Insurance industry in Bangladesh: A rater's perspective
Thursday, 9 October 2008
Khaled Mahmud Raihan
INSURANCE industry in Bangladesh passed through a century-long history of evolution, and is still struggling to achieve maturity. After liberation, as part of the nationalization process, the industry was nationalized by a Presidential Order. Subsequently, in the process of denationalization, private sector companies were allowed to operate in the industry side by side with two state-owned corporations. Consequent to that, a good number of insurance companies emerged in a small economy which resulted in tough and unhealthy competition. Underhand transaction on commission appeared as "open secret" in general insurance business.
The Controller of Insurance, even being the regulatory authority, failed to unveil sophisticated control mechanism to bring the industry into a good shape. At a certain stage, the agency commission system was abolished to stop underhand dealing between the agent and the policy buyer. The move, however, failed to eradicate the unethical practices and thus resulted in the reintroduction of commission system in the sector.
The life insurance companies also follow aggressive marketing strategy for business procurement, many of which ended in high policy lapse. It is the general belief of common people that insurance companies are not sincere in making payment and resort to many unsubstantial excuses for declining claims which are not taken care of, while opening policy. Due to the negative attitude, the penetration rate of the industry is still very low (only 0.62 per cent of GDP) even having immense prospects. In order to make the sector vibrant and operationally sound, the government has taken a number of steps and some are in process with the main objective of taming this wild horse.
Credit rating :Credit rating of insurance is forming an opinion through the assessment of an insurance company's capability to meet its contractual obligations to policyholders and other creditors in a timely manner after a thorough evaluation of its strengths and weaknesses. The basic philosophy behind credit rating of insurance arises from the fact that the insurance companies are undertaking huge risk against a small amount of premium. The risks are so enormous that the entire resources of the company may not be sufficient to handle a single claim in case of general insurance. In view of this, the clients looking for insurance protection should ideally look for an insurance company's ability to pay claim while taking insurance policies. Rating is basically an independent, impartial, professional and best judged opinion regarding the ability and willingness of the insurer to meet the policyholders' and outsiders' obligation when due.
Mandatory credit rating: The Department of Insurance made several attempts, as part of the control mechanism, to restore business environment in the industry. But few endeavours yielded fruitful results. However, the circular (No: 21/21/98-376 dated March 12, 2007) of the Chief Controller of Insurance regarding mandatory credit rating for the insurance companies is considered to be the most effective breakthrough in the sector. Under the above directive, all general insurance companies were instructed to get credit rating with effect from 2007 with mandatory surveillance at the end of each year. The life insurance companies were directed to have the surveillance rating biannually. However, the two state-owned corporations are still out of the rating net. Shadharan Bima Corporation (SBC), the solitary re-insurer in Bangladesh, is to accept at least 50 per cent of the re-insurable amount of policies of all the general insurance companies by virtue of existing Insurance Act. Thus, the claim paying ability of SBC is very important for all the general insurance companies. On the other hand, Jiban Bima Corporation (JBC) directly participates in policy selling, side by side with its reinsurance operation. Considering their immense role and responsibilities towards the development of the sector, SBC and JBC should also come under the framework of rating.
Although the rating of insurance companies is a new phenomenon in the related industry in Bangladesh, it received a strong response from the market participants including the insurers themselves. Many of the good rated insurance companies, particularly upper investment grade entities, started using the rating as a 'marketing tool'. They are also trying to improve their position based on report of the rating agencies. It has also been observed that the non-investment grade rated companies are asking for the surveillance rating to incorporate the latest developments in the surveillance report with the expectation of improvement in rating. The banks are now more interested in the rating report, representing claim-paying ability of the companies before assigning policies instead of bargaining for higher discount in premium. The above changes are expected to make positive transformation in the industry.
Out of 62 companies, 51 companies have so far been rated constituting 82.26 per cent of the total industry. Of the above, 90.91 per cent are in general insurance industry and 61.11 per cent are in life insurance industry. Credit Rating Information and Services Limited (CRISL), the premier credit rating company of Bangladesh, rated 35 insurance companies (including 9 life insurances) which constitutes 68.63 per cent of the total rated entities. Again, among the rated companies, CRISL awarded rating of 65 per cent general insurances and 81.81 per cent life insurances. Over and above, 66.67 per cent companies achieved investment grade ('BBB-' and above) while the rest 33.33 per cent obtained non-investment grade ('BB+' and below). While analyzing the industry-wise strength of rating, it was found that 81.81 per cent life insurance and 62.60 per cent general insurance companies or units achieved investment grade rating. Rating distribution of general insurance companies revealed that 35 per cent of them were in 'BBB' category, followed by 32.50 per cent in 'BB' category, 22.50 per cent in 'A' category and 5 per cent each in 'AA' and 'B' category. On the other hand, 54.55 per cent of the life insurers achieved 'A', 9.09 per cent 'AA' and 18.18 per cent each in 'BBB' and 'BB' category.
