Bangladesh – like many other nations across the globe – is facing economic headwinds, and the local life and non-life insurance companies need to keep a larger-than-required amount of paid up capital now more than ever to better secure depositors’ money.
But the reality is quite different. The Insurance Development and Regulatory Authority’s (IDRA) unaudited data for 2021 reveals that 34 of the 79 such firms did not maintain the minimum level of capital required by law.
Of these firms, 19 are life insurance and 15 are non-life insurance companies.
As per the Insurance Act 2010, a life insurance firm must maintain a minimum paid-up capital of Tk 30 crore, which is Tk 40 crore for general insurance companies. Sixty per cent of the capital will be provided by sponsors and directors, and 40 per cent will be open to general investors.
A firm’s paid-up capital represents the extent to which it depends on equity financing to fund operations. This figure can be compared with a firm’s level of debt to assess if it has a healthy balance of financing, given its operations, business model, and prevailing industry standards.
When approached for comments, a number of insurers – who failed to meet the minimum paid-up capital requirement – claimed that a low amount of paid-up capital causes no harm, and it is a normal practice in the insurance sector of Bangladesh.
They also stated that increasing the paid-up capital will put them in trouble, as they are not doing well in premium business due to extra commissions.
There are currently 81 insurance companies in the country. Of which, 35 are life insurance and 46 non-life insurance firms. Investment in the sector stood at Tk49,293 crore until 2020, and the sector employed 40,575 people directly.
There are around 42,673 agents working in the sector.
Why is low paid up capital risky?
Economists and industry insiders say it is crucial for insurance firms to increase paid up capital, considering the present economic indicators. They also warned that low paid up capital can be a grave threat to the security of their customers’ money.
If a company suffers financial losses or its income falls drastically, its low paid-up capital can lead to problems in paying customers’ insurance claims, they said, adding that the regulatory body should take initiatives to help these firms maintain their paid-up capital as per regulations.
Sadharan Bima Corporation Director AKM Ehsanul Haque said, “The paid-up capital of Tk 30 crore is insufficient as per the Insurance Act. In case of a financial crisis, most such firms will be financially insolvent.
“In such a situation, if the paid-up capital is low, then the risk for customers increases. If capital is low, the insurance companies will fail to pay customers in the future.”
Ahsan H Mansoor, Executive Director of Policy Research Institute, said, “IDRA, the regulatory body of insurance companies, is not yet capable of regulating the insurance sector. As a result, insurance companies are taking advantage of loopholes in the law.”
Mirza Azizul Islam, former advisor to the caretaker government, told The Business Post, “The sponsors and directors of insurance companies share the profit among themselves in various ways without increasing the paid-up capital.
“In this regard, the regulatory body should take appropriate measures.”
19 life insurers with paid-up capital below Tk30cr According to the unaudited IDRA report of insurance companies for 2021, 19 out of the 33 life insurance companies in the country have paid-up capital less than Tk 30 crore.
Sunflower Life has Tk 3 crore paid-up capital, Golden Life Tk 3 crore, Homeland Life Tk 3 crore, Jiban Bima Corporation Tk 5 crore, Progressive Life Insurance Tk 16.54 crore, Alfa Islami Life Tk 18 crore, Baira Life Tk 18.26 crore, Best Life Insurance Tk 18 crore.
Bengal Islami Life has Tk 18 crore, Diamond Life Tk 18 crore, Jamuna Life Tk 18 crore, Mercantile Life Insurance Tk 18 crore, NRB Global Life Tk 18 crore, Protective Islami Life Tk 18 crore, Swadesh Life Tk 18 crore, Trust Islami Life Tk 24 crore, and Zenith Islami Life Tk 18 crore.
On the issue, Golden Life Insurance CEO Amzad Hossain Khan said, “The board has already taken a decision to increase our paid-up capital.”
Homeland Life Insurance Chairman Mohammad Julhas said, “There are errors in the unaudited report. At present, the paid-up capital of our sponsors and directors stands at Tk 18 crore. The remaining amount of the paid-up capital will be fulfilled once the company is listed in the stock market as per the rules.”
15 non-life insurers with paid-up capital below Tk 40cr
Non-life insurance companies are in a slightly better position in terms of capital adequacy. Among the 46 non-life insurance companies, 15 have paid-up capital below Tk 40 crore.
These companies are – Bangladesh Cooperative Insurance with Tk 1.95 crore, Provati Insurance Tk 3.48 crore, Sonar Bangla Insurance Tk 4 crore, Phoenix Insurance Tk 4.03 crore, Northern General Insurance Tk 4.27 crore, and Eastern Insurance Tk 4.31 crore.
South Asia Insurance has Tk 6 crore, Pragati Insurance Tk 6.56 crore, Federal Insurance Tk 7.10 crore, Meghna Insurance Tk 24 crore, Sikder Insurance Tk 24 crore, Union Insurance Tk 29.04 crore, Islami Commercial Tk 30.39 crore, Agrani Insurance Tk 31.76 crore, and Mercantile Insurance Tk 33.90 crore.
What insurers say
Managing Director and CEO of Phoenix Insurance Company Md Jamirul Islam said, “So far, the board has not taken any decision on increasing the paid-up capital. Still, the company is not doing well in premium business with extra commissions.
“However, if the business expands in the future, the board may increase the paid-up capital.”
Md Mofizur Rahman, company secretary of Agrani Insurance Company, “It is normal for our company to have less paid-up capital, and I do not see any harm in it.”
Regulator working on the issue
IDRA Executive Director and Spokesperson SM Shakil Akhtar said, “There is ambiguity in the law about the paid up capital, and the insurance companies are taking advantage of this situation.
“The issue of paid-up capital will be clarified in the rules of Insurance Act 2010. When it is done, every company will have to ensure the minimum requirement of paid up capital.”
Bangladesh Insurance Association (BIA) President Sheikh Kabir Hossain said, “We have written to the IDRA seeking a suspension of the minimum paid-up capital guidelines of companies until rules are formulated according to section 21(3) of the Insurance Act 2010.
“In what manner and within what time limit life and non-life insurance companies licensed before 2010 will fulfill the conditions of having the capital has not been gazetted so far. In this situation, it is specifically requested to suspend the instructions of the above memoranda until the rules are framed as per section 21(3) of the Insurance Act 2010.”
IDRA’s SM Shakil Akhtar said, “Instructions have been issued to life and non-life insurers to maintain minimum paid-up capital and retain 60 per cent share of the paid-up capital through sponsors and directors.
“Later, after the BIA letter, the matter of minimum capital preservation was postponed.”