Insurers worried as dollar crisis halts reinsurance premiums

The insurance industry in Bangladesh is grappling with a major crisis as a shortage of US dollars has made it difficult for local insurers to make premium payments to foreign reinsurers. 

Unpaid premiums worth over $50 million have been stuck for the past five months, raising deep concern among local insurance companies about the future of their businesses.    

Fearing a worst-case scenario, insurers are warning that if they are unable to remit the premium eventually, the overseas reinsurers – who share and handle risks that are too large for local insurance firms – may decline to continue risk coverage, potentially cancelling existing contracts. 

This would have far-reaching consequences, leaving the country's Key Point Installations (KPI), mega-projects, and numerous properties uninsured, resulting in losses for both insurers and policyholders alike.

Infographic: TBS

Sadharan Bima Corporation (SBC), the lone state-owned non-life insurer and also a reinsurer, is limited in its capacity to reinsure properties worth only Tk400 crore. As a result, local insurance companies are forced to seek reinsurance for KPIs, mega-projects, and factories worth more than Tk400 crore, from foreign companies. To keep the reinsurance in place, they must send premiums to overseas reinsurers on a regular basis.

"We could not remit any single dollar for over four months because of restrictions by the Bangladesh Bank. There will be a disaster if the situation doesn't improve soon," said Md Khaled Mamun, managing director and CEO of Reliance Insurance Limited.

He said when they reinsure policies with overseas reinsurers, they are given a specific time – 60 to 90 days – for premium payment and in case of failure, the policies will lapse.

A critical component of the insurance industry, reinsurance involves insurance companies transferring a portion of the risks they underwrite to other insurance companies in exchange for a premium. This helps spread out the risk and provides insurance companies with a safety net against large losses.

According to laws in Bangladesh, all private insurers must reinsure 50% of their business through the state-owned SBC and the remaining half can be placed in or outside Bangladesh. But not all companies have business with foreign reinsurers.

Out of 46 non-life insurance companies in Bangladesh, around a dozen reinsure their business with companies in the United Kingdom, Germany, Singapore, South Korea, Switzerland, Thailand and India. The remaining companies reinsure through SBC, which later shares the risks with overseas companies.

According to market insiders, companies placed reinsurance abroad worth Tk1,500 crore (around $150 million) in 2022.
Green Delta, Pioneer and Reliance Insurance are three of those companies that reinsure their policies overseas and are now suffering the most for not being able to remit premium due to the greenback shortage.

"This is a crucial moment for us," said Farzanah Chowdhury, managing director of Green Delta, on the present crisis relating to the premium payments to their foreign reinsurers.

She said Bangladesh is on a growth trajectory and many mega-projects are being implemented that need reinsurance as SBC alone cannot handle it.

If the situation does not improve quickly, their business with foreign partners will be uncertain, she said.

SM Moinul Islam, country manager of Tysers, a London headquartered insurance broker, said they cannot remit premiums since May last year and neither the Bangladesh Bank nor the insurance regulator is telling them anything on the issue.

"If we fail to remit the premium by this month, renewal of policies may be stopped from April," he said. 

If reputed insurers leave Bangladesh, the market will be captured by substandard reinsurers who do not feel any obligation to pay claims in case of accidents, said the Tysers' Bangladesh head.

Sayed Bealal Hossain, managing director of SBC, said they have their own foreign currency account and SBC is not facing any trouble in remitting dollars to its foreign reinsurers.

Sheikh Kabir Hossain, president of Bangladesh Insurance Association, a forum of sponsors of non-life insurers, however, said he is not aware of the premium remitting issue.

The Bangladesh Bank said it has not imposed any restriction on remitting insurance premiums abroad.
"It depends on the bank concerned. Banks might have other priorities," Mezbaul Haque, executive director and spokesperson of the central bank, told The Business Standard on Sunday.

Life insurers not feeling the pinch 

In the global life insurance industry, reinsurance is a common practice, but this is not the case in Bangladesh. 

The small size of life insurance policies, in terms of monetary coverage, means that over 98% of policies are retained by local insurers. They do not see the need to transfer the risk associated with their policies to foreign insurance companies.

Adeeba Rahman, director of Delta Life, one of the largest life insurers in the country, stated that they are not facing the same problems as non-life insurance companies. 

This suggests that the life insurance sector in Bangladesh is not impacted by the reinsurance limitations faced by the non-life insurance industry.

Dollar situation

Bangladesh is grappling with a shortage of US dollars since the start of the Russia-Ukraine conflict in February 2022. 

Prices of goods, including food, energy, fertiliser, and industrial inputs, have skyrocketed in the international market – leaving Bangladesh to struggle in paying for imports. 

The country's foreign exchange reserves have dropped from $48 billion in August 2021 to $32 billion now, and the local currency, the taka, has depreciated by 20% in the last half year.