See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/349379125

Insurance Industry of Bangladesh and its Future Prospects

Article · June 2000

CITATIONS READS

2 1,957

1 author:

Md Masudur Rahman
University of Dhaka
34 PUBLICATIONS   46 CITATIONS   

SEE PROFILE

All content following this page was uploaded by Md Masudur Rahman on 17 February 2021.

The user has requested enhancement of the downloaded file.

 Insurance Industry of Bangladesh and
its Future Prospects

Md. Masudur Rahman‘

Abstract: Insurance industry is playing an important role in the national economy of

Bangladesh. The last decade has experienced a fast growth of the industry. This paper
discusses the future prospects of the industry on the basis of an analysis of the
opportunities and the threats prevailing in the insurance sector in Bangladesh. The paper
also makes a historical overview of insurance business. It concludes with some

recommendations that may be useful for the policy makers within the government as well as
for the insurance companies to properly use the opportunities and to tackle the threats.

Introduction

Insurance is a sophisticated modern financial institution governed largely by the

law of statistical averages. Insurance spreads the economic burden of losses by
using funds contributed by members of the group to pay for them. Thus it is a
loss-spreading device (Athearn, 1977: 25). The general insurance business
conducted by public and private insurance companies may broadly be classified
into (a) traditional insurance business and (b) non-traditional insurance business.
Traditional insurance business covers several lines of activities namely, marine
insurance, hull insurance, fire insurance and insurance services for covering
damages in cases of burglary, aviation and motor accident. The non-traditional
side covers some important aspects of national economy not covered by
traditional insurance services.

* Mr. Md. Masudur Rahman is a Lecturer in the Department of Marketing, University of Dhaka.
Journal of Business Studies, Vol. xxi, No. 1, June 2000 146

It is one of the most important financial institution in the sense that besides
covering losses of individual policy holders for death and accidents or damages
of properties, it serves an important national purpose of channeling the savings
of the general mass or special group of people to investment. Insurance has the
potential to make a significant overall impact on the economy of Bangladesh
where capital is relatively short in supply, the rate of savings is very low,
investment opportunities are few and far between, inflation is the norm, and
provisions of social security for the people are almost non-existent. Per capita
insurance in Bangladesh is one of the lowest in the world, around Tk. 150 per
annum. The proportion of the contribution of insurance to the gross domestic
savings is still about one percent (Bangladesh Economic Survey, 1993-94).
In Bangladesh, the insurance business, after an early
of dislocation,stage
adventure and experimentation through half a century, has now been established
as a nascent industry distributed between the public and private sectors.
Insurance business evolved in the Indian subcontinent late in the nineteenth
century when several British companies started their business and a few
Christian missionaries began to operate Mutual Funds to serve their own
community members.
The first Indian insurance company, Bombay Mutual was founded in 1871
(Safiyyullah, 1982). Before the partition of India, there was a brisk competition
between Indian and European companies mainly limited to serve the urban
population in industrial cities. Muslims were almost absent from this business
until two new companies were established, one (Eastren Federal Union) by
Abdur Rahman Siddique in 1932 and the other (Muslim India) by Allama Iqbal in
1934 (Safiyyulla 1982). Both companies had some business in the then undivided
Bengal.

There was a relatively rapid expansion of insurance business during the Pakistan
period. The Pakistan government controlled insurance business through the
Insurance Act, 1938. Private insurance companies were regulated through the
Department of Insurance headed by the Controller of Insurance.
In 1958 the Homeland Insurance Company Limited began functioning in East
Pakistan. Thereafter, the Eastern Insurance Company Limited and the East
Pakistan Co-operative Insurance Society Limited were set up in 1959 and 1961
respectively. Between 1958 and 1967, only nine East Pakistani companies came
147 Insurance Industry of Bangladesh and its Future Prospects

into operation, although the total number of insurance companies conducting

business in the province was over eighty (Safiyyullah, 1982).

