This is the law of nature that people have to live and play with hazards and to some extent insurance policy can free people from those frustrations. Even if this is true, people of Bangladesh still don’t prefer to insure themselves. One may think that the people of Bangladesh are risk lover; on the other hand other may contradict by saying that their low purchasing power doesn’t permit them to avail insurance policy. Here we will try to find out the problems of insurance business in Bangladesh and will try to suggest some steps for overcoming these problems.
What is insurance?
Insurance in its basic form is defined as ” A contract between two parties whereby one party called insurer undertakes in exchange for a fixed sum called premiums, to pay the other party called insured a fixed amount of money on the happening of a certain event.”
In simple terms it is a contract between the person who buys Insurance and an Insurance company who sold the Policy. By entering into contract the Insurance company agrees to pay the Policy holder or his family members a predetermined sum of money in case of any unfortunate event for a predetermined fixed sum payable which is in normal term called Insurance Premiums.
Insurance is basically a protection against a financial loss which can arise on the happening of an unexpected event. Insurance companies collect premiums to provide for this protection. By paying a very small sum of money a person can safeguard himself and his family financially from an unfortunate event.
For Example if a person buys a Life Insurance Policy by paying a premium to the Insurance company , the family members of insured person receive a fixed compensation in case of any unfortunate event like death.
There are different kinds of Insurance Products available such as Life Insurance , Vehicle Insurance, Home Insurance, Travel Insurance, Health or Mediclaim Insurance etc.
Types of Insurance
Any risk that can be quantified probably has a type of insurance to protect it. Among the different types of insurance are:
Automobile insurance, also known as auto insurance, car insurance and in the UK as motor insurance, is probably the most common form of insurance and may cover both legal liability claims against the driver and loss of or damage to the vehicle itself. Over most of the United States purchasing an auto insurance policy is required to legally operate a motor vehicle on public roads. Recommendations for which policy limits should be used are specified in a number of books. In some jurisdictions, bodily injury compensation for automobile accident victims has been changed to No Fault systems, which reduce or eliminate the ability to sue for compensation but provide automatic eligibility for benefits.
Boiler insurance (also known as Boiler and Machinery insurance or Equipment Breakdown Insurance)
Casualty insurance insures against accidents, not necessarily tied to any specific property.
Credit insurance pays some or all of a loan back when certain things happen to the borrower such as unemployment, disability, or death.
Financial loss insurance protects individuals and companies against various financial risks. For example, a business might purchase cover to protect it from loss of sales if a fire in a factory prevented it from carrying out its business for a time. Insurance might also cover failure of a creditor to pay money it owes to the insured. Fidelity bonds and surety bonds are included in this category.
Health insurance covers medical bills incurred because of sickness or accidents.
Liability insurance covers legal claims against the insured. For example, a homeowner’s insurance policy provides the insured with protection in the event of a claim brought by someone who slips and falls on the property, and brings a lawsuit for her injuries. Similarly, a doctor may purchase liability insurance to cover any legal claims against him if his negligence (carelessness) in treating a patient caused the patient injury and/or monetary harm. The protection offered by a liability insurance policy is two-fold: a legal defense in the event of a lawsuit commenced against the policyholder, plus indemnification (payment on behalf of the insured) with respect to a settlement or court verdict.
Life insurance provides a cash benefit to a decedent’s family or other designated beneficiary, and may specifically provide for burial and other final expenses.
Annuities provide a stream of payments and are generally classified as insurance because they are issued by insurance companies and regulated as insurance. Annuities and pensions that pay a benefit for life are sometimes regarded as insurance against the possibility that a retiree will outlive his or her financial resources. In that sense, they are the complement of life insurance.
Total permanent disability insurance provides benefits when a person is permanently disabled and can no longer work in their profession, often taken as an adjunct to life insurance.
Locked Funds Insurance is a little known hybrid insurance policy jointly issued by governments and banks. It is used to protect public funds from tamper by unauthorised parties. In special cases, a government may authorize its use in protecting semi-private funds which are liable to tamper. Terms of this type of insurance are usually very strict. As such it is only used in extreme cases where maximum security of funds is required.
