Published on 12:00 AM, August 05, 2022

Regulator moves to end insurance fund misuse

With evidence surfacing of a couple of insurance companies misusing funds of policyholders, the insurance regulator has directed them to refrain from borrowing from banks using life funds as collaterals. 

The Insurance Development and Regulatory Authority (IDRA) found two life insurance companies, including Fareast Islami Life Insurance Company, to have allowed their directors and their associated enterprises to borrow from banks against fixed deposits created with premiums provided by policyholders.

In a circular issued this week, the regulator said some life insurance companies were helping individuals and firms get loans from banks and financial institutions enabling such use of fixed deposits or by becoming guarantors.

Insiders say such borrowers became defaulters and banks and financial institutions subsequently claimed the fixed deposits.

Life funds of policyholders were similarly being misused, creating scopes for funds to be claimed by banks or loan embezzlement, said the IDRA, asking insurance companies not to extend loans against such life funds.

A life fund is an amount of money that is paid to and invested by insurance companies for life insurance, and from which money is paid when someone dies.

Such irregularities have created concerns regarding settlement of claims of policyholders who have opened policies to hedge risks and for a better future.

"This is unlawful, so we have taken the step," said IDRA Chairman Mohammad Jainul Bari.

The anomaly surfaced at a time when insurance sector is suffering from a lack of public confidence mainly for a lack of claim settlement.

Roughly, one-fifth of life insurance related claims remain unsettled in Bangladesh. In other words, overall claim settlement is around 80 per cent which is below the international standard of 97-98 per cent, according to industry insiders.

As such, the life insurance penetration rate is low in Bangladesh. It was 0.41 per cent in 2017, according to the IDRA's annual report.

As of 2019, more than 30 life insurance companies had 1.6 crore life insurance policyholders and the gross premium generated annually amounted to Tk 9,640 crore.

The total investment made by the life insurance companies in various areas, namely government securities, fixed deposit, and land, building floor and flats, amounted to Tk 67,876 crore, according to the IDRA.

The IDRA chairman said the regulator took the latest move to ensure transparency in the insurance sector.

"People will gain more confidence if they know the whereabouts of their money and where the money is invested," said Bari.

In its circular, the IDRA said such use of life funds for availing loans was a punishable offence.

The IDRA plans to issue similar directives for non-life insurance companies, said officials.

Industry people welcomed the IDRA move.

"…the issue of life fund management will get more attention now," said an official of a life insurance company.

Nasir Uddin Ahmed, first vice-president of Bangladesh Insurance Association, said, "Strict punitive measures should be taken against the companies that have violated rules."

Main Uddin, chairman of the banking and insurance department at the University of Dhaka, said in the past some insurance companies provided loans to individuals or organisations using life funds.

"This has led to many problems and irregularities. That's why the IDRA is worried. It remains to be seen how far it can force companies to comply with the latest directive," he said.

The IDRA chief said they have also taken steps to bar insurance companies from investing in real estate without its approval, all to ensure that such investments do not turn bad.