Insurance Insurance Insurance Insurance

27 The Cost and Management, May-June, 2010 28 The Cost and Management, May-June, 2010 29 The Cost and Management, May-June, 2010 30 The Cost and Management, May-June, 2010
Disclosure Practices of Insurance Companies in Bangladesh:
Study on Some Selected Insurance Companies
Md. Abu Bokar Siddique*
Md. Rabiul Islam**
Introduction
In Bangladesh disclosure practices are mostly guided by the
Companies Act, 1994, Securities and Exchange Rules, 1987 and the
Accounting Standards adopted by the Institute of Chartered
Accountants of Bangladesh. Disclosure practices are also affected by
a number of other statutes e.g. Bangladesh Industrial Enterprises
Nationalization Order, 1972, Banking Companies Act, 1991, Insurance
Act, 1938, Income Tax ordinance, 1984, etc.
It may be strongly argued that the most important medium of
external financial disclosure is the corporate annual report. The
quality of financial reporting in a country depends on the legal
requirements governing disclosure together with professional
recommendations which may have a varying degree of effectiveness
depending on the influence of the professional bodies concerned
(Marston: 1986). In addition, national and international accounting
standards and stock exchange requirements may have an impact on
the disclosure of information in corporate annual reports.
Reviewof Literatures
Disclosure is a part of revolutionary process. In a democratic setup,
the demand for disclosure automatically increases. This is because all
of the people directly or indirectly involved with the company in
question will want to be able to quantify their risk. (Komatsubara:
1999). Rahman and Ahsan (1993) viewed that the historical
development of accounting principles and practices has been closely
related to the economic development.
One of the strongest principles in financial accounting is that
accounting reports should disclose fully and fairly the information
they purport to represent. All the concepts, guidelines, conventions,
rules, and procedures that make up accepted accounting practice of
any given time is known as accounting principles. Full disclosure or
completeness requires that all material accounting information that
might be of significance to a reasonably rational user be disclosed.
(Rahman and Ahsan: 1993). Singhvi (1967 and 1968) pioneered the
research on corporate disclosure of third world companies by
including a sample of 45 Indian companies in his overall sample of
200 annual reports to study corporate disclosure in India and the
USA. An index of disclosure comprising 38 major information items
was developed to measure the extent of disclosure by companies in
both countries. Singhvi (1968) reports on the study findings based
exclusively on 45 Indian annual reports. The study revealed that
companies with inadequate disclosure were likely to be small in size
(measured by total assets and number of stockholders) less profitable
(measured by rate of return and earnings margin) and managed by
Indians.
The selection of items included in the disclosure index is a major task
in the construction of any disclosure index (Martson and Shrieves:
1991). Most of the previous studies have included items of
information of interest to a particular group. In some other studies,
items of information have been included keeping in mind their
relevance to a broad range of users. The use of repetition of a
disclosure index by the researchers is uncommon. For example, Parry
and Grpves (1990) argued that their model was originally developed
by Singhvi (1967) index (applied in the Indian context) and they
applied the same in the context of Bangladesh (a country very similar
to India in terms of both industrial framework and level of
development). In some cases, information items were selected by the
researchers for their disclosure indexes from a careful review of other
studies of financial disclosure as well as after a review of recent annual
reports of listed companies. In addition, the disclosure requirements
relating to national accounting standards were considered and taken
into account by these researchers in selecting items of information
that ought to be disclosed by the companies and as such, where
relevant, have been included in the disclosure index.
Objectives of the Study
The main objective of the study is to examine the disclosure practices
of Insurance Companies in Bangladesh. The specific objectives of the
study are:
(a) To find out the adequacy of disclosure score and their
interrelations with size and age of the selected insurance
companies.
(b) To find out the extents of disclosures among the insurance
companies.
(c) To provide suggestions for developing disclosure practices of
the insurance companies.
Abbreviations: TD = Total Disclosure, BF = Balance of Fund, TA = Total
Assets, GP = Gross Premium.
Hypothesis of the Study
a) There is no correlation between the size of the company and the
disclosure practices.
b) There is no correlation between the age of the company and
disclosure practices.
c) There is no significant difference between the extents of
disclosures among the insurance companies.
Methodology of the Study
Collection of Data
The study is based on the financial statements and operational
information of the sample insurance companies, which has been
collected by visiting the head office of the companies personally by
the researcher. Publications of ICAB (Institute of Chartered
Accountant of Bangladesh), ICMAB (Institute of Cost & Management
Accounting Bangladesh), Stock Exchange, and other related
organization has been collected through library work.