Marine Insurance covers the loss or damage of goods at sea. Marine insurance typically compensates the owner of merchandise for losses sustained from fire, shipwreck, etc., but excludes losses that can be recovered from the carrier.
Nuclear incident insurance – damages resulting from an incident involving radioactive materials is generally arranged at the national level. (For the United States, see Price-Anderson Nuclear Industries Indemnity Act.)
Political risk insurance can be taken out by businesses with operations in countries in which there is a risk that revolution or other political conditions will result in a loss.
Professional Indemnity Insurance is normally a mandatory requirement for professional practitioners such as Architects, Lawyers, Doctors and Accountants to provide insurance cover against potential negligence claims. Non licensed professionals may also purchase malpractice insurance, it is commonly called Errors and Omissions Insurance and covers a service provider for claims made against them that arise out of the performance of specified professional services. For instance, a web site designer can obtain E&O insurance to cover them for certain claims made by third parties that arise out of negligent performance of web site development services.
Property insurance provides protection against risks to property, such as fire, theft or weather damage. This includes specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance, inland marine insurance or boiler insurance.
Terrorism insurance
Title insurance provides a guarantee that title to real property is vested in the purchaser and/or mortgagee, free and clear of liens or encumbrances. It is usually issued in conjunction with a search of the public records done at the time of a real estate transaction.
Travel insurance is an insurance cover taken by those who travel abroad, which covers certain losses such as medical expenses, lost of personal belongings, travel delay, personal liabilities.. etc.
Workers’ compensation insurance replaces all or part of a worker’s wages lost and accompanying medical expense incurred due to a job-related injury.
A single policy may cover risks in one or more of the above categories. For example, car insurance would typically cover both property risk (covering the risk of theft or damage to the car) and liability risk (covering legal claims from say, causing an accident). A homeowner’s insurance policy in the US typically includes property insurance covering damage to the home and the owner’s belongings, liability insurance covering certain legal claims against the owner, and even a small amount of health insurance for medical expenses of guests who are injured on the owner’s property.
Potential sources of risk that may give rise to claims are known as “perils”. Examples of perils might be fire, theft, earthquake, hurricane and many other potential risks. An insurance policy will set out in details which perils are covered by the policy and which are not.
History of Insurance business in Bangladesh:
Insurance is not a new business in Bangladesh. Almost a century back, during British rule in India, some insurance companies started transacting business, both life and general, in Bengal. Insurance business gained momentum in East Pakistan during 1947-1971, when 49 insurance companies transacted both life and general insurance schemes. These companies were of various origins British, Australian, Indian, West Pakistani and local. Ten insurance companies had their head offices in East Pakistan, 27 in West Pakistan, and the rest elsewhere in the world. These were mostly limited liability companies. Some of these companies were specialised in dealing in a particular class of business, while others were composite companies that dealt in more than one class of business.
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The government of Bangladesh nationalised insurance industry in 1972 by the Bangladesh Insurance (Nationalisation) Order 1972. By virtue of this order, save and except postal life insurance and foreign life insurance companies, all 49 insurance companies and organisations transacting insurance business in the country were placed in the public sector under five corporations. These corporations were: the Jatiya Bima Corporation, Tista Bima Corporation, Karnafuli Bima Corporation, Rupsa Jiban Bima Corporation, and Surma Jiban Bima Corporation. The Jatiya Bima Corporation was an apex corporation only to supervise and control the activities of the other insurance corporations, which were responsible for underwriting. Tista and Karnafuli Bima Corporations were for general insurance and Rupsa and Surma for life insurance. The specialist life companies or the life portion of a composite company joined the Rupsa and Surma corporations while specialist general insurance companies or the general portion of a composite company joined the Tista and Karnafuli corporations.
