Regulator warns insurers on spending overruns

The insurance regulator has found that 40 non-life insurers have breached their respective limits on management expenses for the last seven years.

Of the country's 45 non-life or general insurers, 40 overshot their management expenses by about Tk 800 crore, according to the Insurance Development and Regulatory Authority or IDRA.

Earlier, 30 life insurers were found to have indulged in over-expenditure of Tk 2,064 crore in the last seven years.

“We have failed to bring down the management expenses by moral persuasion. We will now take action against the violators,” said a senior IDRA official.

About the actions to be taken, the official hinted that the IDRA may impose restrictions on the insurers' management expenses until overspending could be made up.

The Anti-Corruption Commission has already taken up the issue of life insurers and launched an investigation into allegations that the companies embezzled more than Tk 2,000 crore in the name of management expenses.

“We have started an inquiry into the allegation of excess expenses. We have taken information on these insurers from the IDRA recently,” said an ACC official.

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. This includes office management and branch expansion expenses.

On average, it is capped at 97.5 percent of first-year premiums, and if the company has been in operation for 10 years, it is 90 percent. It is calculated as a percentage of the premium (first-year and regular premium) and the size of the business.

No company is allowed to exceed the expenditure ceiling in any calendar year.

But insurers in Bangladesh hardly follow the rule on expenses as the companies know they will be fined nominally for violation.

An insurer will be fined a maximum of Tk 5 lakh for violation of rules pertaining to management spending, no matter how big the additional expenditure is, according to the Insurance Act 2010.

IDRA data shows 30 life insurers, including some new entrants in 2013, spent Tk 2,064 crore in excess as management costs in the seven years to 2015.

If the insurance regulator imposes fine at the highest ceiling (Tk 5 lakh each), the total amount would stand at a meagre Tk 1.5 crore.

Similarly, 40 non-life insurers were blamed for nearly Tk 800 crore of over expenditure during the period. By imposing fine, the IDRA can collect a maximum of Tk 2 crore from these companies.

Over-expenditure was a practice in India too, but the regulator imposed vigorous punishment a few years ago.

Now, if the limit was breached by insurers in India, the excess amount would come out of the shareholders' account.

IDRA data shows new life insurers that came into the market in 2013 spent the most: Guardian Life Insurance, Chartered Life Insurance, Swadesh Life Insurance and Alpha Life Insurance over-spent by 150 percent to 300 percent. Six other life insurers spent at least 100 percent more than their allowable ceiling for management expenses.

According to industry players, life insurance companies, especially in the first five years of their existence, have higher cost per head due to expansion of business, recruitment of staff, new branch opening and marketing.

But the insurance companies that have been around for 10 to 20 years now are spending much higher than their limits.

Even state-run Jiban Bima Corporation spent nearly Tk 277 crore more than its allowable management expenses in the seven years to 2015.

First generation insurance companies that have been doing business for over two decades were also found to have overshot their expenditure limit.

For example, Popular Life's over expenditure was more than Tk 293 crore in the last seven years, Fareast Life's Tk 200 crore, Golden Life's Tk 156 crore, Pragati Life's Tk 147 crore and Sandhani Life's Tk 156 crore.

BM Yousuf Ali, managing director of Popular Life Insurance, said management expenses have been declining for them and some other companies in recent years. Popular Life's excess management cost has come down to 9 percent in 2015 from 12 percent and 18 percent in 2014 and 2013 respectively, he said. It was 31 percent in 2012.

“The cost will be brought down to the allowable limit in five years as per IDRA guideline,” Ali said, adding that the credit goes to the regulator that has been persuading insurers to effectively use the policyholders' money. He, however, questioned the calculation of the additional management spending.

“Our investments with the central bank (bonds) and other commercial banks are kept out in measuring the management expenses. If it is included in the calculation, insurers' management costs will come down significantly,” said Ali.

Also, there are some companies that keep their management expenses within the limit of the law. For example, in the non-life category, Reliance Insurance and Asia Pacific Insurance spent Tk 2.56 crore and Tk 2.41 crore less than their total allowable limits in the seven-year period.

In the life insurance segment, MetLife spent nearly Tk 28 crore less than its limit during the period.