Due to political and economic disadvantages, all ‘Bangali’ owned insurance

companies experienced slow growth, high management cost and unsatisfactory
reserves. On the other hand, the West Pakistani insurance companies were doing
most of the business in East Pakistan, transferring funds from the province for
investment in the projects located in West Pakistan. But insurance companies of
both East and West Pakistan were worse-off in competition with the foreign
companies for various reasons. In order to stabilize their financial position, the
government took up distribution of all general insurance business relating to
different government departments and autonomous organizations amongst the
companies enlisted as members of the Insurance Association of Pakistan. A
National Co-insurance Scheme was implemented through the Pakistan Insurance
Corporation, established in 1952 for development of insurance and re-insurance
business.
In 1972, the government of Bangladesh took over the control and management of
all insurance companies. Subsequently, the management of all insurance
companies, except the Postal Life Insurance and the foreign life insurance
companies, were also taken over by the government, pending nationalization of
the insurance industry, through appointment of custodians under the Bangladesh
Insurance (Emergency Provisions) Order, 1972 (Presidential Order No. 30 of
1972).
In fact, insurance industry was nationalized under the Bangladesh Insurance
(Nationalization) Order, 1972 (Presidential Order No. 95 of 1972) which came
into effect on 8 August 1972. Consequently, two subsidiary corporations namely,
Surma Jiban Bima Corporation and Rupsha Jiban Bima Corporation were
established for life insurance and two other organizations, namely Teesta Bima
Corporation and Karnaphuli Bima Corporation for general insurance were
established. Under the same order another controlling organization known as the
Jatiya Bima Corporation was also established in order to co-ordinate and
supervise the activities of these corporations.
The idea was that the work of integration of the unit companies under each
subsidiary corporation would be completed by December, 1972 and the newly
established corporations would start functioning from the 1 January 1973. The
integration work of the offices and employees suffered greatly for a variety of
Journal of Business Studies, Vol. xxi, No. 1, June 2000 148

reasons and the liquid assets were rapidly depleted. The government decided to
further streamline the organization and have one corporation only operating in
each of the two main market areas -- Jiban Bima Corporation (JBC) for life
insurance business and Sadharan Bima Corporation (SBC) for general insurance
business.

In 1984, the Government amended the Insurance Act, 1938 and the Insurance
Corporation Act, 1973 to enable the private insurance companies to do insurance
business. During that period between 1985 and 1988 permission were accorded
to 16 companies for general insurance business and 2 companies for life
insurance business. Only one life insurance company got permission to do
business in 1990 (Jasimuddin, 1994). Again in 1995 the government gave
permission to 8 new general insurance companies to start business. After 1996,
the government allowed 30 more general and life insurance companies to start
business.

Objectives
The aim of this paper is to identify and evaluate the opportunities and threats
prevailing in the insurance industry of Bangladesh in order to assess the future
prospects. The specific objectives are:
° to identify the opportunities of marketing of insurance services in
Bangladesh,
e to identify the threats of marketing of insurance services, and
e® to make constructive recommendations on how to utilize the opportunities,
to overcome the threats and to meet the coming challenges.

Methodology
This paper is based on primary and secondary data. It involves collection and
analysis of both published and unpublished secondary data sources, official
statistics and other available documents. The sources of data include different
publications of the government of Bangladesh, economic and financial journals,
newspaper articles, publications of the Bangladesh Insurance Academy and
annual reports of different insurance companies. The primary data were
collected through opinion survey and participatory appraisal method, where the
participants included office executives, policyholders and representatives of
research and general business community.
 149 Insurance Industry of Bangladesh and its Future Prospects

Opportunities of Marketing of Insurance Services in Bangladesh

Insurance product is a written legal contract (insurance document) plus a bundle
of services associated with it. But insurance is a service and Kotler defines
service as “any act or performance that one party can offer to another that is
essentially intangible and does not result in the ownership of anything. Its
production may or may not be tied to physical product” (Kotler, 1999: 428).
Insurance as a service has all the four main characteristics: intangibility,
inseparability, variability and perishability. Each of these characteristics of
insurance services poses problems and requires different strategies to cope with.
The following points describe the opportunities of marketing of insurance
services in relation to unique characteristics of service marketing.