The basic idea behind the formation of four underwriting corporations, two in each main branch of life and general, was to encourage competition even under a nationalised system. But the burden of administrative expenses incurred in maintaining two corporations in each front of life and general and an apex institution at the top outweighed the advantages of limited competition. Consequently, on 14 May 1973, a restructuring was made under the Insurance Corporations Act 1973. Following the Act, in place of five corporations the government formed two: the sadharan bima corporation for general business, and jiban bima corporation for life business.
The postal life insurance business and the life insurance business by foreign companies were still allowed to continue as before. In reality, however, only the american life insurance company. continued to operate in the life sector for both new business and servicing, while three other foreign life insurance continued to operate only for servicing their old policies issued during Pakistan days. Postal life maintained its business as before.
After 1973, general insurance business became the sole responsibility of the Sadharan Bima Corporation. Life insurance business was carried out by the Jiban Bima Corporation, the American Life insurance Company, and the Postal Life Insurance Department until 1994, when a change was made in the structural arrangement to keep pace with the new economic trend of liberalisation.
The Insurance Corporations Act 1973 was amended in 1984 to allow insurance companies in the private sector to operate side by side with Sadharan Bima Corporation and Jiban Bima Corporation. The Insurance Corporations Amendment Act 1984 allowed floating of insurance companies, both life and general, in the private sector subject to certain restrictions regarding business operations and reinsurance. Under the new act, all general insurance businesses emanating from the public sector were reserved for the state owned Sadharan Bima Corporation, which could also underwrite insurance business emanating from the private sector. The Act of 1984 made it a requirement for the private sector insurance companies to obtain 100% reinsurance protection from the Sadharan Bima Corporation. This virtually turned Sadharan Bima Corporation into a reinsurance organisation, in addition to its usual activities as direct insurer. Sadharan Bima Corporation itself had the right to reinsure its surplus elsewhere outside the country but only after exhausting the retention capacity of the domestic market. Such restrictions aimed at preventing outflow of foreign exchange in the shape of reinsurance premium and developing a reinsurance market within Bangladesh.
The restriction regarding business placement affected the interests of the private insurance companies in many ways. The restrictions were considered not congenial to the development of private sector business in insurance. Two strong arguments were put forward to articulate feelings: (a) Since the public sector accounted for about 80% of the total premium volume of the country, there was little premium left for the insurance companies in the private sector to survive. In this context, Sadharan Bima Corporation should not have been allowed to compete with the private sector insurance companies for the meagre premium (20%) emanating from the private sector; (b) Being a competitor in the insurance market, Sadharan Bima Corporation was hardly acceptable as an agency to protect the interests of the private sector insurance companies and should not have retained the exclusive right to reinsure policies of these companies. The arrangement was in fact, against the principle of laissez faire.
Private sector insurance companies demanded withdrawal of the above restrictions so that they could (a) underwrite both public and private sector insurance business in competition with the Sadharan Bima Corporation, and (b) effect reinsurance to the choice of reinsurers. The government modified the system through promulgation of the Insurance Corporations (Amendment) Act 1990. The changes allowed private sector insurance companies to underwrite 50% of the insurance business emanating from the public sector and to place up to 50% of their reinsurance with any reinsurer of their choice, at home or abroad, keeping the remaining for placement with the Sadharan Bima Corporation.
According to the new rules the capital and deposit requirements for formation of an insurance company are as follows:
Capital requirements: for life insurance company – Tk 75 million, of which 40% shall be subscribed by the sponsors; for mutual life insurance company – Tk 10 million; for general insurance company – Tk 150 million, of which 40% shall be subscribed by the sponsors; and for cooperative insurance society – Tk 10 million for life and Tk 20 million for general.
Deposit requirements (in cash or in approved securities): For life insurance – Tk 4 million; for fire insurance – Tk 3 million; for marine insurance – Tk 3 million; for miscellaneous insurance – Tk 3 million; for mutual insurance company – Tk 1.4 million; and for cooperative insurance society, in case of life insurance – Tk 1.4 million, and in case of general insurance – Tk 1 million for each class.
The government guidelines for formation of an insurance company are:
(1) The intending sponsors must first submit an application in prescribed form to the Chief Controller of Insurance for prior permission.