Recent Development: The insurance industry is now at the final stage of transition. It has been decided to replace the age-old insurance laws with Insurance Regulatory Authority (IRA) Ordinance 2008 and Insurance Ordinance (IO) 2008. The Department of Insurance will be abolished by a five-member Insurance Regulatory Authority headed by the Chairman not below the rank of a Secretary to the government of Bangladesh. For further enhancing the solvency position, the paid-up capital for general and life insurance companies have been raised to TK. 400 million and TK. 300 million respectively. The number of directors in the company has also been reduced to 15 from 20 with the participation from the policyholder directors. The new law also introduced mandatory solvency margin for the insurance companies. Besides, the insurance companies will be required to ensure international accounting standard, separate Islamic insurance from conventional ones and put a limit on commission expenses. Moreover, the life insurance companies will be required to make the valuation of liabilities on yearly basis to reveal the real strength of the company. The law has also allowed foreign investment in general insurance sector. With the promulgation of the ordinances, the insurance industry will be under the Ministry of Finance, in place of existing Ministry of Commerce.
Evaluation framework: The credit rating reports of CRISL based on financials up to December 31, 2006 have been taken into consideration as sample for the framework of evaluation. As said earlier, CRISL rated 26 general and 9 life insurance companies which respectively constitute 59.09 per cent of the general insurance industry and 50 per cent of the life insurance industry. Out of the above, general insurance companies, 10 are first generation, five are second generation and the rest 11 are third generation companies. On the other hand, out of the life insurance companies, only one is a second generation company and the rest are third generation companies. The appraisal specifically covers the areas of corporate governance, business profile, risk management, financial & operating performance, solvency and liquidity.
Corporate governance: Corporate governance is the set of processes, customs, policies, laws and regulations affecting the way a corporation is directed, administered or controlled to perform efficiently and generates long-term economic value for its shareholders while respecting the interest of its stakeholders and society as a whole. The specific areas covered are transparency in disclosure of relevant reliable financial and operational information, information on ownership and control, information on internal processing of management etc. Unlike banks and other financial institutions, the corporate governance in insurance industry is at very early stage of development.
The specific areas, relating to corporate governance, are delineated below:
Ownership structure: The ownership structure of the industry as a whole is concentrated towards a small number of shareholders. The ownership of 34.61 per cent general insurance companies was found highly concentrated followed by 26.92 per cent moderately concentrated, 30.76 per cent moderately diversified and rest well diversified. On the other hand, ownership structure of 55.56 per cent life insurers was found concentrated, followed by 22.22 per cent well diversified and the rest are is equally distributed to highly concentrated and moderately diversified zone.
Out of total 35 samples in the industry, 22 companies had gone for public offerings; yet the same couldn't make any significant breakthrough in the formation of the Board. In most of the companies, the sponsor shareholders dominate the board. Under existing law, the life insurance companies are required to have sponsor directors, shareholder directors and policyholder directors having equal participation in the Board to protect the interest of different stakeholders. However, none of the companies either comply with the law or the sprit of the law. Most of the companies don't have any policyholder directors on the board. A couple of companies has policyholder directors where the sponsors become eligible for the same through purchasing policies from the companies. In some cases, it has also been observed that sponsors become the shareholder directors by virtue of having shares from the secondary market.
Board and its sub-committees have substantial involvement in operational affairs of the company in addition to formulating policy issues and strategic aspects. The board and its committees of 26.47 per cent companies have high involvement, 58.82 per cent have considerable involvement and rest 14.71 per cent have little involvement in the operational affairs. This situation relating to involvement of the board and its committees results in poor delegation of power to management. There are companies where even a claim of taka five thousand needs to be approved by the Board or its Claim Committee. In some instances, petty expenditures can't be endorsed by the executives. The delay in decision making is a serious impediment to the growth of the organization. The inherent gap between the entrepreneurs and the professionals is the main obstacle to the growth of the insurance companies.
The author is a Senior Financial Analyst and the Head of Insurance Sector of CRISL.
