis seminar, symposium, road show etc in different parts of the
country.
Product Innovation: Insurance Companies should diversify their product. They should
introduce new products to satisfy customers’ needs.
Developing Professional Code of Ethics: Insurance companies should try to develop
professional ethics among its personnel. Government should have a regulatory body for the
surveillance on insurance companies so that they must perform their business maintaining the
ethical issues properly
Establishment of R&D Cell: In response to the opportunities of growing market, the insurance
companies should expand their market by identifying and providing responsive services. In order
to do so each company should establish an effective research and development cell.
Arrangement of Training Programs: Relevant authorities in collaboration with supportive
agencies should provide training to the insurance related personnel for improving the insurance
business in the country. Bangladesh Insurance Academy (BIA) should arrange training programe
on regular basis. The syllabus, curriculum and training programs of the academy need to be
modified to meet the future challenges of the insurance industry.
Investment: The collected premium should be invested in large and beneficial sectors so that
insurance companies can return their clients the expected gain timely. In this respect, they should
progressively come forward to invest heavily in profitable earning sectors such as real estate,
health, education, leasing, share market and other money markets.
Pricing Policy: The pricing policy should be flexible so that the companies can exercise some
autonomy. The government should allow the insurance companies to quote different premium
rates according to their requirement that will help to increase the profitability of the insurance
companies.
Monitoring: The office of the Controller of Insurance should be strengthened with expert
professional people aiming at efficient handling of the affairs of the insurance companies.
Legal Reforms: Existing insurance laws should be improved incorporating upcoming challenges
of the insurance industry. The existing provisions allow the only two public sector insurance
companies to do all government insurance business. Also, according to current insurance rules
only these two public sector insurance companies can do reinsurance business. This restriction
need to be withdrawn so that the private insurance companies can do reinsurance business. This
would help to save foreign exchange outflows, create new technical job opportunities, open up
scope for innovations which are important to build confidence in the market.
Recruitment Strategies: Insurance companies need to modify their recruitment strategies with
increased focus on the marketing and sales training because insurance being a service industry it
requires a special attention. Insurance companies should recruit youths who are trainable and
developable.
Claim Settlement: Claim settlement procedure should be made easy, transparent and improved
by the insurance companies.
Removing Multi-tier Fake Agents: Unnecessary multi-tier organizational set up should be
replaced by one tier. This is essential for reducing the management expenses. Fake agents or
dummy agents who indulge in malpractices should be eliminated and selection of agents should
be unbiased. Appointment of too many agents in particular area should be stopped. Full time
agency should be encouraged and part-time agency should be discouraged.
Conclusion: Insurance sector in Bangladesh is contributing to the growth and development
process of the business and property by protecting all variety of assets from all types of hazards.
However, the size of the insurance industry in Bangladesh is small but over-institutionalized.
Only by achieving competitiveness, this sector can contribute more to the development of the
economy of the country. In spite of all constraints both at macro and micro environment, good
growth rate and tremendous growth potential reconfirm the brightest prospects of the insurance
sector in Bangladesh. If insurance sector can be developed at optimum level by eliminating the
problems identified in the study, it is expected that it will continue to march forward at an
accelerated speed and bring economic benefits to the economy.