Table 1: General Insurance Premium Income

Number | Name of the Insurance Gross Premium Income (Taka in crore)
Companies 1989 1990 1995 1996 1997 1998
1 Shadharan Bima Corporation 79.41 58.14 62.78 84.10 64.57 84.10
2 Bangladesh General Ins. Co. 7.16 8.43 18.11 15.54 13.88 14.52
3 Peoples Insurance Co. Ltd. 8.37 11.02 20.71 21.19 18.29 15.10
4 United Insurance Co. Ltd. 5.86 7.38 13.55 13.86 14.92 13.13
5 Bangladesh Co-operative Ins. Co. 1.99 3.61 6.57 5.09 5.79 3.92
6 Green Delta Ins. Co. Ltd. 10.50 13.73 21.28 23.58 25.04 26.24
7 Pragati Ins. Ltd. 10.29 12.66 20.90 22.77 25.35 25.62
8. Eastern Ins. Co. Ltd. _ 5.07 9.05 14.88 16.96 16.56 16.18
9 Eastland Ins. Co. Ltd. 3.75 6.33, 12.39 8.74 11.96 13.48
10. Karnaphuli Ins. Co. Ltd. 4.63 7.22 16.10 14.90 16.63 15.77
11. Janata Ins. Co. Ltd. 8.26 11.57 19.10 12.65 13.59 16.98
py Phoenix Ins. Co. Ltd. 8.49 11.22 19.22 22.38 22.76 17.87
13. Federal Ins. Co. Ltd. 5.33 6.61 16.78 15.20 17.00 16.53
14 Central Ins. Co. Ltd. 3.47 6.80 11.70 11.50 13.73 13.45
15. Reliance Ins. Ltd. 8.61 13.34 22.20 23.08 20.27 21.24
16. Rupali Ins. Co. Ltd. 6.56 9.99 18.85 21.45 18.97 18.83
17. Purabi Ins. Co. Ltd. 0.56 3.38 5.23 7.92 4.04 3.01
18. Prime Ins. Co. Ltd. - - - 1.92 5.13 8.17
19 Provati Ins. Co. Ltd. - - - 7.46 9.77 11,36
20 Meghna Ins. Co. Ltd. : - : 0.59 4.79 7.15
21 City General Ins. Co. Ltd. - - - 0.68 4.73 4.79
22. Pioneer Ins. Co. Ltd. - - - 2.31 8.54 10.53
23 Mercantile Ins. Co. Ltd. - - - 0.61 4.26 6.17
24. Northern Gen. Ins. Co. Ltd. - - - 2.67 5.39 10.61
25 Bangladesh National Ins. Co. Ltd. - - - 0.19 3.66 5.00
Gross Total 178.31 | 200.48 | 320.35 | 357.34 369.62 379.29
Private Sector Total 98.90 142.34 | 257.57 | 273.24 305.05 315.65

Source: The office of the Controller of Insurance, Dhaka, Bangladesh.

Journal of Business Studies, Vol. xxi, No. 1, June 2000 150

Growing market
Since the formation of Sadharan Bima Corporation (SBC) in 1973 it has exclusive
monopoly right to carry on all kinds of general insurance and reinsurance
business. It started with a business figure of Tk. 12 crore in 1973, while it earned
premium of around Tk. 98 crore in 1985. The overall economy of the country
recorded some growth as a result of privatization of a number of industries. The
insurance industry of Bangladesh has recorded satisfactory performance during
the first decade of its privatization. Table 1 shows yearly premium earning of
public and private general insurance companies over a period of 10 years.