(2) After necessary scrutiny the Chief Controller shall forward the application with his recommendation to the Ministry of Commerce.
(3) After further scrutiny, the Ministry of Commerce shall submit its views to the Cabinet Committee constituted for this purpose.
(4) The decision of the Committee, if affirmative, should be sent back to the Ministry of Commerce which in turn should send it back to the Chief Controller of Insurance for communicating the same to the sponsors.
(5) The sponsors would then be required to apply in a prescribed form to the Registrar of Joint Stock Companies to get registration as a public liability company under the Companies Act. Memorandum and Articles of Association duly approved by the Controller of Insurance would have to be submitted with the application.
(6) Once the registration process was completed the sponsors would have to obtain permission of the securities and exchange commission to issue share capital.
(7) Reinsurance arrangements would have to be made at this stage.
(8) After all the above requirements were fulfilled the licence to commence business under the Insurance Act 1938 is to be obtained from the Chief Controller of Insurance. Application can only be made subject to government announcements in this regard.
The control over insurance companies, including their functions relating to investments, taxation, and reporting, are regulated mainly by the Insurance Act 1938 and the Finance Acts.
The privatisation policy adopted in the 1980s paved the way for a number of insurers to emerge in the private sector. This resulted in a substantial growth of premium incomes, competition, improvement in services, and introduction of newer types of business in wider fields hitherto untapped. Prior to privatisation, the yearly gross premium volume of the country was approximately Tk 900 million in general insurance business and approximately Tk 800 million in life insurance business. In 2000, premium incomes rose to Tk 4,000 million in general insurance business and Tk 5,000 million in life insurance business.
Up to 2000, the government has given permission to 19 general insurance companies and 10 life insurance companies in the private sector. Insurers of the country now conduct almost all types of general and life insurance, except crop insurance and export credit guarantee insurance, which are available only with the Sadharan Bima Corporation.
Numerous institutions, associations and professional groups work to promote the development of insurance business in Bangladesh. Prominent among them are the Bangladesh Insurance Association and bangladesh insurance academy. Bangladesh Insurance Association was formed on 25 May 1988 under the Companies Act 1913. It is registered with the Registrar of Joint Stock Companies and has 30 members. It aims at promoting, supporting and protecting the interests and welfare of the member companies.
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Surveyors and insurance agents occupy a prominent position in the insurance market of Bangladesh. The surveyors are mainly responsible for surveying and assessing general insurance losses and occasionally, for valuation of insurance properties, while the agents work to procure both life and general insurance business against commission. The system of professional brokers has not yet developed in Bangladesh. However, it is a common practice of the insurers to engage salaried development officers for promotion of their insurance business.
Problems of insurance business in bangladesh
The insurance business in Bangladesh is facing lots of problem in every now and then. To describe the problems, we use service quality gap model. By using the model it will become more easer to understand the problms of insurance in Bangladesh.
Service Quality Gap Model
Managers in the service sector are under increasing pressure to demonstrate that their services are customer-focused and that continuous performance improvement is being delivered. Given the financial and resource constraints under which service organizations must manage it is essential that customer expectations are properly understood and measured and that, from the customers ‘ perspective, any gaps in service quality are identified. This information then assists a manager in identifying cost-effective ways of closing service quality gaps and of prioritizing which gaps to focus on – a critical decision given scarce resources ( SERVQUAL and Model of Service Quality Gaps: A Framework for Determining and Prioritizing Critical Factors in Delivering Quality Services by Dr. Arash Shahin, Department of Management, University of Isfahan, Iran). What makes managing customer service different, as a marketing problem, from managing the standard elements of the marketing mix (product, price, promotions, and place) is that customer service is typically delivered by front-line employees. Personnel policies, thus, have immediate marketing implications. Many retailers take this into consideration by treating employees as “internal customers.” According to this philosophy, management must “sell” their internal customers on the company and its policies in order to induce front-line employees to deliver the desired levels of customer service. Standard personnel policies that can facilitate customer service and sell the “internal customers” include (a) employee screening and selection, (b) training, (c) setting suitable reporting relationships, (d) goals and reward systems, (e) internal communications, and (f) generally creating a “service” culture. The Gap Analysis Model goes a step beyond simply reexamining each of the standard personnel policies in light of the desired customer service. The model provides specific criteria concerning personnel and management policies that complete the linkage between customer expectations and perceived service delivery. In addition, the model provides a checklist of where breaks in the chain can occur; using this checklist can provide a useful audit of service quality (See: A Service Quality Audit:
Application of the Gap Analysis Model by Paul R. Messinger, University of Alberta). There are seven major gaps in the service quality concept, which are shown in Figure-1. The model is an extension of Parasuraman et al. (1985). According to the following explanation (ASI Quality Systems, 1992; Curry, 1999; Luk and Layton, 2002), the three important gaps, which are more associated with the external customers are Gap1, Gap5 and Gap6; since they have a direct relationship with customers. Gaps 1 through 6 widen or close, so does Gap 7. The authors’ conceptual model of service quality follows:
“The key to delivering high quality service is to continually monitor customer perceptions of service quality, identify causes of service quality shortfalls, and take appropriate action to improve the quality of service (close the service gaps).”