Selection of Sample
In order to accomplish a meaningful representation, the present
study has examined the annual audited reports of 5 insurance
companies of the 31 enlisted in Dhaka Stock Exchange Ltd. for the
period of 2004 to 2008. The sample insurance companies were
selected by using of judgmental sampling approach.
The name of the sample insurance companies is as follows:
Sl.N. Sample Insurance Company Abbreviation
1 Bangladesh General Insurance Company BGIC
2 Progressive life Insurance Company PLIC
3 Prime Insurance Company PIC
4 United Insurance Company UIC
5 Central Life Insurance Company CIC
Construction of Disclosure Index
The disclosure index constructed for this study included 54 items
(shown in appendix) which were used in the formulation of items of
information. The items of information included in the disclosure
index were selected according to the IAS (International Accounting
Standard) adopted in Bangladesh Accounting Standard (BAS), and
Insurance Company Act-1938, Companies Act 1994, SEC (Securities &
Exchange Commission) Ordinance-1987 and ICAB. The items of
information included in the disclosure index are regrouped as a.
Balance Sheet Items b. Income Statement Items c. Accounting Policy
Items d. Board of director's reports and e. Historical summaries.
Scoring of the Disclosure Index
In the present study, the annual reports of the 5 insurance companies
enlisted in the Dhaka Stock Exchange examined against un-weighted
indexes. An un-weighted index of accounting standards is the ratio of
the values of the number of items a company discloses divided by
total value that it could disclose. Here, the only consideration is that
whether a company discloses an item of information in its corporate
annual report it will be awarded 1 and if not, it will be awarded 0.
Techniques of Analysis
a. A survey of the published accounts of the sample insurance
companies in the light of provisions of the Insurance Companies
Act 1938, Securities & Exchange Ordinance 1987, Securities &
Exchange Commission Act 1993 and accounting standards has
been made. An un-weighted index of disclosure has been
prepared incorporating the provisions of the aforesaid Acts.
Related literature has also been reviewed to construct the index.
b. Correlation analysis has been conducted to find out the
association between different variables using the SPSS (Statistical
Package for Social Sciences).
c. T-test has been used to compare the significant difference
between two sample means using the SPSS.
Results and Discussion
Testing of Hypothesis-1
Size of the firm influences the level of disclosure. There are several
measures of size available. In the present study gross premium, total
asset and balance of funds have been used to measure the size of the
company.
Table-I
Gross Premium vs. Total Disclosure
Year G.P. T.D G.P. T.D G.P. T.D G.P. T.D G.P. T.D
2004 231.42 65.37 209 56.11 154.55 66.48 130.18 63.52 108.18 56.67
2005 275.28 65.93 338.9 54.91 131.47 67.78 149.44 64.35 158.72 59.35
2006 285.29 67.78 474.7 56.39 127.66 69.72 153.06 66.48 145 66.2
2007 317.29 71.67 588.4 58.06 144.24 71.94 180.05 68.89 166.13 67.59
2008 353.66 72.31 833.7 60.46 168.03 70.09 208.01 72.13 181.75 66.39
Correlation 0.934 0.907 0.018 0.983 0.726
Source: Annual Audited Reports
Table-I portraits the correlation between gross premium and total
disclosure practices in the annual report of the selected insurance
companies in Bangladesh for the year 2004 to 2008. There is a
correlation between gross premium and total disclosure of all the five
selected companies. Where gross premium is independent variable
and total disclosure is dependent variable. BGIC, PLIC and UIC have
shown very high positive correlation while CIC has shown positive
correlation and PIC has shown very low positive correlation. We can
conclude that disclosure practices are mostly affected by the gross
premium rate.
Table-II
Total Assets vs. Overall Disclosure
BGIC PLIC PIC UIC CIC
Year T.A T.D T.A T.D T.A T.D T.A T.D T.A T.D
2004 488.03 65.37 144.1 56.11 389.52 66.48 318.91 63.52 371.54 56.67
2005 515.76 65.93 322.1 54.91 419.66 67.78 336.5 64.35 392.93 59.35
2006 548.45 67.78 399.9 56.39 465.37 69.72 348.65 66.48 427.1 66.2
2007 567.88 71.67 616.9 58.06 491.54 71.94 414.23 68.89 440.42 67.59
2008 642.51 72.31 994 60.46 523.42 70.09 770.41 72.13 485.39 66.39
Correlation 0.91 0.92 0.86 0.89 0.85
Source: Annual Audited Reports
Table-II reveals the correlation between total assets and total
disclosure practices. All the five selected companies are found
correlated. Where total asset is independent variable and total
disclosures is dependent variable. All the five companies have shown
the very high positive correlation between total assets and total
disclosure. Hence, with the increasing of total assets, the total
disclosure score has linearly increased. The increasing rate for BGIC,
PLIC, PIC, UIC and CIC are 82.81 percent, 84.64 percent, 73.96 percent,
81 percent and 73.96 percent respectively.
