Local, global firms decry abolition of spl insurance premium tariffs

Mushir Ahmed The insurance regulator's decision to scrap special premium tariffs for companies has drawn sharp reactions with firms saying the move will fuel inflation, pass an extra Tk20 billion cost to consumers and deal a heavy blow to their profitability. In a letter Swiss food giant Nestle has said the move will force it to raise prices of baby food, top drug maker Novartis said it could lead to spike in medicine prices, and local steel makers said cost of the rod will climb significantly. And the country's 4,500 garment makers said their shrinking profitablity amid a double-dip recession fear in its key markets would face a knock-on effect due to the withdrawal and a subsequent rate hike of the marine and fire insurance coverage. The Insurance Development and Regulatory Authority (IDRA) has insisted it took the move to boost non-life premium income and create a level playing field in the crowded market where big insurers undercut their small rivals by offering deep commisson. In the past, special discount premium rates were granted by legally constituted Central Rating Committee, now a wing of the IDRA, based on each client's insurance portfolios and on the their loss experience. A loss experience is the claim record of a client. A company which has a low level of loss experience can seek a lower rate of premium. But the newly constituted IDRA has declared the special discounts null and void in August this year in an effort to restore discipline in the tariff regime and boost insurers annual preimum income. But companies said the move means they now have to pay three times more than their previous premiums. The BSRM, the country's leading steel maker, alone calculated that its premium cost would jump to Tk180 million from around Tk 60 million last year. Nestle said despite enjoying a 5.25 per cent loss ratio and "favourable experience' in premium payment, it has to count an extra 33.63 per cent hike in insurance cost thanks to the IDRA move. "This will adversely impact our overall business operation as the cost of doing business will insrease significantly and may result in price increase of consumer goods like baby food, milk and milk based products," the company said in a letter to its insurer. Global pharmaceutical giant Novartis said its comeptiveness in the local market will erode as it strictly follows quality regulations to produce drugs whereas its Bangladeshi competitors are often not fully compliant. "A further insrease in our insurance cost will lead us to an increase in medicine cost, which is not possible to pass to the consumers at this moment. This will have a negative impact on our profitability," said a Novartis letter. According to the IDRA, annual premium in the non-life insurance industry would rise to Tk35 billion in two years from Tk 15 billion in 2010 owing to the regulator's discount abolition. "Eventually what'll happen is that the companies like BSRM, Abul Khaer, PHP, Meghna or food giant like Nestle and City will raise their product prices, fuelling inflation, which is already 50-month high," said a chief executive of a leading non-life insurer. "We understand the IDRA took the move to restore order. But instead of bringing discipline in the premium regime, it has created a topsy-turvy situation in the insurance market." "Our clients, including some of the top food, medicine, cement and steel firms have bluntly told us that IDRA decision would jolt their business hard and could cut their profit margins significantly," he said. Experts have agreed the IDRA's decision would be a "boon" for the small insurers in coming months, but in the long term it would force some of their clients, especially big corporate houses, to cut back on their insurance coverage. "Several firms have already told us that they don't want full packages anymore. They want half or fragmented package for their fire and marine deals," said another official. "Some of them now want to purchase insurance on selective basis covering only exposed properties, which is not a good sign for the future health of the industry. Some seek insurance coverage for limited perils," he said. During a seminar on Tuesday, IDRA chairman Shefaq Ahmed rejected the notion that abolition of discount would be detrimental to the financial health of the local businesses or the non-life insurance industry. Ahmed, an actuary and an ex-chief executive of a private life insurer, said the IDRA's decision to scrap the discount facilities would only affect some "selected" clients, but could more than double premium incomes for the industry by 2013. The stoppage of discounts could reduce premium rates, which is already too high in Bangladesh, and woo more people to come under insurance coverage, he said. He, however, addeed that the IDRA is open to a review of its decision. Meanwhile, the garment manufacturers have demanded withdrawal of the insurance regulator's recent decision to hike the rate of marine and fire insurance coverage, saying that it will cut competitiveness of the sector in the global arena. They also expressed their concern over scrapping the discount facilities as it would "seriously affect" the RMG sector. Bangladesh Garment Manufacturers and Exporters Association (BGMEA) in a statement issued Wednesday said the decision came at a time when the industry has been passing through a tough time due to a number of barriers, including volatile global cotton market and power and gas shortages. It said the country's highest foreign currency earning sector will lose competitiveness in global stage if the Insurance Development and Regulatory Authority (IDRA) scrap 10 per cent discount facility which the apparel makers have been enjoying in terms of export and import. "The decision is completely against the readymade garment industry and it was made without holding discussions with the apparel producers," it stated. The BGMEA leaders also demanded scrapping of the decisions for the development of the labour-intensive sector where more than three million people are directly involved. The IDRA took the move to boost non-life premium income and create a level playing field in a crowded market.