The author may be contacted at raihan@crislbd.org
INSURANCE industry in Bangladesh passed through a century-long history of evolution, and is still struggling to achieve maturity. After liberation, as part of the nationalization process, the industry was nationalized by a Presidential Order. Subsequently, in the process of denationalization, private sector companies were allowed to operate in the industry side by side with two state-owned corporations. Consequent to that, a good number of insurance companies emerged in a small economy which resulted in tough and unhealthy competition. Underhand transaction on commission appeared as "open secret" in general insurance business.
The Controller of Insurance, even being the regulatory authority, failed to unveil sophisticated control mechanism to bring the industry into a good shape. At a certain stage, the agency commission system was abolished to stop underhand dealing between the agent and the policy buyer. The move, however, failed to eradicate the unethical practices and thus resulted in the reintroduction of commission system in the sector.
The life insurance companies also follow aggressive marketing strategy for business procurement, many of which ended in high policy lapse. It is the general belief of common people that insurance companies are not sincere in making payment and resort to many unsubstantial excuses for declining claims which are not taken care of, while opening policy. Due to the negative attitude, the penetration rate of the industry is still very low (only 0.62 per cent of GDP) even having immense prospects. In order to make the sector vibrant and operationally sound, the government has taken a number of steps and some are in process with the main objective of taming this wild horse.
Credit rating :Credit rating of insurance is forming an opinion through the assessment of an insurance company's capability to meet its contractual obligations to policyholders and other creditors in a timely manner after a thorough evaluation of its strengths and weaknesses. The basic philosophy behind credit rating of insurance arises from the fact that the insurance companies are undertaking huge risk against a small amount of premium. The risks are so enormous that the entire resources of the company may not be sufficient to handle a single claim in case of general insurance. In view of this, the clients looking for insurance protection should ideally look for an insurance company's ability to pay claim while taking insurance policies. Rating is basically an independent, impartial, professional and best judged opinion regarding the ability and willingness of the insurer to meet the policyholders' and outsiders' obligation when due.
Mandatory credit rating: The Department of Insurance made several attempts, as part of the control mechanism, to restore business environment in the industry. But few endeavours yielded fruitful results. However, the circular (No: 21/21/98-376 dated March 12, 2007) of the Chief Controller of Insurance regarding mandatory credit rating for the insurance companies is considered to be the most effective breakthrough in the sector. Under the above directive, all general insurance companies were instructed to get credit rating with effect from 2007 with mandatory surveillance at the end of each year. The life insurance companies were directed to have the surveillance rating biannually. However, the two state-owned corporations are still out of the rating net. Shadharan Bima Corporation (SBC), the solitary re-insurer in Bangladesh, is to accept at least 50 per cent of the re-insurable amount of policies of all the general insurance companies by virtue of existing Insurance Act. Thus, the claim paying ability of SBC is very important for all the general insurance companies. On the other hand, Jiban Bima Corporation (JBC) directly participates in policy selling, side by side with its reinsurance operation. Considering their immense role and responsibilities towards the development of the sector, SBC and JBC should also come under the framework of rating.
Although the rating of insurance companies is a new phenomenon in the related industry in Bangladesh, it received a strong response from the market participants including the insurers themselves. Many of the good rated insurance companies, particularly upper investment grade entities, started using the rating as a 'marketing tool'. They are also trying to improve their position based on report of the rating agencies. It has also been observed that the non-investment grade rated companies are asking for the surveillance rating to incorporate the latest developments in the surveillance report with the expectation of improvement in rating. The banks are now more interested in the rating report, representing claim-paying ability of the companies before assigning policies instead of bargaining for higher discount in premium. The above changes are expected to make positive transformation in the industry.
Out of 62 companies, 51 companies have so far been rated constituting 82.26 per cent of the total industry. Of the above, 90.91 per cent are in general insurance industry and 61.11 per cent are in life insurance industry. Credit Rating Information and Services Limited (CRISL), the premier credit rating company of Bangladesh, rated 35 insurance companies (including 9 life insurances) which constitutes 68.63 per cent of the total rated entities. Again, among the rated companies, CRISL awarded rating of 65 per cent general insurances and 81.81 per cent life insurances. Over and above, 66.67 per cent companies achieved investment grade ('BBB-' and above) while the rest 33.33 per cent obtained non-investment grade ('BB+' and below). While analyzing the industry-wise strength of rating, it was found that 81.81 per cent life insurance and 62.60 per cent general insurance companies or units achieved investment grade rating. Rating distribution of general insurance companies revealed that 35 per cent of them were in 'BBB' category, followed by 32.50 per cent in 'BB' category, 22.50 per cent in 'A' category and 5 per cent each in 'AA' and 'B' category. On the other hand, 54.55 per cent of the life insurers achieved 'A', 9.09 per cent 'AA' and 18.18 per cent each in 'BBB' and 'BB' category.