Table-III
Balance of Fund vs. Total Disclosure
BGIC PLIC PIC UIC CIC
Year B.F T.D. B.F T.D. B.F T.D. B.F T.D. B.F T.D.
2004 53.58 65.37 73.4 56.11 42.36 66.48 27.2 63.52 32.63 56.67
2005 54.88 65.93 159.3 54.91 32.82 67.78 31.45 64.35 45.64 59.35
2006 61.44 67.78 273.9 56.39 33.12 69.72 31.61 66.48 38.21 66.2
2007 55.03 71.67 492.7 58.06 41.81 71.94 37.27 68.89 36.73 67.59
2008 54.04 72.31 868.2 60.46 46.6 70.09 38.86 72.13 43.03 66.39
Correlation -0.09 0.95 0.21 0.95 0.16
Source: Annual Audited Reports
Table-III demonstrates the correlation between balance of fund and
total disclosure practices. All the five selected companies have found
correlated. Where balance of fund is independent variable and total
disclosure is dependent variable. PLIC and UIC have shown very high
positive correlations, PIC and CIC have shown low positive
correlations and BGIC have shown very low negative correlations.
On the basis of the table I, II, & III, we reject our null hypothesis at 95
percent confidence level, which supports that the size of the insurance
companies in Bangladesh mostly affects the disclosure practices.
Testing of Hypothesis-2
Age of the firm influences the level of disclosure. The old aged firms
have a tendency to disclose more information due to their long
experience than that of the new firms.
Table-IV
Age vs. Disclosure practice
Year Age T.D Age T.D Age T.D Age T.D Age T.D
2004 20 65.37 4 56.11 8 66.48 20 63.52 18 56.67
2005 21 65.93 5 54.91 9 67.78 21 64.35 19 59.35
2006 22 67.78 6 56.39 10 69.72 22 66.48 20 66.2
2007 23 71.67 7 58.06 11 71.94 23 68.89 21 67.59
2008 24 72.31 8 60.46 12 70.09 24 72.13 22 66.39
Correlation 0.964 0.872 0.848 0.98 0.89
Source: Annual Audited Reports
Table-IV portraits the correlation between age and total disclosure
practices. All the five selected companies are found correlated. Where
age is independent variable and total disclosures is dependent
variable. All the companies have shown very high positive correlation
between age and total disclosure. Hence, with the increasing of age,
the total disclosure score has linearly increased. The increasing rate
for BGIC, PLIC, PIC, UIC and CIC are 92.16 percent, 75.69 percent, 72.25
percent, 96.04 percent and 79.21 percent respectively. Our null
hypothesis is rejected at 95 percent confidence level. We can
conclude that the disclosure practices of old companies are slightly
higher than the new established companies.
Testing of Hypothesis-3
Table-V
T-test for Sample Companies

Sig.
Paired Differences t df (2-tailed)
Std. Std. 95%Confidence
Mean Devia- Error Interval of the
tion Mean Difference
Lower Upper
Pair 1 BGIC - PLIC 11.43 1.56 .70 9.48 13.37 16.32 4 .000
Pair 2 BGIC - PIC -.59 1.71 .76 -2.71 1.53 -.77 4 .483
Pair 3 BGIC - UIC 1.54 .94 .42 .37 2.71 3.65 4 .022
Pair 4 BGIC - CIC 5.37 2.69 1.20 2.04 8.71 4.47 4 .011
Pair 5 PLIC - PIC -12.02 1.89 .85 -14.37 -9.66 -14.19 4 .000
Pair 6 PLIC - UIC -9.89 1.62 .72 -11.89 -7.88 -13.68 4 .000
Pair 7 PLIC - CIC -6.05 3.84 1.72 -10.82 -1.28 -3.53 4 .024
Pair 8 PIC - UIC 2.13 2.34 1.05 -.77 5.03 2.04 4 .111
Pair 9 PIC - CIC 5.96 2.94 1.31 2.31 9.61 4.53 4 .011
Pair 10 UIC - CIC 3.83 2.88 1.29 .26 7.41 2.98 4 .041
Source: Annual Audited Reports
Table-V shows the paired sample t-test for insurance companies under
study. T-test for insurance companies shows that at 5 percent level of
significance for paired sample 2 and 8 are significant. Hence, the null
hypothesis is rejected at 95 percent confidence level. We conclude
that there is significant difference between the extent of disclosure
practices of BGIC & PIC and PIC & UIC. T-test for rest of the paired
sample is not significant, which supports the null hypothesis. That
means the extent of disclosure practices between BGIC - PIC, BGIC -
UIC, BGIC - CIC, PLIC - PIC, PLIC - UIC, PLIC - CIC, PIC - CIC, UIC - CIC do
not significantly differ. We can conclude that the extent of disclosure
practices for maximum insurance companies is almost same.
