Reform in insurance industry is overdue

The lack of corporate governance is mainly responsible for backwardness of the insurance sector. A comprehensive definition of corporate governance may be as follows:
"Corporate governance is the system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders, such as, shareholders, management, customers, suppliers, financiers, government and the community. Since corporate governance also provides the framework for attaining a company's objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure."
Thomas J. Atchison and Winston W. Hill in their book Management Today define an organization as follows:
"An assemblage of resources in a particular place (building) viz, men, money and materials that are arranged and sequenced through technology to achieve an intended output."
The set-up of a traditional insurance company in our country is not compatible with modern commercial organizations.
Insurance organizations are mainly service providers and one of its main functions is marketing of insurance products. Therefore, a hierarchical structure with central command will not be suitable. Decentralization in place of centralization, autonomy in place of control, flexibility in place of rigidity de-layering with reduced levels of middle management, a flat structure with larger span of control, external focus (customers and other stakeholders) in place of internal focus will be ideal for an insurance organization.
Too many committees to hold too many meetings at frequent intervals may disturb the normal working atmosphere in an insurance company. The board and its committees should deal with only policy matters leaving the day-to-day decision-making with the professionals.
Insurance is, basically, a service-oriented organization. Insurance products are intangible products. These products can't be touched, felt or their utility can't be judged immediately after purchase. Insurance products provide a promise for further benefit in the form of lump-sum payment on the happening of designated event in lieu of which insurance companies get periodical installment of premium from the clients for the period of contact while a tangible product when purchased can be touched, its benefits can be enjoyed immediately on purchase. In this case, after-sale service is not very important and duration of providing service to the clients is short lived.
According to John M. Rothwello, "goods are produced, services are performed." And the modern management guru peter F. Drucker says: "If we want to know what business is we have to start with its purpose. And its purpose must lie outside of the business itself … There is only one valid definition of business purpose - to create a customer… the customer is the foundation of a business and keeps it in existence."
Owners, managers, officers and others associated with insurance business should aim at creating customers - customers first and customers last.
RELATIONSHIP BETWEEN BANK AND INSURANCE: Bank and insurance are the two wings of the same bird which contribute greatly to the economic development of the country. Banks create risks by providing loans and advances for establishing industries and to conduct other businesses, opening of letter of credit (LC) for import financing, etc. and, on the other hand, insurance companies provide security against those risks. Their functions are complementary and not antagonistic.
Most of the non-life business is distributed through the banks. As a natural corollary, banks are in a position to help in reducing the procurement cost which is the root cause to increase the overhead cost of insurance business. IDRA through Bangladesh Bank may motivate the banks so that excess commission, in violation of insurance law, is not paid. Besides a circular was issued by Bangladesh Bank that while opening of LC insurance premium should also be realized and paid to the insurance companies through pay order/Bank draft etc. but at present this is not followed. This system should be revived immediately to avoid credit business.
There is another problem with the banks. They have introduced a system of enlistment with the respective banks just like the contractors enlist with various departments to become eligible to submit tenders. This is a bad system. Because, insurance companies are licensed by the government and therefore, one has got no right to infringe the scope of business of another. This practice should be discarded.
Of late, Bancassurance (Bank + assurance) has emerged as a powerful distribution channel in many European and Asian countries. Bancassurance refers to an insurance which is instituted to sell insurance products (both life and non-life) through a bank's distributional channels leading to a bank offering banking, insurance, lending and investment products to a consumer from the same premises. In another word, Bancassurance is selling of insurance as well as banking products through the same channel, most commonly through bank branches selling insurance.
Bancassurance is an agreement between a bank and an insurance company to sell life and general insurance products through the bank's distribution channel. Bancassurance is profitable for both -banks benefit by product diversification and increased not-interest earnings while this innovative modality enables insurance companies to increase their market penetration and premium turnover - a win-win situation for all.
Insurance company reduces reliance on traditional agency channel because banks have wider customer access through large branch networks. Procurement cost for the insurance will be much lower.
Bancassurance is a growing trend worldwide and its future prospect is very bright. United States of America, the largest life market in the world, is opening up to bancassurance. It has become a dominant model in a number of European Countries. Banks now control 40 per cent to 50 per cent percent life insurance market in Europe. European Bancassurance model has proved that by using bank tie-up, the distribution cost can be reduced to by 30 per cent to 50 per cent. Bancassurance is fast growing in the Middle-east, India, China, Malaysia and many other Asian countries. In India, it is estimated that average collection of insurance companies would rise by 50 per cent in five years fro now if the companies go via this model.
Although there is tremendous prospect for its development as an innovative distribution channel, Bancassurance is yet to take its root in Bangladesh. Fifty-six banks, including foreign banks, are now operating in the country and they have more than seven thousand branches. Insurance companies, both life and non-life, can utilize these vast network of branches for distribution of their products.
STATE SUPERVISION: In any country, insurance is a highly regulated sector. This is because of the fact that insurance deals with public money and the government is to see that this money is adequately protected against misuse, claim is duly paid and good return is ensured on investment of policy holders' fund. Besides, in a free market economy, there should be adequate legal framework to safeguard the interest of the stakeholders.
Bangladesh insurance sector is governed by Insurance Act 2010 which had replaced insurance Act 1938 and the supervisory authority is 'Insurance Development and Regulatory Authority' established by Insurance Development and Regulatory Authority Act 2010 which had replaced Department of insurance headed by chief controller of insurance.
The Insurance Development & Regulatory Authority (IDRA) started its function from January 26, 2011. From the very inception IDRA had to face an uphill task to enforce discipline in the market. During initial years, say 2012 and 2013, IDRA formed vigilance teams to inspect different branches of insurance companies and any violation detected was severely punished through enforcement of heavy monetary penalties, specially in the non-life sector and as a result so-called excess commission was reduced by at least 20 per cent to 30 per cent. IDRA did not continue this vigilance, creating a total chaos in the market.
The very name of the regulatory authority, i.e., Insurance Development & Regulatory Authority indicates that more emphasis should be given on 'development' and then to 'regulate.'
Section 15(i) b of IDRA Act, 2010 says, "to give encouragement in the development of insurance industry of Bangladesh, and to give advice to the government regarding matters for development of this industry.'
IDRA should take appropriate steps immediately to develop the industry. Many rules have yet to be framed. In the absence of new rules, old rules under Insurance Rules 1958 are being still followed which sometimes become conflicting.
IDRA Act 2010 has provided enough power and authority to the regulator to introduce and enforce appropriate reforms in the insurance industry. Stakeholders of the sector are waiting to see that IDRA acts in this regards to fulfill their expectation, the sooner the better. Insurance industry needs to be developed properly so as to play its due role in materialising Vision 2021.

The writer is Consultant, Meghna Insurance Company Limited.
abm.nurul.haq@gmail.com