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Insurance Reform in Bangladesh and opportunities for Foreign Direct Investment

Kazi Md. Mortuza Ali Managing Director

Prime Islami Life Insurance Limited

Introduction:

Just after independence in 1971 following a bitter and brutal war, the Government of

Bangladesh(GOB) took over the control and management of all the Pakistani Insurance

Companies. Ultimately, the insurance industry of Bangladesh was nationalised in August

1972. The weak insurance industry of the country suffered a set-back. This is because the

newly created Life Insurance Corporation (Jiban Bima Corporation) had to take over the

liability of all life policies written by Pakistani insurers. As on 1- 1-1973 the assets of

Pakistani life insurers taken over by the Jiban Bima Corporation (JBC) amounted to

Taka- 148 million against total liabilities of Taka 264 million. Similarly General

Insurance Corporation known as Shdharan Bima Corporation (SBC) inherited assets of taka

103 million against liabilities of taka 76.5 million.

The government of Bangladesh promulgated an ordinance in 1984 to allow the formation

of insurance companies in the private sector. So far 42 general insurance companies and 17 life

insurance companies have commenced business. No foreign company except American Life

Insurance Company (now MetLife ALICO) has been allowed to operate in Bangladesh.

ALICO is the only foreign insurance company operating in Bangladesh since

independence and transacting life insurance business throughout the country and enjoying

the largest pie of life market.

The British made Insurance Act, 1938 and the rules made there-under were being administered

until 2010 through Department of Insurance (D.O.I) under Ministry of Commerce. The

D.O.I as the regulatory and supervisory authority of the insurance industry was headed

by the Chief Controller of Insurance (a rank equivalent to additional secretary of the

Government Civil Service). Now the new regulatory body is functioning since early 2011 and

working hard to go ahead with the reforms.

REFORM EFFORTS DURING 1995-2010

Back in 1995 M/S Watson Wyatt of Singapore in association with Janet Tay Consultants

submitted a report to the Government of the peoples republic of Bangladesh regarding changes

to be made in the insurance regulations. As many as twenty specific recommendations were

made in respect to Insurance legislation and deregulatory aspects.

It took about four years to take a decision as to whether we move forward for implementations

of those recommendations. Subsequently the Government of Bangladesh decided to form a

committee to study the report for comments and views. The committee made a detailed study

of the Consultants recommendations and submitted its report to G.O.B. in March 2000. This

committee also made several recommendations in areas of regulatory frame work for

strengthening the insurance sector.

There was another report on “Insurance Industry & Pension & Provident Fund Reforms”. The

report was submitted to G.O.B. in August 1999 by M/S SEA Consultants Inc., of the

Philippines.

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In July 2001 the G.O.B. formed a specialist committee headed by the then Chief Controller of

Insurance. Subsequently as per decision of the Ministry of Commerce, World bank appointed

Mr. Craig Thorbon in mid 2003 to submit a report for reforms of Insurance Laws in

Bangladesh. Mr. Thorbon submitted his report in December 2004. On the basis of the report of

Mr. Craig Thorbon, a new Insurance law reform committee was formed in January 2005. This

committee worked very hard and submitted three draft Acts titled as (a) Insurance Act 2005,

(b) Insurance Regulatory Authority Act 2005 (c) The Takaful Act 2005 in December 2005. In

2008 G.O.B by promulgating two ordinance (46 & 47) viz Insurance Regulatory Ordinance

2008 & Insurance Ordinance 2008. Later on the elected government did not pass those

ordinances and therefore was of no effect.

After lengthy process of review, discussion and bureaucratic process two Acts viz Insurance

Act 2010 & Insurance Development & Regulatory Authority Act 2010 were passed by the

Parliament in March 2010. So, whatever reform had been suggested by different committees

and consultants had been given a shape, but still being debated as we need more reforms in the

right directions, to move further. It may be noted that the draft Takaful Act 2005 was not

considered for enactment by the Caretaker Government and has been kept in abeyance so far.

BIRTH OF INSURANCE ACT 2010

Finally, a new Insurance Act was passed in March 2010 which contains several special features

as follows:

Salient Features of the Insurance Act, 2010

Insurance business in rural or social sector:

The Act deals with the insurance business in rural or social sector and makes it mandatory

for an insurer to undertake such percentage of its business in the rural or social sector as

specified by the authority.

Restriction on Window Products:

The Act requires that non-life insurer shall not be allowed to transact both takaful ( insurance

based on shariah) and conventional insurance.

Investment of assets:

Certain restrictions were imposed by the Insurance Act, 1938 and the rules there under on

investment of assets by the insurer. The aforesaid schedule has been deleted from the draft

Insurance Act. This matter has been left with the Authority to do it by framing rules.

Subsidiary Companies:

There was no provision under the previous laws to set up any subsidiary company. However,

the Insurance Act 2010 has allowed an insurer to set up one or more subsidiary companies,

subject to limitations imposed by the authority.

Solvency margin requirement:

There was no solvency margin requirement under the Insurance Act, 1938, though it is

currently practiced world wide with variations. It is usually a -risk based capital assessment of

a company's “insurance risk.” The international standard for assessing solvency standard is still

under trial. The Insurance Act 2010 has been drafted to meet the response to the changing

method of calculation of solvency in future. It has been left with the IDRA to do it.

