Reinsurance on the rise for non-life policies

The practice of reinsuring with a third company is on the rise as insurance companies look to mitigate the risk claims payment by a single insurer, especially if policies are for large amounts.

At present, the Sadharan Bima Corporation is the only state-owned institution in the country accepting reinsurance against policies of private sector insurers. 

Officials at the corporation say that the non-life insurance sector is now receiving large policies, the claims of which cannot be paid by any local insurance company alone. As a result, companies are being forced to reinsure with foreign insurers — a trend which has been on the rise for the past few years.

Reinsurance is a process by which an insurer transfers some of its risk to another insurance company in exchange for a premium. In other words, reinsurance is insurance for insurers.

For example, "A" is an insurance company that holds "X" institution's policy. As "A" could not bear the insurance risk alone, it insured the policy again with company "B".

First, taking the premium from company "X", "A" insurance company will deposit the premium in proportion to the risk coverage with "B" insurance company. Both the companies will jointly pay the insurance claim of company "X" during the claim settlements.

And both companies will benefit from the policies through commissions and premiums.

Due to reinsurance with foreign institutions, the claims money is also being received from abroad. The Banglar Samriddhi ship, hit by a rocket while anchored in the Alvia port channel of Ukraine on 2 March last year, is the latest example of this. 

The ship, owned by the Bangladesh Shipping Corporation (BSC), was insured by Sadharan Bima Corporation. Later, Tysers, a member of the Lloyd's Syndicate — the world's largest insurance marketplace based in London — received a reinsurance policy from the corporation.

Sadharan Bima Corporation accepts reinsurance to reduce the risk for private insurance companies. But now, against its own insurance policies, the corporation is reinsuring with foreign companies to reduce the risk on a single institution.

Both the country's public and private insurance companies bear the risks of various issues in life and non-life insurance policies against the deposit of a certain amount of premium.

Usually, insurance companies sell policies to a third domestic or foreign insurer to reduce the risk on a single company. As a result, when it comes to losses or payments against insurance policies, both insurers bear the risk proportionately, leaving no single company burdened with insurance claims.

Bangladesh is getting almost the entire insurance claim from abroad for the Banglar Samriddhi ship due to its reinsurance with foreign companies, although a premium has to be paid for the insurance.

Now, the state-owned BSC is likely to receive $22.48 million by the end of February as an insurance payout for the Banglar Samriddhi,  which remains abandoned in Ukraine's port. 

"We have been negotiating the insurance claim with Tysers for a couple of months. The reinsurer has finally confirmed the payout in foreign currency within this month," Syed Belal Hossain, managing director of the Sadharan Bima Corporation, told The Business Standard.

An official of the company's reinsurance division said, "In the case of fire insurance, if the insurance portion is more than Tk400 crore, and in the case of marine insurance, if it is more than Tk100 crore, it has to be reinsured with a foreign company. The premium depends on the amount of damages claimed."

Insurance industry insiders say that the Sadharan Bima Corporation is the only government body that accepts reinsurance for non-life, fire, marine, or vehicle insurance policies.

After accepting non-life insurance policies, the corporation itself reinsures with a third-party insurer.

Although there is scope for reinsurance in the case of non-life policies in the country, no such institution has been established in the field of life insurance. Sadharan Bima Corporation enjoys reinsurance; state-owned Jiban Bima does not.

So, local private insurers are reinsuring life insurance policies with foreign institutions.

According to the Insurance Corporation Act, regarding reinsurance, every insurer registered and carrying on insurance business in Bangladesh shall reinsure the reinsurance portion in excess of its own capacity. In the case of non-life insurance, 50% of the re-insurable portion shall be made by Sadharan Bima Corporation.

However, in the case of life insurance, the whole or any part of the re-insurable portion has to be made with insurers located inside or outside Bangladesh.

Last year, the Jiban Bima Corporation wrote to the finance ministry seeking an opportunity to reinsure the additional 50% of the holding capacity of private insurance companies, citing that "foreign currency is going abroad."

However, no instructions have been given in that regard yet.