Insurance firms spend beyond regulatory limits

Over half of the life insurance companies in Bangladesh exceeded their allowable management expense in 2021, putting a negative impact on life funds and eroding their capacity to settle claims.

Here, allowable management expense, as per insurance laws, refers to the amount permitted to be spent by the life insurer in the form of company expenses, meaning behind paying agent commissions and operating costs.

According to insurance laws, once a policy is launched, Tk 95 out of every Tk 100 collected as premium in the first year can be spent.

In the second year, it is Tk 22 and from the subsequent year and onwards it is Tk 5.

Among 36 life insurers, 17 incurred higher costs whereas for 16 it was lower. There is no data available of three in documents of the Insurance Development and Regulatory Authority (IDRA).

The 17 spent Tk 123 crore more than what they were allowed.

The highest excess was by Baira Life Insurance. It spent Tk 2.2 crore whereas it was allowed Tk 26 lakh.

This excess apparently led to the insurer failing to settle less than 50 per cent of claims made in 2021.

The second highest excess spending was by Swadesh Islami Life Insurance Company. It spent Tk 28.5 crore, around 148 per cent more.

The company was able to settle 42.61 per cent of claims in 2021, one of the five lowest claim settlements.

In 2021, the industry managed to settle 68 per cent of claims whereas it was 88 per cent the previous year, according to Bangladesh Bank's Financial Stability Report.

In 2020, the industry spent Tk 208 crore in excess.

It was Tk 133 crore, Tk 159 crore, Tk 109 crore and Tk 202 crore in 2019, 2018, 2017 and 2016 respectively.

Mofizur Rahman Chowdhury, chairman of Baira Life Insurance, did not receive phone calls and reply to an SMS over the last two days.

The history of spending in excess has long been prevalent though it is not a good practice for the sector, said Sultan-ul-Abedin Mollah, a former IDRA member.

Some companies pay even 94 per cent to 95 per cent as agent commission on the policy's first year, so obviously it will not be possible for the company to cover the operating cost with the rest of the premium, he said.

Some of the remaining premium is then used up as operating expenses, leaving very little to keep as life fund, he said. 

Life fund is an amount of money from which life insurance claim settlements are made and with which an insurance company makes investments.

With such types of excess spending, life fund growth slows and a company's capacity to settle claims reduces, he said.

For the betterment of their own sustainability, life insurers should control their costs. The agent commission should especially be competitive, he added.

Nasir Uddin Ahmed, first vice president of Bangladesh Insurance Association, echoed him.

He said if the expenses exceed the approved amount, the company's life funds decrease gradually.

At one time, the company fails to settle claims of policyholders, thus the claim settlement ratio falls. So, the cost has to be kept under control, he said.

The IDRA should take strict action against those who do not follow the rules, he said, adding that it has a negative impact on the insurance industry.

The association always ask companies to spend abiding by the rules and regulations. This is good for their own business too, Ahmed added.

Insurance companies failed to settle claims on schedule because of the higher management expenditure, said a senior IDRA executive, requesting anonymity.

So, the IDRA has already taken many steps to reduce the costs, such as asking companies to reduce agent commissions, he added.

Ekhtiar Uddin Shahin, CEO of Swadesh Islami Life Insurance Company, said the company was new and there were many other costs involved in setting up the new company, including building a team, getting an office and buying furniture.

"We had to invest in different places so actual expenses crossed the allowable expenses. But in the overall situation, I see it will recover in 2023," he added.

Costs of Sonali Life Insurance was comparatively low amongst all the companies. It spent Tk 138 crore while it was allowed to spend Tk 207 crore.

Costs of Protective Life Insurance, National Life Insurance, Guardian Life Insurance and MetLife Insurance was 29 per cent, 21 per cent, 14 per cent and 13 per cent of their limits respectively.