IDRA backtracks on new directive on insurers' expenses

The insurance regulator has decided not to implement its new directive on management expenses for non-life insurers after it found that the ceiling was unrealistic for the industry.

The Insurance Development and Regulatory Authority will continue to follow the 1958 Insurance Act on management expenses.

“Our proposal was mistakenly changed in the final gazette notification. So, we have decided not to implement the new rule on management expenses now,” said M Shefaque Ahmed, chairman of IDRA.

Commission and management expenses have been merged in the final government order sent out on July 18, which was not the case in the IDRA's original proposal, he said.

The regulator's decision will relieve the general insurers, who were dreading that their business would be squeezed by the wrongly-perceived idea of management expenses.

Management expenses are all charges incurred, whether directly or indirectly, according to insurance laws.

It includes commission payments of all kinds and any amount of expenses capitalised, including office management, product development and branch expansion expenses.

In the latest gazette notice, the government fixed the management expenses plus commission at 16 percent for marine insurance of a non-life insurer whose premium income would be Tk 40 crore plus. It is set at 22 percent for fire and other insurances.

The expenditure ceiling for marine and fire insurance has been set at 26 percent and 35 percent respectively for an insurer whose premium income will be within Tk 5 crore.

At present, the IDRA allows a company to spend 15 percent as commission to hook businesses.

But, as per the latest decision, a company with a premium earning upwards of Tk 40 crore would have only 1 percent in hand for management expenses.

The move irked the insurers, especially the large ones that earn more than Tk 40 crore each from marine and fire insurance.

But the IDRA's decision to continue to follow the 1958 Insurance Act on management expenses did not go down well with the insurers either.

The existing rule on management expenses based on the 1958 Insurance Act is outdated and needs to be overhauled immediately, said Farzana Chowdhury, managing director and chief executive officer of Green Delta Insurance.

“It is true that the companies have been spending more than the permitted amount under the 1958 Insurance Act. But we have to keep in mind that the law was enacted 58 years ago and doesn't reflect the present scenario.”

For example, inflation along with expenses for utilities, rents, transportation, advertisement and salary soared 3,000 times since 1958.

Even the regulator itself increased insurance registration fee by 133 percent in 2005.

Moreover, since 1991 there has been value added tax on almost all the expenses, which again push up an insurer's overall costs, she added.

Currently, there are 45 non-life insurance companies operating in the market, which is very small compared to Bangladesh's peer countries.

Insurance penetration is less than 1 percent of Bangladesh's gross domestic product against 3.3 percent in India, according to industry players. So, there is unhealthy competition in the market and many companies have to spend big sums to acquire business and retain skilled workforce.

Amid the conditions, the IDRA continues to warn insurers on overspending in a bid to safeguard the interests of policyholders and shareholders.

The regulator found that 40 out of the 45 non-life insurers overshot their management expenses by about Tk 800 crore in the last seven years.

Around 30 life insurers were also found to have indulged in over-expenditure of Tk 2,064 crore during the period. The IDRA has asked insurers to reimburse the amount of overspending from the profits to be earned in the next five years.