Recent Development: The insurance industry is now at the final stage of transition. It has been decided to replace the age-old insurance laws with Insurance Regulatory Authority (IRA) Ordinance 2008 and Insurance Ordinance (IO) 2008. The Department of Insurance will be abolished by a five-member Insurance Regulatory Authority headed by the Chairman not below the rank of a Secretary to the government of Bangladesh. For further enhancing the solvency position, the paid-up capital for general and life insurance companies have been raised to TK. 400 million and TK. 300 million respectively. The number of directors in the company has also been reduced to 15 from 20 with the participation from the policyholder directors. The new law also introduced mandatory solvency margin for the insurance companies. Besides, the insurance companies will be required to ensure international accounting standard, separate Islamic insurance from conventional ones and put a limit on commission expenses. Moreover, the life insurance companies will be required to make the valuation of liabilities on yearly basis to reveal the real strength of the company. The law has also allowed foreign investment in general insurance sector. With the promulgation of the ordinances, the insurance industry will be under the Ministry of Finance, in place of existing Ministry of Commerce.
Evaluation framework: The credit rating reports of CRISL based on financials up to December 31, 2006 have been taken into consideration as sample for the framework of evaluation. As said earlier, CRISL rated 26 general and 9 life insurance companies which respectively constitute 59.09 per cent of the general insurance industry and 50 per cent of the life insurance industry. Out of the above, general insurance companies, 10 are first generation, five are second generation and the rest 11 are third generation companies. On the other hand, out of the life insurance companies, only one is a second generation company and the rest are third generation companies. The appraisal specifically covers the areas of corporate governance, business profile, risk management, financial & operating performance, solvency and liquidity.
Corporate governance: Corporate governance is the set of processes, customs, policies, laws and regulations affecting the way a corporation is directed, administered or controlled to perform efficiently and generates long-term economic value for its shareholders while respecting the interest of its stakeholders and society as a whole. The specific areas covered are transparency in disclosure of relevant reliable financial and operational information, information on ownership and control, information on internal processing of management etc. Unlike banks and other financial institutions, the corporate governance in insurance industry is at very early stage of development.
The specific areas, relating to corporate governance, are delineated below:
Ownership structure: The ownership structure of the industry as a whole is concentrated towards a small number of shareholders. The ownership of 34.61 per cent general insurance companies was found highly concentrated followed by 26.92 per cent moderately concentrated, 30.76 per cent moderately diversified and rest well diversified. On the other hand, ownership structure of 55.56 per cent life insurers was found concentrated, followed by 22.22 per cent well diversified and the rest are is equally distributed to highly concentrated and moderately diversified zone.
Out of total 35 samples in the industry, 22 companies had gone for public offerings; yet the same couldn't make any significant breakthrough in the formation of the Board. In most of the companies, the sponsor shareholders dominate the board. Under existing law, the life insurance companies are required to have sponsor directors, shareholder directors and policyholder directors having equal participation in the Board to protect the interest of different stakeholders. However, none of the companies either comply with the law or the sprit of the law. Most of the companies don't have any policyholder directors on the board. A couple of companies has policyholder directors where the sponsors become eligible for the same through purchasing policies from the companies. In some cases, it has also been observed that sponsors become the shareholder directors by virtue of having shares from the secondary market.
Board and its sub-committees have substantial involvement in operational affairs of the company in addition to formulating policy issues and strategic aspects. The board and its committees of 26.47 per cent companies have high involvement, 58.82 per cent have considerable involvement and rest 14.71 per cent have little involvement in the operational affairs. This situation relating to involvement of the board and its committees results in poor delegation of power to management. There are companies where even a claim of taka five thousand needs to be approved by the Board or its Claim Committee. In some instances, petty expenditures can't be endorsed by the executives. The delay in decision making is a serious impediment to the growth of the organization. The inherent gap between the entrepreneurs and the professionals is the main obstacle to the growth of the insurance companies.
The author is a Senior Financial Analyst and the Head of Insurance Sector of CRISL.
The author may be contacted at raihan@crislbd.org