Conclusion & Policy Recommendations
Our study discussed some of the result of the annual report survey.
Financial report is of vital importance to several groups. A company
should develop a sound financial reporting system for its own
interest. Financial performance and position of a company are
measured on the basis of financial information which is used in the
financial reporting system.
Disclosure of accounting information is a necessity for better
financial reporting of the insurance companies. An attempt has been
made in this study to measure the extent of disclosure practices by
the insurance companies. In this regard an un-weighted disclosure
scores have been calculated. Disclosure practices of insurance
companies in the annual reports are not at satisfactory level.
Our study showed that fifty four information items in the disclosure
index were disclosed average 65 percent by insurance companies.
Insurance company also showed the increasing tendency of
information item disclosed. The average disclosure score of the
individual insurance companies for the study period 68.61 percent,
57.19 percent, 69.20 percent, 67.07 percent, & 63.24 percent of BGIC,
PLIC, PIC, UIC, & CIC respectively. 60 percent of the insurance
companies have shown disclosure scores which are above the
average disclosure score of all insurance companies. Disclosure
practices of current year of insurance company are better than that of
the previous year.
Another attempt has been made to examine whether the extent of
disclosure is associated with various corporal attributes like size and
age of the company. This study showed that there is a relationship
between disclosure practices by the insurance companies and the
size and age of the company. The disclosure scores of old companies
is slightly higher than that of the new established companies. Again,
large size companies have disclosed more information than that of
the small one. This study also showed that there is no significant
difference between the extents of disclosures among the insurance
companies. Disclosure scores of general insurance companies are
higher than that of life insurance companies.
Disclosure practices of insurance companies except a few included
the promulgation of the accounting standard followed. Insurance
companies strive to comply with AIS-1, AIS-30 adopted in
Bangladesh. To promote transparency of financial reporting the
insurance company should follow companies Act, SEC rules and
Accounting Standard (AIS) properly. However, the disclosure practices
of insurance companies are very poor due to lack of proper
regulations and reporting standard.
Management attribute is very much important to disclose the
available information in the financial statement such as if the attribute
is conservative the financial disclosure will be less. However, it is the
demand of time to disclose more information to satisfy the various
kinds of users. Only a sound financial reporting system with good
governance can bring or maintained the confidence of the investors.
It is evident from the findings of our study that disclosure in the
insurance sector is inadequate and poor. Meaningful performance
evaluation of the insurance sector is not possible on the basis of
information disclosed in the financial statement. In the case of financial
reporting, the outlook of the company's board of directors should be
changed and it should be made mandatory for the insurance sector to
follow the disclosure requirements outlined in the IAS-30. All insurance
companies in Bangladesh should improve their disclosure practices
particularly the small sized. Moreover, insurance companies should
improve their disclosure practices regardless of their age. r
References
Annual Audited Reports, BGIC, PLIC, PIC, UIC, CIC: 2004-2008.
A.Z.M. Anisur Rahman and Quazi Mohammad Galib Ahsan, Full disclosure: A defense of the
disclosure of Accounting Policies, Accounting Disclosure, The Cost and Management,
May-June 1993, p. 36
Financial Accounting Standards Board (FASB) 1978, Objectives of financial Reporting by
Business Enterprises. Statement of Financial Accounting Concepts No. 1 (Stamford,
Connecticut: FASB)
Financial Accounting Standards Board (FASB), (1981), Annual Report of the Financial
Accounting Standards Board (Stamford, Connecticut: FASB).
Institute of Chartered Accountants of Bangladesh (ICAB), Bangladesh Accounting Standards
(BAS), Volume I and II. Dhaka: ICAB.
International Accounting Standards Board (IASB) (2001), Framework for the Preparation and
Presentation o Financial Statements (London: IASB).
International Accounting Standards Board (IASB), (2004), Discussion Paper Preliminary Views
on Accounting Standards for Small and Medium-sized Entities (London: IASB).
Komatsubara, Akira (1999), "The Disclosure Practices of Life Insurers", NLI Research Institute,
No.127, pp. 23-28.
Martson and Shrieves P.J. (1991) "The use of disclosure Indices in Accounting Research: A
review article," British Accounting Review, Vol.23, pp. 32-43.