The growth of the private sector economy only partially explained the increase of
premium income from the private sector from Tk. 44 crore in 1985 to Tk. 142.34
crore in 1990. In 1994 general insurance premium totalled Tk. 279.04 crore and
life insurance premium totalled Tk. 170 crore. In 1998 premium income in general
insurance business was Tk. 379.29 crore and that in life insurance business was
Tk. 310 crore providing for a growth rate of 36% in general insurance business
and 82% in life insurance business. In 1998 general insurance premium totalled
Tk. 379.29 crore out of which the public sector company SBC earned Tk. 84.10
crore and the rest came from the private sector. The moderate increase in
premium income of the insurance companies reflects a relatively slow growth of
the economic activities and business in the country. It is interesting to note that
the premium earned from the underwriting of public sector general insurance
business has increased nominally over years, with all the increase in business
coming from the private sector. The evidence, however, indicate that the
insurance market in Bangladesh is growing day by day. Despite a slow growth in
overall business activities there has been a rapid increase in marine (cargo)
insurance business due to increase in imports of raw materials for garments and
items like cement, vegetable oil and food grain. There has also been some growth
in small and medium industries, particularly in textile and engineering sectors
opening up potential avenues in the fire insurance business. Establishment of
Export Processing Zones (EPZ) and inflow of foreign investments also indicate a
potentially good market for insurance industry.

Development of new products

Most of the insurance companies in Bangladesh deal with traditional insurance
services such as marine, fire, motor and other accident insurances. But in the face
of cutthroat competition between public and private insurance companies as well
151 Insurance Industry of Bangladesh and its Future Prospects

as among the private companies themselves, individual insurance companies

have become active in eliminating threats and trapping up new opportunities.
Nowadays, along with traditional insurance services, they are offering various
nontraditional services to their customers. Options for providing these
nontraditional insurance services can be considered as opportunities. With the
economic development of the country the per capita income of the people are
gradually increasing and therefore a gradual increase of per capita expenditure
on insurance can be expected. Target market of insurance companies is
expanding and they can afford different types of non-traditional insurance
services such as health insurance, personal accident insurance, travel insurance,
education plan insurance, burglary insurance and pension scheme.
The economy of Bangladesh is predominantly an agrarian one, with most people
engaged in farming and fishing. About 60% of her export earnings come from the
agriculture and the contribution of the agriculture to our Gross Domestic Product
is 35% (Karim, 1997). The uncertainty of agricultural production due to crop
failure caused by climate variations, drought, cyclone, flood and pests affects
farmer income as well as government revenue. Furthermore, in the last few years
commercialization has occurred in some sections of the agriculture sector.
Increase in investment in the agriculture sector is creating a new opportunity for
insurance industry. Various agricultural insurance services are becoming common
these days. Demand for insurance protection against crop loans, livestock loans,
fisheries loans and equipment loans are also increasing day by day.

Scope of policy changes

SBC has long been the sole reinsurer in Bangladesh and private insurance
companies were statutorily compelled to place 100% of their reinsurance
business with SBC. In 1990 the government amended the relevant provisions of
the Insurance Act and the Insurance Corporation Act allowing 50% of all
reinsurance of general insurance business to be placed compulsorily with SBC
and the rest to private reinsurance companies. About 70% of premium income
from general insurance business in Bangladesh is retained locally and the rest
30% goes to reinsurers abroad.

Permission to private insurance companies to act as reinsurers will open up new

opportunities to them. This will initiate open competition between the SBC and
the private reinsurers within the country and will reduce the reinsurance cost and
increase efficiency. This requires amendment of the existing rules. The private
Journal of Business Studies, Vol. xxi, No. 1, June 2000 152

insurance companies can argue in favor of their capability to act as reinsurers on

the basis of the fact that the total capital belonging to the government owned
general insurance company SBC is Tk. 550 million while the private sector
insurance companies own Tk. 2500 million (Islam, 1997).

