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Abolish tariff, develop underwriting skills to fuel insurance growth
MR Khan
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T HE country has 46 non-life and 32 life insurance companies. Still, there is virtually no local underwriting expertise or capability within the country.
The market remains regulated by the tariff system inherited from the British era. The system is not only outdated but also a barrier to the development of local expertise in underwriting.
The sector is unable to attract local talents to join the industry because of lack of scope for innovation, risk assessment calculations or pricing based on intelligence.
The combined premium revenue in Bangladesh from life and non-life insurance is slightly over $1 billion, approximately a third of which comes from non-life insurance.
In contrast, our neighbouring country India, which liberalised the insurance market in 2000, licensed only 33 insurance companies in non-life and 24 in life insurance sector.
India currently has a $100 billion insurance sector, which was regulated by the tariff too until 2000.
Now, a majority of the television advertisements in India come from the insurance sector -- to encourage people to insure everything from life, savings and even luggage.
Liberalisation of the insurance industry fuelled India’s growth and attracted talented youth who developed local actuarial and underwriting capability.
Students also started feeling encouraged to join the insurance, reinsurance and broking industry thanks to its increasing prospect to offer a bright career in the field.
Commission is the only thing that matters in Bangladesh today, as there is no real understanding of risks or the underwriting of risks.
The Insurance Development & Regulatory Authority (IDRA) has taken positive steps to control the maximum allowable commission across the board. This was indeed a strong step by reducing the levels from up to 70 per cent reported at various instances in life and non-life insurance sectors.
However, there are complaints that some insurance companies are still paying higher commissions, primarily because of pressures from their directors and shareholders.
This is unlikely to change until there is a proper understanding of risks through the process of underwriting.
Currently, the role played by the private insurance companies towards insuring a particular risk depends on the total insurable value (TIV). The insurance company will look up the published tariff rate and issue the policy if the TIV is below Sadharan Bima Corporation’s (SBC) country limit -- Tk 400 crore for property damage.
If the rate is above the country limit, the insurer will then seek rates, terms, conditions from foreign facultative reinsurance underwriters (reinsurance company), either via SBC or directly. The reinsurance underwriter will then provide their rate of premium, based on which the local insurance policy will be issued.
The role played by Sadharan Bima is also similar. Due to specific treaty understandings and limits set with the private insurance companies, Sadharan Bima is generally required to accept and consume the insured value up to its treaty limit.
Again, there is no scope for the due process of underwriting, as the policy is issued under the published tariff rates. If the TIV is above the treaty limit or the country limit, the Sadharan Bima can reach out to foreign facultative reinsurance underwriter for rates and terms.
As per the regulations, all private sector companies must cede at least 50 per cent of their reinsurance portion to Sadharan Bima. More than 80 per cent of the local insurance companies depend on Sadharan Bima, which relies on foreign reinsurance underwriters.
As a result, most of the private sector insurance companies feel there is no real need to develop their own underwriting capabilities. The foreign reinsurance underwriters have a choice to accept or reject a risk based on his or her risk appetite.
While insurance is the process of sharing, transferring or assuming risk exposures by an insurance company, reinsurance is the process through which insurance companies insure themselves.
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