Marston, C. L. (1986), Financial Reporting Practices in India. London: Croom Helm.
Parry M. J. and Groves, R. E. (1990), "Does Training More Accountants Raise the Standards of
Accounting in Third World Countries? A Study of Bangladesh", In R. S. O. Wallace, John
M. Samuels and Richard J. Briston (eds.), Research in Third World Accounting", vol.1,
London: JAI Press.
Singhvi, S. S. (1967), Corporate Disclosure through Annual reports in the USA and India
(unpublished doctoral dissertation, Graduate School of Business, Columbia University).
Singhvi, S.S (1968), "Characteristics and Implication of Inadequate Disclosure: A Case Study of
India". The International Journal of Accounting Education and Research, Vol. 3 No. 2
Spring, pp. 29-44
Appendix
Disclosure Index
A. Balance Sheet Items
1. Classification of asset;
2. Amount of tangible assets& intangible assets;
3. Original cost of fixed assets and valuation procedure;
4. Revaluation of fixed assets;
5. Long-term prepayment and deferred costs;
6. Method of valuation of investment and debenture;
7. Nature of investment;
8. Investments loan and advances;
9. For loan and advances (good, bad, doubtful);
10. Loans;
Current Assets
11. Classification of current assets;
12. Trade debtors, advances & agent balances (good, bad, doubtful);
13. Deposits & prepayments;
14. Bills receivable;
15. Accrued interest, premium, dividend, and tax refunds;
16. Cash and bank balances;
Capital and Liabilities
17. Classification of share and share premium;
18. Disclosure of each class of share capital;
19. Additional information about share capital;
20. Reserve or contingency accounts;
21. Balance of funds and accounts;
22. Long-term loans (secured and unsecured);
23. Debenture and loans;
24. Deferred liabilities;
25. Deposits (premium);
26. Classification of current liabilities;
27. Short-term loans & over drafts;
28. Have in the parenthesis been separately disclosed? (creditors, accrued liabilities, advance
payment, interest accrued, unclaimed dividend, unpaid dividend, proposed dividend,
custom duties, annuities, accrued expenses etc.);
29. Contingencies and commitments;
B. Income Statement Items:
Revenue account:
30. Debit items (claims, annuities, and surrenders);
31. Expenses of management;
32. Credit items (premium, annuities, registration fees, interest, dividends, commission
on re-insurances, other income to be specified);
Profit and Loss Account
33. Result of operation (if company has more than one business);
34. Items of income;
35. Items of expenses should be disclosed separately;
36. Interest on borrowing and loans;
37. Losses & provisions for bad and doubtful debts;
38. Taxation;
39. Remuneration of directors & executives;
40. Profit & loss appropriation account;
C. Accounting Policy Items
Notes to the Financial Statements / Accounting Policies
41. Cash flow statement;
42. Legal status and nature of the company;
43. Additional information on financial statement;
44. Compliance with relevant laws;
Significant Accounting Policies:
45. Description of all significant accounting policies
46. Important accounting methods (depreciation, valuation, amortization)
47. Revenue recognition (premium, interest, dividend, management expense etc.)
48. Share capital & share premium
59. Accounting policies (life fund, loan & advances, balance of fund, reserve for
exceptional losses and contingent liabilities etc.)
50. Premium & claims
51. Specific current assets and liabilities
52. Information about directors and executives
D. Board of director's reports
53. Reports of the board of directors (the state of the company's affairs, growth of
business, promotional measures, rating of the company, social welfare activities,
appointment of auditors, directors responsibility statement recommended dividend
etc.)
E. Historical Summaries
54. Information about company (name, nature & activities, legal status etc.)
Abstract: The disclosure practices have become more comprehensive overtime because of increasing awareness of the
stakeholders. The present study evaluates the extent of disclosure practices relating to age and size of the insurance companies in
Bangladesh covering a period of five years based on published annual audited reports and relevant reporting requirements. The
major finding of the study is that the age and size of the insurance companies mostly affects the disclosure practices by them.
Adequate disclosure practices by the small sized companies are desired. Insurance companies should also improve their disclosure
practices regardless of their age.
Keywords: Insurance, Stakeholder, awareness, Practice.
* Mr. Md. Abu Bokar Siddique, Assistant Professor (Accounting), Dept. of
Humanities, Rajshahi University of Engineering &Technology (RUET),
Rajshahi-8204, Bangladesh.
** Mr. Md. Rabiul Islam, Lecturer (Management), Department of Humanities,
Rajshahi University of Engineering & Technology (RUET), Rajshahi-8204,
Bangladesh.