Insurance: When transferring the risks get riskier

The sheer weakness of our insurance sector was laid bare once again. According to a report, one official of the regulatory body, Insurance Development and Regulatory Authority (IDRA), said that about 25,000 life insurance policy-related complaints have been filed against 14 life insurance companies in the last 10 months. Around 95 percent of the complaints were related to settlement of claims. 

"If 95 percent of complaints relate to claim settlement, it is a miracle how they [14 life insurance companies] can still operate. [The regulatory authority] should have taken stern action against the insurance companies," said Main Uddin, professor and former chairman of the Department of Banking and Insurance at Dhaka University.

He said that there has long been a culture of non-settlement and it has been so because the regulatory authority has not been strengthened purposefully. He added that the government will have to have the intention to make it strong in the real sense of the word. 

"The problem is that there is no such intention in sight," said Professor Main Uddin. "I feel the governments never wanted it to be a strong regulatory body." 

He said that the owners of insurance companies are so powerful that the officials of the regulatory body believe that if they take action against them, they would fall into trouble.   

Trust matters the most 

The relationship between customers and insurance companies in Bangladesh is marked by a lack of trust. According to a recent study by PwC, a majority of Bangladeshi people do not trust insurance agents and there is limited awareness regarding life insurance products. 

"Claim settlement-related problems also undermine the customer-insurer relationship, and the process of settling claims can be arduous and long," found the PwC study. 

Professor Main Uddin said that if one wants to see the progress of a country's insurance sector, he or she will have to see its claims settlement ratio. 

The claims settlement ratio means the percentage of claims insurance companies settle in a year compared to the total number of claims they receive. 

On average, the global claim settlement ratio is 98 percent. Even in our neighbouring India's average claim settlement ratio stands at 98 percent.

Professor Main Uddin said that data show that the claims settlement ratio stood at around 54 percent between 1973 and 1990 in Bangladesh. However, the ratio went up to about 73 percent during 1991-08. It was 78 percent between 2009 and 2019. However, this rate dropped dramatically to 68 percent in 2021 from 88 percent in 2020. 

Professor Main Uddin believes that the latest figures will create distrust among people. The insurance business will fall into a higher risk in the future. 

"Because customers' claims have not been settled, insurance business cannot flourish in those areas. If confidence is lost, it is hard to regain it," said Professor Main Uddin. "These people will share their experience with other people."

State-run think-tank Bangladesh Insurance Academy's director SM Ibrahim Hossain said that the insurance penetration is not increasing in Bangladesh because of the lack of awareness, and people do not have trust in insurance. 

"In terms of assets, people do not insure because of lack of awareness. With regards to life insurance, several companies could not utilise their funds properly and as a result, they could not settle their customers' claims," said SM Ibrahim Hossain. "And those responsible remain under the veil," said SM Ibrahim Hossain.  

The shape of the industry

Bangladesh's insurance sector consists of a total of 81 companies — 35 in life insurance and 46 in non-life. The insurance industry earned Tk16,812 crore in premiums in 2022, of which Tk11,399 crore went to the life insurance industry.

Professor Main Uddin said that the number of insurance companies in Bangladesh is abnormally high in terms of the country's economic size. 

According to the World Bank, the GDP of Bangladesh is $460 billion. India's GDP is $3,388.5 billion. The number of insurance companies in India is only 57.  

"When around 25 to 30 insurance companies are needed, you give licences to 81 insurance companies. There is bound to be trouble," said Professor Main Uddin. "In our country, the number is more than double."

He added that efficiency they will need to do business properly, is not possible to achieve in a short time, in Bangladesh's economy. 
 
Insurance appears to be a negative-demand product in Bangladesh as the majority of people and businesses tend to be reluctant to pay non-mandatory sums for insurance coverage, while the industry is yet to become strategic or innovative enough to change the behaviour.

In developed countries like Canada, Japan, Sweden, Australia, and New Zealand, almost everyone had insurance coverage even a decade ago. Neighbouring India and Pakistan ensured insurance coverage for 27% and 12.5% of their population, respectively, while Sri Lanka, with its full literacy rate, has almost everyone insured.

According to the Insurance Development and Regulatory Authority (IDRA), less than one in every 17 people hold life insurance policies in Bangladesh.

The PwC study finds that the insurance sector of Bangladesh suffers due to an uneven income distribution in the country, where a majority of the people are poor and do not have disposable income to afford insurance. This hinders the growth of the country's insurance penetration rate, it said.

When it comes to insuring assets, most businesses are reluctant unless insurance coverage is made mandatory to work with banks, ports and state authorities.

And this is why insurance is only around 0.5% of the country's GDP, ahead only of Nigeria among other comparable countries.

According to the Swiss Re Institute, the ratio was 3.69% in India, 2.1% in Vietnam and 1.16% for Sri Lanka in 2017 and more than 10% in countries like the United Kingdom and Hong Kong, and over 8% for the gigantic economies like the US and Japan.

Liquidity crisis and complaints 

Insurance companies in Bangladesh also appear to be in a perennial liquidity crisis. Bangladesh Insurance Academy's director SM Ibrahim Hossain said that local insurance companies' excessive expenses are responsible for this situation. 

"They spend more than what is written in the law. As a result, in the long-run, the companies face financial crisis," said SM Ibrahim Hossain. 

He also said that the companies that take on undue expenses and take part in anomalies need to be brought to justice. On the other hand, the companies that are doing well have to be rewarded.

If any insurance company fails to settle the claims, it shows that the company does not have the money. If they have and they do not want to settle the claims, it is a lack of good governance inside the company and also a failure of the regulatory authority, which is entrusted to monitor the insurance companies.

After collecting the premium from customers, insurance companies typically invest in different sectors, including the stock market.  

"If they are failing to settle claims we have to assume that they failed to make investments prudently, and as a result, they incurred losses or could not profit. It means these insurance companies are not being run efficiently," he said. He added that many companies purposefully try not to settle the claims or delay it. Many insurance companies embezzle the money of their customers in this way as well. 

The way out?

Bangladesh Insurance Association's president Sheikh Kabir Hossain said he believes the life insurance companies in question cannot settle the claims at all. 

"I would say that they cannot pay back the money and they have embezzled the money," said Sheikh Kabir Hossain. "Some have fled and some of them are roaming freely."

"I believe IDRA should take action against them and the regulatory body knows how to take action," said Sheikh Kabir Hossain. "By IDRA, I mean the government."

He said that it is unfortunate that the government does not take any action against the insurance companies that do not pay back the money to their customers. He said that the government helps salvage a bank when it goes bankrupt, but the government does not come forward to save an insurance company. 

"The government should take action so that the owners of an insurance company cannot embezzle money," said Sheikh Kabir Hossain.