Insurers fail to rein in management costs

Despite numerous steps taken by the Insurance Development and Regulatory Authority (IDRA) of Bangladesh, life insurance companies failed to limit their excessive management costs which went way beyond their authorised limits during the Covid-19 pandemic.

Amid the Covid-19 crisis, at least 19 life insurance companies among 33 expended excessive management costs worth nearly Tk 208 crore in 2020, depriving shareholders of the companies concerned.

Additional management costs of 10 life insurance companies were Tk 188 crore while among them, state-owned Jibon Bima Corporation alone expended Tk 112 crore, according to the unaudited report submitted to the IDRA by the insurance companies.

What is management cost as per the insurance act?

Management cost consists of direct and indirect expenses of insurance companies, according to the Insurance Act 2010. The act already has fixed a specific limit on management costs, which should be followed by the insurers and indicates affirmative financial conditions of insurers.

On the contrary, excessive management costs cut short assets, reduce investment return, and notify the fragile financial conditions of insurers.

An official of IDRA said management costs of insurance companies are comparatively high than many foreign countries. In the past few years, excessive costs reduced to some extent due to different steps and fines imposed by the IDRA.

According to the law, five to 95 per cent management cost for insurance companies is acceptable as per the policy and tenure.

In cases of one to five years of insurance policies, 95 per cent of the premium money of the first-year management costs is acceptable and in cases of the second to the fifth year, this cost will not be beyond 25 per cent.

Similarly, in cases of six to 10 years of insurance policies, 94 and 22 per cent of first-year and later-year premiums will be acceptable for management costs.

Insurers’ cost management scenario in last five years

According to the IDRA data, management costs of most of the life insurance companies exceeded their desired limits, which reached Tk 202 crore in 2016.

Subsequently, the excessive management cost of 32 companies was Tk 109 crore in 2017, Tk 159 crore in 2018, Tk 133 crore in 2019, and Tk 208 crore in 2020.

Company insiders said management costs mounted as insurance companies failed to earn much from premiums while the expenses centring utility, workers, and management continued during the pandemic.

Besides, the IDRA will also inspect the rational cause behind the hiked management costs, they said.

The 19 life insurance companies that failed to control their management costs are Jiban Bima Corporation, Swadesh Life Insurance Company Limited, Sunflower Life Insurance Company Limited, Progressive Life Insurance Co Ltd, Sunlife Insurance Company Ltd, Padma lslami Life Insurance Limited (PILIL), TRUST Islami Life Insurance Limited, Golden Life Insurance Limited (GLIL), Life Insurance Corporation ( LIC ) of Bangladesh Ltd, Protective Life Insurance Company, Jamuna Life Insurance Company Limited

(JLICL), Astha Life Insurance Company Ltd, Best Life Insurance Ltd, BAIRA Life Insurance Company Limited, Zenith Islami Life Insurance Company Limited, Diamond Life Insurance Co Ltd, NRB Global Life Insurance Company Limited, and Mercantile Islami Life Insurance Ltd.

Among them, state-owned Jiban Bima Corporation has expended an additional Tk 112.57 crore in 2020, which was the highest amount of management cost.

Managing Director of Jiban Bima Corporation Zahurul Haque told The Business Post the Covid-19 pandemic has hit Jiban Bima massively, but the organisation never sacked a single employee during the crisis.

Amid the crisis, insurance companies paid a record number of insurance claims but failed to earn that much, which hiked costs of the companies, he said.

On the other hand, Swadesh Life Insurance Company Limited grabbed the second position and expended an additional Tk 13.69 crore in 2020 that pushed its life fund towards a negative flow.

Swadesh Life Insurance’s CFO Tawabur Rahim told The Business Post, “We did not get premiums in 2020 during the pandemic, but our expenses continued which led to the negative flow of life fund.”

He hoped that the fund would return to positive shortly.

Padma lslami Life Insurance Limited, Zenith Islami Life Insurance Company Limited, and Jamuna Life Insurance Company Limited also experienced negative flow of life funds and followed the same path triggering risks.

Besides, Chief Executive Officer (CEO) of Zenith Islami Life Insurance Nuruzzaman said life insurance companies have huge expenses.

“Although our life fund had negative flow in 2020, we will obtain a positive flow in 2021 and already the company gained a great position after recovery,” he added.

In case of expending excessive management costs, Sunflower Life Insurance, Progressive Life Insurance, and Sunlife Insurance Company took the third, fourth and fifth place, spending Tk 11.67 crore, Tk 9.62 crore, and Tk 7.93 crore, respectively.

IDRA Executive Director and Spokesperson SM Shakil Akhtar told The Business Post, “Inspection is underway to identify insurance companies with excess management costs. Necessary directives will be issued to reduce additional expenses.”