Insurance industry: Unfair competition in a limited market

In a developing country, service sector, including Insurance and Banking, plays a crucial role. It not only provides security to commerce and industry, but also mobilises much-needed capital to establish industries/businesses and to keep them going. The demand of insurance rises as the economy develops. Bangladesh is now poised, according to the Perspective Plan, Vision 2012, to graduate into a middle-income country by 2021. And the government is in the process of formulating another perspective plan to make the country a developed one by 2041.

Let us discuss the present scenario of the insurance industry in the country and how far it will be able to meet the needs of the economy in future.

BACKGROUND: Just after the birth of Bangladesh, the insurance industry was nationalized. The Bangladesh Insurance (Nationalization) Oder 1972 (President's Order No. 95 of 1972) was promulgated on August 08, 1972. The order created four subsidiary corporations, viz, Surma Jinon Bima Corporation and Rupsha Jiban Bima Corporation for life insurance business, and Teesta Bima Corporation and Karnaphuli Bima Corporation for general insurance business and the assets and liabilities of the unit companies were vested in those corporations.

Under the same order, a controlling corporation, the Jatiya Bima Corporation, was established to co-ordinate and supervise the activities of the four subsidiary corporations. Soon after,  the Insurance Corporations Act 1973 (Act vi of 1973) was promulgated. Under this Act, two corporations were created viz, Sadharan Bima Corporation by amalgamating Karnaphuli Bima corporation and Teesta Bima Corporation and Jiban Bima Corporation by amalgamating Surma Jiban Bima Corporation and Rupsha Jiban Bima Corporation. Jatiya Bima Corporation was dissolved.

This, in nutshell, is the structural change and operational scenario of insurance industry in Bangladesh just after liberation. An analysis of the performance of the industry during this early stage presents a dismal picture. Due to frequent structural changes and faulty process of nationalization, the insurance industry experienced a serious setback. Due to top-heavy administration resulting from hasty and undue promotions, indiscriminate salary rise, large-scale new appointments, etc., management expenses increased abnormally and at the same time procurement of business fell disproportionately. On top of this, there were shortage of fund and technical staff due to flight of capital during Pakistan time and the departure of non-local staff during the period of liberation war and thereafter. 

Against this backdrop was promulgated the Insurance Corporation (Amendment) Act 1984 which, in recognition of the importance of market economy, allowed private insurance companies to function. Since April 1985, the number of private non-life companies has risen to 45 and of life companies to 31 including one foreign company viz, American Life Insurance Company (now Metlife) which has been operating since 1972. Insurance market in Bangladesh is a mixed market - public sector corporations and private companies are operating side by side.

Experts are of the opinion that too many insurance companies are operating in a small market of Bangladesh causing most unhealthy competition.

Robert J. Kiln in an article, "The Development of Healthy Insurance Market in the third world," has suggested the following basic conditions of a healthy insurance market:

1. A competitive market to foster inventiveness, adaptability and flexibility to provide new coverage and protection for new and developing industries. No market is a 'Market" without this competition.
2. The financial resources and the financial stability to take on the insurance liability expected and to provide the necessary capacity.

III. Access to a reasonable and increasing volumes and spread of business.

1. The resources to be able to provide services such as, loss prevention, statistical information, education, training and most important technical knowledge in underwriting.
2. Above all, a number of quality people with experience, flair and integrity.

COMPETITION IN THE MARKET: During the period from 1972 to 1984, insurance was a monopoly market. However, with the privatization since 1985, there began competition among the companies.

So far I recall, during the nineties, the competition was  more or less healthy but with the influx of a large number of companies, both life and general, the competition drifted towards unhealthy in the form of excess procurement cost, indiscriminate appointment of incompetent personnel, weak management, lack of technical know-how. As a result, insurance industry, both life and non-life, is facing a very tough time and, frankly speaking, very survival of many companies is now at stake.

Most serious problem affecting the non-life companies is the outgo in the shape of so called commission. In non-life business, the allowable commission is 15 per cent but it goes sometimes much higher through the mechanism of intermediaries beyond the control of the companies. Non-life business is more or less compulsory in nature which means if any one opens letter of credit for importing goods and/or takes loan from the banks, he/she is to insure goods/properties with any insurance company. These sorts of businesses are mostly channelized through the concerned banks. Therefore, banks are in a position to help reduce the procurement cost to a great extent. In such case, 'bancassurance', an innovative model, may play a vital role. 

FINANCIAL SOUNDNESS: High procurement cost is mainly responsible for excess management expense which naturally tells upon the financial strength of the companies. Insurance companies act as trustees for policyholders' money. The fund of the company must be sufficient to pay all genuine claims and also to discharge all outstanding liabilities and the size of the reserve will vary with the volume and the type of business written.

In the present market mismatch, it is very difficult to make underwriting profit. In order to cover up the underwriting deficit, investment of fund of the companies should be made profitably.

Of course, at present the scope to invest the fund in profitable sectors is very limited in the country. Share market is suffering from various predicaments. Investment in real estate is also not that attractive. Only available source is to keep money in fixed deposit with the scheduled banks, leasing companies/investment banks, etc., but here also the yield is not that attractive. Therefore, it is very difficult for the insurance companies to diversify their investable funds and accrue better yield on it.

But, it is expected that this fund is invested in secured avenues with maximum profit so that the fund is not lost due to bad investment. Therefore, insurance companies fund is regulated by the relative provisions of the insurance law.

A sizable amount of insurance companies' fund (30 per cent of life fund which previously was 60 per cent), including statutory deposit as per Section-23 of Insurance Act 2010, is to be kept in government securities but yield on government securities is lower compared to interest earned on bank fixed deposits and other savings instruments. The limited scope of investment to earn attractive interest and the regulation to make compulsory investment in government securities have made the position of life companies very precarious because they are committed to offer attractive bonus to policy holders and also a fair return to the shareholders as the custodian of the trust fund.

In developed countries, the yields on government securities are made favourable compared to other kinds of securities through the interplay of market forces of demand and supply. Hence, the insurance companies are attracted to invest in government securities helping the government to undertake expenditure with these funds without resorting to increased deficit financing. Apparently realizing the adverse situation, the government issued a Statutory Regulatory Order (SRO) No 28 AvBb  289 law/2004 dt October 13, 2004. The SRO has widened and relaxed the investment portfolio by allowing 70 per cent of aggregate life fund of life insurance companies for investment in avenues other than government bond and securities while keeping 30 per cent (thirty percent) for investment in government securities.

The new Statutory Regulatory Order (SRO) has for the first time allowed insurance companies to invest in land and housing, mutual and unit fund, bridge financing and on anything approved by the regulatory authority. Insurance companies are yet to take advantage of the new investment opportunities and diversify their investment portfolio so that the return on investment is lucrative in the best interest of the policy holders. The management of life companies should equip their investment department with financial experts and formulate plan and programme to invest their idle fund in suitable areas where return is higher and secured. 

The writer is Consultant, Meghna Insurance Company Ltd.

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