Scope of investment
Insurance companies can usually make more profit from investment activities
than from their regular insurance business. The private insurance companies are
realizing this fact and playing an important role in the finacial market. Insurance
companies are making large investments in government bonds, ICB projects and
in private sector business. There are opportunities to enhance profit through
effective and efficient money management by employing capable and experienced
personnel. Scope of investment expansion persists in the areas of leasing,
housing, health and money market.

Threats of Insurance Business in Bangladesh

A total of 41 general insurance companies and 15 life insurance companies are
now operating in the private sector insurance business in Bangladesh (Prothom
Alo, 2000). With the emergence of these private companies, the volume of both
general and life insurance business have increased substantially. The increase is
partly the effect of inflation in the economy, but the combined efforts made by
the SBC and the private insurance companies to explore new business have been
no less important. However, due to a slow pace of economic development in the
country, the rate of growth in the insurance industry has slackened. Besides, the
insurance industry is now facing some challenges.

Poor public image

Public image about the services of the insurance companies is very poor. There is
a common belief that getting money from an insurance claim is a very difficult
task. The claim settlement process takes longer time than what is justified.
Peoples’ faith in insurance companies has yet to be widely established.

Necessity of service diversification

Insurance is not just a tool of risk coverage. It is also an attractive instrument of
savings. The mixture of risk coverage with savings gives the opportunity for
innovative product designing, i.e. service diversification. In a dynamic insurance
153 Insurance Industry of Bangladesh and its Future Prospects

market one can expect to see new products being promoted at regular intervals.
So far very little efforts have been taken to innovate and introduce need-oriented
insurance services in response to existing threats.

Necessity of market expansion of life insurance business

The concept of life insurance has not yet been widely accepted by the general
mass in Bangladesh. The insurance market is characterized by low penetration of
life insurance business. The main reason is that a large proportion of the
population live below the subsistence level. The per capita income is around $
385 per year. Here, only 4 persons out of 1000 have life insurance policies.
However, people’s economic condition is not the only deterrent. People’s
perception about life insurance varies due to their culture, religion and level of
education. Life insurance is still considered contra-religion among a large section
of the population. Life insurance business is not flourishing at an appreciable
rate due to various other reasons such as inadequate monetary benefit, lack of
tax incentives and dissatisfaction over the level of services etc.

Poor risk management

Most of the private insurance companies have over simplified approaches to
premium income and are slow to introduce comprehensive risk evaluation. The
shortage of skilled and experienced professionals in the insurance companies has
the consequence that most of them are unable to underwrite and manage their
risks on a scientific basis. They underwrite and retain risks indiscriminately
without considering what results they may subsequently face. Lack of
professional knowledge misguides these companies with regard to risk assessing,
claim handling and risk managing consequently weakening their financial
strengths. In addition, most of the private insurance companies do not have
sufficient qualified personnel to administer their reinsurance business. Usually
they tend to retain premium income for their own purposes at the risk of failing
to gain the full benefit of averaged risk provided by the reinsurance market.

Absence of business ethics

Absence of business ethics is another major element causing indiscipline and
irregularity in the insurance market. In a competitive market, some insurance
companies use some business tactics, which violate the standard business
practices and the provisions of insurance acts.
Journal of Business Studies, Vol. xxi, No. 1, June 2000 154

Regulated price structure

The price (premium rate) of general insurance products is determined by the
ministry of commerce with the assistance of local reinsurer (SBC). All general
insurance companies have to follow this price structure. Due to rigid price
structure companies can not offer lower price to their clients. Therefore, reputed
and well-managed companies can not enjoy comparative advantage in price over
other companies.

Recommendations

In the light of the preceding discussion, it is felt necessary that the policy makers
within the government and the insurance companies should adopt measures in
order to make good use of the opportunities and to tackle the threats for ensuring
a healthy development of the industry. The following actions are suggested.

