The claim settlement ratio of life insurance companies in Bangladesh plunged to its lowest level at least in a decade in 2021 as their capacity to pay out has been reduced by bad investment, excessive costs and business slowdown caused by the coronavirus pandemic. 

In 2021, the claim settlement fell to 68 per cent from 88 per cent the previous year, according to the Financial Stability Report of the Bangladesh Bank for 2021.

The claim settlement ratio, often considered by customers as an indicator of an insurer's reliability to pay out their claims, is the percentage of claims that insurers settle in a financial year out of the total claims filed by the policyholders.

Prof Md Main Uddin, a former chairman of the department of banking and insurance at the University of Dhaka, expressed his surprise at the sharp drop in the claim settlement ratio.

"The main reason for the sharp decline in claim settlements is the low accountability of companies. The insurers did not settle the claims even after policies had matured."

"This tendency creates a negative perception among general people about the insurance companies."

Industry insiders often refer to claim settlement as a life insurance  company's moment of truth. It is one of the most critical services an  insurance provider is obligated to fulfill for its customer, according to an article in Forbes magazine.

So, the steep drop in the settlement ratio will not bode well for an industry where the life insurance penetration, measured as the ratio of gross written premium to GDP, was 0.5 per cent last year, down from 0.94 per cent in 2010, according to data from the Insurance Development and Regulatory Authority (IDRA).

The claim settlement ratio was around 83 per cent in 2019 and 78 per cent in 2013.

In India, the settlement-to-claim ratio in the country's most of the life insurers was in the range of 98.3 per cent to 99.3 per cent in 2020-21 while only one company's ratio stood at less than 90 per cent, according to media reports.

The global standard for claim settlements is 97-98 per cent.

"Many life insurance companies are deceiving people and the rural people are the main victim," said Ghulam Rahman, president of the Consumers Association of Bangladesh (CAB).

"Some influential people took control of the companies and they misused and embezzled life funds. In recent times, some of the cases were detected too."

For example, the auditor of Fareast Islami Life Insurance found that the insurer allowed its former chairman and directors to commit serial financial crimes and siphon off policyholders' funds worth more than Tk 2,100 crore between 2010 and 2020.

A number of directors of Prime Islami Life Insurance also siphoned off more than Tk 300 crore, according to its auditor.

Rahman, a former chairman of the Anti-Corruption Commission, said one of his relatives also struggled to get back his fund.

Many companies spent more to run their operations than the allowable expenses, so they could not settle claims, said Jalalul Azim, managing director of Pragati Life Insurance.

Last year, 17 life insurers spent Tk 123 crore in excess of their allowable costs, IDRA data showed.

"Bad investment of some companies has reduced their capacity to pay back clients. So, the claim settlement ratio has decreased abruptly," Azim said.

Tahmina Akhter, a homemaker in Chandpur, bought a life insurance policy. The tenure was 10 years and it matured in November last year.

She submitted the claim with the insurer but it was dilly-dallying and was not making the payment.

"I had to knock on the insurer's door for six months to get the fund," Tahmina said. She received the proceeds of the policy with the help of an influential relative.

A senior official of a life insurer said that two or three big companies that are in bad shape financially do not settle claims for their lower capacity.

Similarly, many small companies could not settle claims at the rate they normally do due to the business losses amid the pandemic, he said.

"So, the situation has deteriorated."

Nasir Uddin Ahmed, first vice-president of the Bangladesh Insurance Association, said insurance companies were hit in 2020 and 2021 due to the pandemic.

"The situation has improved in 2022, so the settlement ratio would hopefully be better this year."

If the lower claim settlement continues, general people's perception of the insurance sector will face further blows, according to Prof Main.

"All the efforts of the insurers and the IDRA to create a positive impression and lift the penetration level will be hampered if the claim settlement ratio does not improve."

Prof Main points out that the IDRA does not have an adequate workforce so the regulator can't monitor the sector properly.

"The government should strengthen the IDRA so that it can work properly to ensure accountability in the sector. Until the companies follow rules and regulations and settle claims, the sector will not receive any boost and be able to keep pace with the economic progress of the country," said CAB's Rahman.

Mohammad Jainul Bari, chairman of the IDRA, also said that the settlement ratio dropped mainly because of the lower settlement by some insurance companies.

"We are sitting with these companies separately to know about their plans on how they would settle the claims. If needed, we are asking the insurers to sell assets because timely claim settlement is the most important priority to us."

He acknowledges that if companies do not settle claims properly and timely, the confidence of the people in the sector would erode.

"We have already taken some steps to reduce the cost of the companies and the misuse of funds," he said, adding that the claim settlement ratio has already improved in 2022.