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Appointed actuary:

The Insurance Act 2010 requires that every life insurer to appoint an actuary with the approval

of the regulatory authority. The qualifications and responsibilities would be determined by the

IDRA through regulation.

Role of IDRA:

IDRA as the new regulatory body started its journey on 26-01-2011 with the vision to establish

the insurance industry as the premier financial service provider in the country. Since inception

IDRA has confronted with many challenges namely excess commission, tariff violation,

business on credit, lack of transparency etc.

In order to bring discipline and stability in the industry 11 regulations/rules have been framed

e.g. Fund Management Regulations 2011, Fit and Proper Test of Person for Appointment of

Chief Executive Officer Regulations 2012, Fees for licensing of Branch and Office of Insurers

Regulations 2012, Fees for Registrations Rules 2012, Obligations of Insurers to Rural and

Social Sectors Regulations 2012, Central Rating Committee Regulation 2012, Dispute

Resolution Regulations 2012. Investment of Assets of Life Insurance Regulations 2012,

Investment of Assets of Non-Life Insurance Regulations 2012, Paid up Capital and

Shareholdings of an Insurer Regulations 2012, Reinsurance for Life Insurance Business

Regulation 2012, Statistics Regulations and Life Insurance Policy Holders Protection Fund

Regulations are in the pipeline.

FDI Opportunities:

With an aim to attract FDIs into the Bangladesh insurance market, the Bank and Financial

Division of the Ministry of Finance of Bangladesh Government has recently fixed the FDI

limit in Bangladesh’s insurance sector at 60% of the paid-up capital in any insurance company,

thereby giving the foreign investor a controlling stake in the local company. Under the existing

Insurance Act, the minimum paid-up capital for insurance companies in Bangladesh is BDT

300 million (US$ 3.8 million) and so the investment amount allowed for foreigners will be

BDT180 million.

In March, 2013 the government had issued a set of rules for facilitating investments by foreign

nationals as equity partners in insurance companies in Bangladesh. Prior to this, there were no

specific rules in relation to purchase or retention of shares of any of the country’s insurance

companies by foreign investors.

The government’s latest circular has come at a time when the IDRA had invited applications

for the setting up of new insurance companies. One foreign company US-based MetLife Alico

which has been operating a branch office in the country since 1952. Recently Taiyo Life

Insurance Company, one of Japan’s oldest life insurers, which has tied up with the Summit

Group of Bangladesh to start a life insurance company and India’s largest life insurer, the state-

run Life Insurance Corporation of India, had evinced interest in the Bangladesh insurance

market.

Currently, there are 60 private insurers operating in the country, 17 of which are life insurers.

Recently, the Insurance Development and Regulatory Authority have received 77 application

for the registration of new insurers as the deadline for submission of applications lapsed in mid

May. Among the applications, 71 are for life insurers and the remaining six are for non-life

insurers. Among the firms seeking registration are two foreign companies – Life Insurance

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Corporation of India jointly with the local Square Group, and Taiyo of Japan jointly with the

local Summit Group.

Each applicant had to deposit BDT 180 million (US$2.3 million) in a bank and pay a non-

refundable processing fee of BDT500,000. Under the country’s Insurance law, the paid-up

capital required of a life insurer is BDT300 million while that required of a non-life insurer is

BDT 400 million. Furthermore, 60% of the capital has to be collected from sponsors and the

remaining 40% from the public.

Insurance Industry-Bangladesh:

Insurance market in Bangladesh remains extremely competitive due to existence and operation

of a large number of companies, un-commensurate with the size of the market.

The country’s economy has deteriorated and this has affected the non-life insurance industry

significantly in the 4th

quarter of 2011 year and this trend continued in 2012. The IDRA’s

recent circulars, particularly withdrawing all special premium rates since august 2011 have

created strong reaction from the large clients. It has also created significant aversion from such

clients to buy new insurance and many of them are reviewing their position and are inclined to

go for minimum or limited insurance covers to keep their insurance costs down. As a result this

may negatively impact the growth of non-life insurance in Bangladesh.

The total premium income of private sector Life Insurance Companies rose from Tk 55,089.34

million in 2010 toTk 59,735.26 million in 2011.The annual growth rate of private sector life

insurance business was 8.43% in 2011. The total 1st year premium of private sector life

insurance business decreased from tk. 19,124.40 million in 2010 to Tk 17,703.40 million in

2011 and the renewal premium increased from Tk 33,306.67 million in 2010 to Tk 39,674.17

million in 2011. During 2012 life insurance markets growth rate declined farther and is likely

to remain stable during 2013. The causes for decrease of life premium of 1st year business

were due to revision/reduction agency commission schedule, high inflation and diverting

premium to NGOs. The renewal premium was increased because of the drive taken by the

individual life companies.

Concluding numerals:

Future expansion of Bangladesh non-life and life insurance market and increase of insurance

penetration in the county lies in tapping the hitherto untapped segments of the market which

has remained neglected so far. Conducting insurance business in the true spirit of

professionalism, bringing in modern management and sales techniques and new product

developments are keys to the future growth and progress of the industry.