Non-life insurers in Bangladesh will have to operate in a non-tariff regime sooner or later, and in order to do so, they will have to inculcate the practice of doing business at lower costs, says Mr M Shefaque Ahmed, Chairman of the Insurance Development and Regulatory Authority (IDRA).
Currently, non-life insurers operate in a market in which premium rates for all classes of business are determined by a committee. There is no incentive for the insurers to improve their business operations and reduce the cost of doing business in an effort to reduce the premium rates, Mr Ahmed says in an article in The Financial Express.
The IDRA has set a limit on insurers' management expenses, keeping a vigilant watch and taking various measures including holding frequent meetings with the chief executives of the companies in an effort to reduce cost.
While the actual management expenses of some of the companies are close to the regulatory limit, the same for many other companies exceed the limit by substantial margins. “The companies continued to maintain profitability apparently by repudiating claims,” he said.
“One of the reasons for high management expenses is payment of high commission rates as well as high operating expenses. Since the primary responsibility of the IDRA is to protect the interests of the policyholders, any effort undertaken by the insurers to earn profit by repudiating claims is seriously viewed by the IDRA.”
He notes that the claim ratio in Bangladesh is very low, an indication that policyholders in Bangladesh are being deprived of claim payouts in many cases.
He warned: “If insurers continue to incur management expenses higher than the regulatory limit, the IDRA will be constrained to take punitive action even if such action would require amendment of the existing laws and regulations. Laws are meaningless if such laws are not backed by punitive action for violation of those laws.”
He said that the IDRA had under the law instituted special audits of insurers because it “was very concerned at the very high level expenses of management and alarmingly low claim ratio”. The special audits were also necessary to investigate the extent of the non-reporting of premium income by insurers. He said that, the IDRA engaged a number of highly reputed audit firms, but unfortunately it had to abandon these supervisory functions for one reason or another.
Although Mr Ahmed did not mention it, there are reports that the Finance Ministry had intervened to suspend the special audit of a particular insurance company. This led to a halt to IRDA's plan at the end of last year for a special audit of 25 nonlife insurers.
Mr Ahmed said: “In order to make the insurance sector a vibrant one, it is essential for all stakeholders, including the government and the insurers, to extend full support and cooperation to the IDRA so that it can perform its duties and responsibilities as per provisions of the law.”