Political favouritism eroded confidence in insurance sector

More than two-thirds of the insurance companies registered in Bangladesh since 1990 were approved during the regimes of the Awami League government led by former prime minister Sheikh Hasina.

However, these companies could hardly attract clients due to fragile customer confidence.

In Bangladesh, 72 insurance companies have been registered since 1991, according to the Insurance Development and Regulatory Authority (Idra). The highest number of registrations, 60, occurred under Sheikh Hasina's governments.

No insurance companies were registered under the caretaker government, which held power from 2006-2008, according to the data.

Economists say political patronage in business licensing activities contributed to a market that is oversaturated relative to the size of the Bangladesh economy.

This market lacks professionalism and public trust, as many companies were licensed simply based on political favours.

Given the poor record of claim settlement and growing liquidity concerns among companies in the sector, experts are now calling for drastic measures such as mergers and strengthening of the regulator.

The four straight terms of the Awami League led to the emergence of various interest groups seeking financial benefits, according to Md Main Uddin, a Banking and Insurance professor at Dhaka University.

"These groups often prioritise making money while maintaining political power. Granting licences for banks, insurance, and financial institutions had become a tool for political patronage," he commented.

According to Main, both those who receive approval for these companies and those who grant it stand to benefit financially.

He criticised the government's intention to license so many insurance companies without simultaneously strengthening the Idra.

Due to political interference and weak regulatory oversight, public confidence in the sector has not improved, said the professor.

LICENCE TALLY

Bangladesh has a total of 82 insurance companies, compared to neighbouring India's 57, Pakistan's 40 and Sri Lanka's 28.

Among insurers currently operating in Bangladesh, MetLife is the sole foreign company. Besides, the Life Insurance Corporation of India (LIC) is conducting business in the country as LIC Bangladesh.

During the Bangladesh Nationalist Party's tenure with Khaleda Zia as prime minister from 1991-1996, three life and eight non-life insurance companies were registered, according to Idra data.

Under the AL's 1996-2001 regime, the highest number of registrations were recorded, with 13 life and 27 non-life insurance companies being formed.

The BNP-Jamaat alliance, which ruled from 2001 to 2006, allowed only one non-life insurance company.

However, from 2009 to 2024, Sheikh Hasina's government approved 18 life and two non-life insurance companies, according to regulatory data.

POLITICAL CONNECTIONS

Nasir Uddin Ahmed, acting president of the Bangladesh Insurance Association, said the excessive number of insurance companies prompted unhealthy market competition and instability.

It also led to various unethical practices among many companies, he said.

"Political connections often superseded qualifications when companies were granted licences under the Awami League government," Ahmed said.

"The insurance sector experienced its biggest loss in 2013 when 13 life insurance companies were approved," Ahmed added. "Despite promises of job creation at the time, the sector remains crippled, although some jobs have been created."

Regarding the boards of directors and management of struggling companies, he said the Idra must take decisive action.

"Otherwise, customers of these companies may never get back their funds."

TOO MANY PLAYERS

The oversaturation of insurance firms in the market encouraged malpractice, according to an executive with 25 years of experience in the local insurance sector.

"With everyone competing in the same space, it has become difficult for the regulator to supervise so many companies," the officer told The Daily Star on condition of anonymity.

The executive said holding the position of chairman or director at an insurance company is considered prestigious. So, many politically powerful individuals registered companies but often failed to fulfil their responsibilities.

Faced with a lack of professionalism, the authorities introduced bancassurance last December, allowing banks to sell insurance products.

Industry insiders believe that bancassurance may help restore public confidence as banks are generally perceived as more professional.

In 2013, the insurance regulator published a draft of the life insurer solvency margin regulations. But that is yet to be finalised.

The official believes that it is difficult for the regulator to assess a company's financial health without these regulations.

"If implemented, some companies would likely become insolvent or be encouraged to go for merger," according to the official.

Another insurance expert commented that many insurance companies were approved based on political considerations rather than economic necessity.

"There was no need for so many companies," the expert said, requesting not to be named.

He added that insurance companies are often used as tools for financial misconduct.

"Insurance companies are one of the few ways to move money out of the country and they are used for looting. This is why the regulator has been weakened -- to serve political interests," the expert claimed.

Asifur Rahman, a chartered accountant and life insurance expert with over 22 years of experience in both multinational and local companies, believes there should be only 6 to 10 life insurance companies based on the country's economy and population.

"However, with the number exceeding that, many companies engage in mis-selling their products," Rahman said.

He said many entrepreneurs view the sector as a quick way to earn large premiums without considering repayment. The low paid-up capital requirement of only Tk 18 crore for licences, coupled with corruption in the licensing process, exacerbates the problem.

Highlighting the implementation of the solvency margin policy, the chartered accountant criticised the previous government for negligence in strengthening the insurance regulator.

WORST CLAIM SETTLEMENT

The insurance sector's contribution to GDP, measured by the penetration rate, is only 0.46 percent in Bangladesh, compared to 4.2 percent in India and 0.91 percent in Pakistan.

Approximately 17.11 million people in Bangladesh currently have insurance coverage, Idra data showed.

Despite the large number of insurers, Bangladesh's average claim settlement ratio lags significantly behind the global standard of 97-98 percent.

In India, the average claim settlement ratio was around 98.45 percent in fiscal year 2022-23, according to reports.

In contrast, Bangladesh's claim settlement ratio was 65.19 percent in 2023, as per Idra.

As of March this year, claims worth Tk 3,050 crore from about one million policyholders were still pending, with 29 life insurance companies facing acute liquidity crises.

Over the past 14 years, more than 2.6 million insurance policies have lapsed due to factors such as the worsening financial health of clients, lack of awareness, and agents bent to not explain product features properly.

In 2009, the total number of policies was nearly 11.2 million. But by 2023 this had dropped to 8.58 million.

ARE MERGERS THE SOLUTION?

In December last year, the insurance regulator recommended liquidating or merging several insurance companies that have lost financial viability due to widespread irregularities and embezzlement.

The report highlighted that a failure to settle claims severely damaged public confidence in the insurance sector.

Of the troubled firms, the Idra report named Fareast Islami Life, Padma Islami Life, Prime Islami Life, Golden Life, Homeland Life and Progressive Life.

There have been no further updates.

AB Mirza Azizul Islam, former finance adviser to the caretaker government, also believes the government may consider merging ailing companies.

He said that Bangladesh's financial sectors, including insurance, have more organisations than necessary, leading to unhealthy market competition. It also causes the regulator to struggle to monitor the sector effectively.