The office of The Controller of Insurance should be strengthened with

professional people with an aim to efficiently handle the affairs of the insurance
companies to ensure discipline and regularity in operations. While it is desirable
to give freedom and autonomy to the insurance industry, the government is to
monitor the activities of the companies so that their profit motive does not
damage the industry through distortions.

There should be a change in the insurance rules and acts in Bangladesh to

accommodate that the private sector insurance companies can procure business
from the public sector. The existing provisions allow the only two public sector
insurance companies to do all government insurance business. Also according to
the current insurance rules only these two public sector insurance companies can
do reinsurance business. This restriction needs to be withdrawn so that the
private companies can do reinsurance business. This would help to save foreign
exchange outflows, create new technical job opportunities, open up scope for
innovations, which are important to build confidence in the market.

One of the basic requirements for the insurance industry to have sustained
growth is to enhance training facilities. Bangladesh Insurance Academy is
providing training facilities and professional education to those engaged in
insurance business in the country. The syllabus, curriculum and training programs
of the academy need to be modified to meet the modern needs of the insurance
industry.
155 Insurance Industry of Bangladesh and its Future Prospects

Insurance companies need to modify their recruitment strategies with increased

focus on the marketing and sales training because, insurance being a service
marketing industry it requires special attention. The underlying problem in
Bangladesh is that there is no insurance tradition and all development is
conditional upon educating the potential buyer to the advantages of insurance
generally before the specific product can be sold.

At present insurance companies of Bangladesh are shaky and conservative about

the investment decisions. They should progressively come forward to invest
heavily in profitable emerging sectors such as real estate, health, education,
leasing, share market and other money markets.
To penetrate through the potential life insurance market the companies should
take aggressive marketing efforts by offering additional services in the form of
lucrative economic benefits, tax incentives and saving plans with easy
mechanism. To regain and maintain a positive public image, the insurance
companies should overcome the dissatisfaction in regards to services and claim
settlements and should strive to maintain a service standard.

The pricing rules should be relaxed and less rigid so that the companies can
exercise some autonomy. The government should allow the insurance companies
to quote different premium rates within a specified span.

In response to the opportunity of growing market the insurance companies can

expand their target market by identifying and providing responsive services. In
order to do so each company should establish and effectively operate research
and development department. The insurance companies should be encouraged
and motivated to expand their activities towards developing non-traditional and
people oriented insurance schemes along with their aggressive efforts for the
development of traditional types of insurance schemes.

References

Athearn, J.L. (1977), Risk and Insurance, West Publishing Co. USA, p.25. Bangladesh Economic
Survey, 1993-94, Planning Commission, Government of Bangladesh.

Bhuiya, A.R. (1997), ‘General insurance market in Bngladesh- a review’, The Independent,
Dhaka, 15th September.

Hibibulla, M. and Ghosh, S.N. (1989), General Insurance Business in Bangladesh, Bureau of
Business Research, University of Dhaka, Bangladesh.
 Journal of Business Studies, Vol. xxi, No. 1, June 2000 156

Islam, R. (1997), ‘Progress by creating trust’, The Independent, Dhaka, 15th September.

Jasimuddin, S.M. (1994), ‘Privatisation policy: the case of Bangladesh insurance sector’, Insurance
Journal, Bangladesh Insurance Academy, Vol.46, June, p-27-31.

Karim, R. (1997), ‘The role of crop insurance’ The Independent, Dhaka, 15th September.
Kotler, P. (1999), Marketing Management, Prentice-Hall of India Private Ltd., Tenth Edition,
p.428.

News Item, (2000), The Prothom Alo, Dhaka, 13! June.

Safiyyullah, A.F.M. (1982), ‘The nationalisation of insurance: historical background
in the context
of Bangladesh’, Insurance Journal, Bangladesh Insurance Academy, Vol.32, December, p.26-
32.

Viewpublicatonsta