General insurers have to keep 40%-100% reserve against risk: Idra

Infographic: TBS

Non-life insurance companies have to keep a reserve between 40% and 100% as a solvency margin against their bearing risk of insurance coverage as the regulatory body, Insurance Development and Regulatory Authority (Idra), is going to issue Solvency Margin Regulations to increase the risk-bearing capacity of the insurance sector, for the first time in the country.

The regulatory body has proposed a draft regulation in this regard.

The solvency margin is a minimum excess on an insurer's assets over its liabilities set by regulators, similar to capital adequacy requirements for banks.

The financial base of insurance companies in Bangladesh is very weak and no company can pay the insurance claim on time, which creates a crisis of public confidence in the insurance sector. Hence, the insurance regulatory body has made these regulations which will increase the risk-taking financial capacity of insurance companies. 

The National Insurance Policy also called for the issuance of solvency margin regulations.

The proposed draft regulation was uploaded to the Financial Institution Division of the Finance Ministry on 6 April. The stakeholders concerned have been asked to give their opinion on the draft regulations within the next 15 days.

In the draft regulations, general insurance companies are required to reserve a specified percentage of risk coverage in various sector-wise insurance policies.

Idra Chairman Mohammad Jainul Bari told The Business Standard, "There are such laws all over the world but not in Bangladesh. We have taken the initiative to enact the law to ensure the sustainability of the insurance sector."

"This law is to make insurance companies capable of easily paying insurance claims against their risk as we have recently noticed such problems in the payment of insurance claims," he added.

"Long-term development of non-life insurance companies requires ensuring solvency. With this law, we can continuously monitor the business of the insurance company, whether the insurance company is taking risks beyond its capacity," he said further.

Till now, this is a draft regulation and time will be given to the insurance companies who cannot confirm the reserve. How much time will be given after the publishing of the gazette, he added.

Although the insurance business started after independence in the country, the solvency margin policy was not adopted to strengthen the financial base of the respective companies. Solvency margin regulation was done in the neighbouring country India in 2000.

How to reserve

According to the draft resolution, against the risk taken, the fire insurance policy has to keep 40%, marine insurance 50%, marine-hull 100%, motor 40%, aviation 100%, miscellaneous 50% and health insurance 100% as a reserve.

Idra source said if a general insurance company accepts a risk of Tk1 crore of a customer through a fire insurance policy, then according to the solvency margin, the company concerned has to keep a 40% reserve of that risk.

In that case, the company has to make this reserve from its profit. If it is not covered by the profit, the reserve should be increased by injecting fresh capital.

According to sources, those with low reserves will not be able to sell large policies if the solvency margin regulations come into effect.

Besides, the insurance company has to keep a 100% reserve against unpaid claims. Bad and suspicious loans, proposed dividend, tax, unexpected loss, and bank loan with interest reserve has to be kept in the proposed regulations.

A list of assets which cannot be valued i.e. zero value is given in the draft regulations too.

In the draft regulations, three schedules are prescribed for companies to account for, and the companies will report to the insurance regulatory body on the prescribed schedule.

The Idra chairman said in a press conference on Insurance Day, "The claim settlement rate in the insurance sector is more than 30%.

However, if four to five companies are excluded, the rate will reach almost 90%."

More than a half-century after the achievement of the country's independence, Bangladesh now has 81 insurance companies. Among them, there are 35 life insurance companies and 46 non-life insurance companies. 

According to IDRA statistics, the gross premium amount at the end of 2022 stood at Tk16,812.65 crore, which was 17% higher than the previous year amid challenges caused by the pandemic and the Russia-Ukraine war. 

The gross premium for life insurance was Tk11,399.51 crore, while the gross premium for non-life insurance was Tk5413.14 crore.

The total number of insurance claims in 2021 was 30,62,468. Among them, 18,92,992 were life insurance and 19,877 were non-life. Insurance companies settled a total of 19,12,869 claims. In addition, the total amount of unpaid claims is Tk6,559.81 crore.