Marine insurance in Bangladesh: 0.30% minimum premium hurts importers, competitiveness

Infograph: TBS

The 0.30% minimum premium in marine insurance for imports in Bangladesh is unusually higher than international rates and is escalating the business expenses, which are ultimately passed on to the consumers, say experts and entrepreneurs.

According to them, setting a minimum insurance premium rate is deemed inconsistent with the principles of a free-market economy and a competitive environment. They argue that establishing a higher minimum violates competition law.

They say unlike Bangladesh, no other country has a specified minimum insurance rate, with the global rate ranging between 0.01% and 0.1% in the international insurance market, a pattern observed even in neighbouring countries such as India and Pakistan.

Advocate Captain Mohiuddin Abdul Kader, president of the Bangladesh Maritime Law Society, told The Business Standard, "International maritime law does not prescribe a minimum premium rate, and even in developed countries, such rates are not established. The imposition of minimum rates in Bangladesh is impeding the competitive environment.

"Moreover, the marine insurance premium rate in Bangladesh is comparatively higher. The resulting cost burden on the import sector is ultimately passed on to the consumer."

As per Bangladesh's import policy, the marine insurance must be procured from a domestic company.

The Insurance Development and Regulatory Authority (Idra) establishes premium rates, facilities, and conditions for general insurance, relying on recommendations from the Central Rating Committee. They are also responsible for setting the minimum rate of marine insurance premium.

In accordance with the Institute Cargo Clauses (ICC), marine insurance is categorised into three categories.

In August 2020, Idra established the marine insurance premium rates at 0.45% plus other policies for ICC-A category, 0.45% for ICC-B category, and 0.30% for ICC-C category. Typically, Bangladeshi importers opt for the lowest-cost category, namely ICC-C.

Stakeholders say against imports worth more than Tk100 crore, insurance companies re-insure against the customer's insurance with foreign companies to share the risk. In that case, only 0.05% premium rate is determined. However, there is no avenue to directly acquire policies from foreign insurers.

Khairul Alam Sujan, vice president of the Bangladesh Freight Forwarders Association (BAFFA), said, "In a free market economy, fixing a minimum rate restricts the bargaining scope between service receivers and providers, leading to a diminished competitive environment."

He, however, noted that there is a practice in various sectors of setting a maximum service price. "For instance, BAFFA has established a maximum local delivery charge of Tk5,500 for each import shipment to maintain order."

Idra Chairman Mohammad Zainul Bari said, "Idra determines the premium rate in accordance with the law, and it is decided by the expert committee. International factors are taken into account while setting the rate. Any objections to the rate will be addressed and updated in the future."

Sector insiders say the annual import trade in the country amounts to approximately $80 billion, with a significant portion being conducted through marine means. Consequently, importers are required to allocate around Tk240 crore each year for marine insurance expenses.

BSRM's case against Idra

On 13 September 2021, BSRM, a leading local steel company, lodged a complaint with the Competition Commission against Idra, contending that the imposition of a minimum insurance premium rate has hindered the competitive environment.

The case highlighted the absence of market competition among insurance companies due to the fixed minimum rate, emphasising that the prevailing minimum rate in the country's market significantly exceeds the international rate.

At that time, Idra authorities stated that the premium rate is determined by considering factors such as risks, trends, and expenses. The Bangladesh marine tariff was revised in 2020, resulting in a 22% reduction in the previous premium rate.

They also highlighted that in a smaller market like Bangladesh, domestic insurance companies may struggle to fulfil their obligations if insurance service obligations are halted.

The final order on the case on 29 November 2021 said the existing fixed rates of marine insurance are considered not to be fully competitive. Idra and the Central Rating Committee may take necessary measures to make marine insurance rates competitive.

The order also emphasised that a competitive insurance market necessitates equal opportunities for all participants. Therefore, it is essential to adhere to existing laws governing the current practices of charging and providing commissions in the insurance business. The relevant authorities are urged to take appropriate measures in this regard.

It was also mentioned that a competitive insurance market requires equal opportunities for all. In this context, it is necessary to properly follow the prevailing laws regarding the ongoing practice of charging special rates and providing commissions in the conduct of insurance business. Authorities concerned can take necessary measures in this regard.

Withdrawal of special rate benefits

Documents reveal that Idra established the marine insurance premium rates in 2000 through the formulation of the Bangladesh Marine Tariff.

At that time, rates were set at 0.70% plus other policies for ICC-A category premiums, 0.70% for ships arriving at the Chattogram port, 0.80% for other sea ports in ICC-B category, 0.50% for ships arriving at the Chattogram port, and 0.60% for other sea ports in ICC-C category.

In 2007, special premium rates were introduced for specific companies, including BSRM, PHP, and Abul Khair Group, based on the applications of major importers. These special rates were fixed at 0.55% in ICC-A, 0.20% in ICC-B, and 0.15% in ICC-C. However, this special arrangement was withdrawn in January 2021, leading BSRM to file a writ in the High Court regarding this matter.

Ameir Alihussain, managing director of BSRM, told TBS, "We have a large volume of imported products and are a well-reputed company. Because of our good reputation and minimal risk, the insurance company may be able to offer us a reasonable premium. However, fixing the minimum premium causes us to spend a lot of money on insurance for importing raw materials, which is illogical.

"Even foreign insurance businesses with competitive pricing are prohibited here. Paying a large premium raises the expense of doing business. We need to spend a lot of money on it. The minimal premium rate must be lifted to save businesses and minimise the burden on consumers."