The state of insurance industry in Bangladesh

M Shefaque Ahmed

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

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.

ECONOMIC OBSERVER 35

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 maximize return on its life fund.

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'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

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 first- year business procurement cost is very high, lapse ratio has to be reduced in order to reduce the overall management expense ratio.

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.

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 state- owned general insurance business entity, the Managing Director and the General Managers of 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

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 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

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.

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 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

ECONOMIC OBSERVER 39

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 licenses 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 mobilization of savings, particularly mobilization 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

in the private sector. The IDRA is of the view that licenses, preferably two to three, may be given to transact life insurance business in the private sector.

Non life Insurance Companies: 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 organizations: Microfinance non government organizations (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 mobilization 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.

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 specialized 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 Insurance Association: The role of any insurance association is to assist the insurance supervisory authority in its endeavor 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.

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.

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 finalized 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 finalized 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 finalizing them.

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 organizational 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.