A number of life insurers made higher management expenses in 2017 implying that their financial strength was on the wane, in terms of profitability and claim-settlement.
Management expense is the cost which is borne from premium incomes for different heads and crossing the limits here would make the companies insolvent at policy maturity.
Such excess expenses erode profits and shrink the size of bonuses for the policyholders. So, policyholders may not find the benefits or bonuses of the policies attractive. This may lead to an overall business loss, which impacts shareholders' confidence.
Such a scenario of the country's life firms was observed at a closed-door meeting with Chief Executive Officers (CEOs) held recently at the office of the insurance regulator -- IDRA.
Many experts, however, believe that if the insurers continue to make such higher management expense, the long-term financial viability of the firms will be at stake.
They also take the view that there is need for imposing penalties like neighbouring India who violate the limit of management expenses.
In the meantime, state-owned Jiban Bima Corporation (JBC) overspent by nearly 13.6 per cent than its allowable limit in management expenses, followed by Fareast Islami 7.32 per cent, Sandhani Life nearly 4.0 per cent, Sunflower about 9.0 per cent, Sunlife around 6.0 per cent, and Padma Islami 28.80 per cent.
On the other hand, there are few companies that had spent lower than the allowable expenses.
These are overall expenses, not first year expenses for procurement of business, as first year expenses for new companies are usually over 97 per cent.
When contacted, CEOs at top life insurers who crossed the ceiling set for the year 2017, some of them declined to make comment on the issue.
On the other hand, some argued that there is need for revision of the guidelines on management expenses.
AKM Shariful Islam, managing director at privately-owned Sunlife, told the FE that their earnings remained lower than their average fixed cost.
If there is significant rise in the business, overall expenses usually become low, he said, adding that the regulator asked them to reduce the same for the survival of the companies.
However, management expenses of 32 life firms in excess of the limit stood at over Tk 1.0 billion in 2017.
Currently, there are no rules on management expenses but the insurance regulator has been following rules 1958.
The limits depend on the age of an insurance company, its business in force calculated in accordance with the sum assured and the term of the products sold.
For example, for the insurers that have been doing business for long and for a regular life insurance policy with a premium paying term of more than 12 years, the insurer can deduct up to 90 per cent of premium as expenses in the first year.
The insurance companies that came into operation recently could spend up to 97 per cent of their first-year earnings.
On the other hand, IDRA officials said some cases relating to such excess management expenses remain pending with the anti-graft body -- Anti-Corruption Commission.
jasimharoon@yahoo.com