Insurance sector needs streamlining

Shamsul Huq ZahidbrCountry's insurance companies, reportedly, are engaged in an unhealthy competition to grab business. brAccording to a newspaper report, the general insurance companies in the private sector, numbering 43, claim to have nearly 46,000 insurance agents. But, in reality, most of them exist only on paper. Their names are being used only for the purpose of securing business. brAn importer prior to the opening of a letter of credit with a bank has to take an insurance policy against the goods to be imported by him or her. Usually the bank official concerned refers the importer to a general insurance company known to him. The importer then haggles over the rate of commission with the insurance company. Rules concerned permit a maximum of 20 per cent commission in case of marine policies and 25 per cent in cases of fire, motor vehicles and miscellaneous policies. But the insurers offer commission up to 60 per cent in some cases to the clients. brInterestingly, insurance agents, not the clients, under law, are entitled to receive any commission offered by the insurance companies against policies. But with a view to giving their misdeeds a legal coverage, a section of insurance companies, allegedly, prepare the lists of fake insurance agents and submit the same to the office of the controller of insurance from time to time. brThe lawfully allowed commission is shown as disbursed among the insurance agents and the amount in excess as 'management expenditure' in the financial statements of the insurance companies involved in such irregular practices. brIt is not that the clients are the only beneficiaries. A section of bank officials handling external trade transactions, allegedly, do have prior arrangements with certain insurance companies that guarantee some financial benefits for them. New insurance companies are found to be more prone to irregularities in commission payment which deprive the government of sizeable revenue earning every year. What is worse is that the unholy practice debars thousands of educated young men from earning their livelihoods by working as insurance agents. brHowever, the unwanted development is the natural outcome of a wrong decision taken by the last Awami League government, which allowed too many insurance companies to compete in a rather small market. Allegations have it that party as well as personal fund raising rather than market demand prompted the AL government to take the decision. The same was true in the case of granting permission a large number of commercial banks at the fag end of the AL rule. brIn the year 2005, the total premium income of the general insurance companies stood at Tk.8.07 billion. The share of the state-owned Sadharan Bima Corporation (SBC) in that earning was only 11 per cent and that of the private sector insurance companies was 89 per cent. In the battle for business, the SBC has been gradually giving in to the private sector insurance companies. However, the old and well-established private sector insurers have been taking away the big chunk of the business, leading to adoption of unethical business practices by the newcomers in the sector. But one cannot take it for granted that the first and second generation insurance companies are not indulging in irregular and unethical business practices. Actually, the field is wide open for all insurers to be involved in malpractices in the absence of an effective regulatory body. brThe office of the controller of insurance companies has been a bureaucratic outfit manned by persons lacking sufficient knowledge about the industry. The ministry of commerce actually has until recently considered the office of the controller a redundant one. For many years, a joint secretary in the ministry of commerce used to work concurrently as the controller of insurance. Being a part-timer, the official concerned took his responsibilities casually and came to the controller office once or twice in a week. brFollowing media reports on the state of affairs in the insurance sector, the situation of late has improved a bit. More improvement is expected following promulgation of ordinances relating to a number of new insurance laws. One law in particular does put emphasis on the strengthening of the office of the controller of insurance. brThere is no denying that the presence of so many insurance companies has created a situation where the companies for the sake of their survival might try unethical or irregular business practices. So, it is of utmost importance to put in place an effective regulator, manned by officials having the requisite knowledge and expertise in insurance business. brWhile meeting the need for making the office of the controller of insurance as an effective regulatory entity, the government does need to look into another serious issue-- the existence of a large number of insurance companies. One may argue that in a market where rule of the game is competition, inefficient ones would be automatically eliminated. But it would be better to avoid such elimination since lots of people have their investment in the stocks of these companies and many would lose their jobs. Merger and acquisition remains to the best way of overcoming the problems in the sector as far as overcapacity is concerned. The sector insiders do know it well that a good number companies are strong candidates for merger with big and strong entities in the sector. The central bank has already made available a guideline for such a process. So, anyone willing to follow the process should not face any problem to complete it. brHowever, most Bangladesh entrepreneurs have the propensity to hold on to the individual character of his or her enterprise abhor sell off. Besides, they are not familiar with the practice of merger and acquisition, which is rampant in the developed and emerging markets. But if the regulator for the sector turns out to be tough and enforces rules and regulations properly, some smaller companies would start thinking loudly about merger with stronger insurance entities. Once the regulator or any other government entity goes for stopping unlawful commission payment to clients or to the bankers, survival of many insurance companies might be at stake.