• Gap 1. Not Knowing What Customers Expect:
Based on interviews, the authors found that executives’ perceptions of superior quality service are largely congruent with customers’ expectations. Customers’ expectations versus management perceptions are the result of the lack of a marketing research orientation, inadequate upward
communication and too many layers of management.
• Gap 2. The Wrong Service-Quality Standards:
Gap 2 arises when there is a discrepancy between what managers perceive that customers expect and the actual standards that they (the managers) set for service delivery. This gap may occur when management is aware of customers’ expectations but may not be willing or able to put systems in place that meet or exceed those expectations.
• Gap 3. The Service-Performance Gap:
Organizational policies and standards for service levels may be in place, but is front line staff following them? A very common gap in the service industry, Gap 3 is the difference between organizational service specifications and actual levels of service delivery. Service specifications versus service delivery is the result of role ambiguity and conflict, poor employee-job fit and poor technology-job fit, inappropriate supervisory control systems, lack of perceived control and lack of teamwork.
• Gap 4. When Promises Do Not Match Delivery:
Customers perceive that organizations are delivering low-quality service when a gap appears between promised levels of service and the service that is actually delivered. This gap is created when advertising, personal selling or public relations over-promise or misrepresent service levels. Service delivery versus external communication may occur as a result of inadequate horizontal communications and propensity to over-promise.
• Gap5: The discrepancy between customer expectations and their perceptions of the service delivered:
as a result of the influences exerted from the customer side and the shortfalls (gaps) on the part of the service provider. In this case, customer expectations are influenced by the extent of personal needs, word of mouth recommendation and past service experiences.
• Gap6: The discrepancy between customer expectations and employees’ perceptions:
As a result of the differences in the understanding of customer expectations by front-line service providers.
• Gap7: The discrepancy between employee’s perceptions and management perceptions:
As a result of the differences in the understanding of customer expectations between managers and service providers.
Figure1: Model of service quality gaps (Parasuraman et al., 1985; Curry, 1999; Luk and Layton, 2002)
Other Problems
Service quality gap model does not provide all the problems of insurance business. There some other problems too. These problems are given below:
Lack of trustworthiness: Lack of trustworthiness is one of the the major problems of insurance business in Bangladesh. Lengthy process in getting payment after any incident is the main reason of trustworthiness. Time killing behavior in payment after incidence is reducing the trust of the customers towards the insurance companies.
Low income of the people: Low income and purchasing power doesn’t permit the people of Bangladesh to go for an insurance policy. Practically we can easily relate the above mentioned factors. For example, in one hand the lower income of the people is creating barrier in buying insurance policy, on the other hand lack of trustworthiness makes this insurance avoiding behavior more acute.
Unattractive offerings: Insurance companies are not providing attracting offerings to their customers. All the offerings are similar. There is very less variation among the offerings of differnt insurance companies.
Lack of information about the insurance companies: The insurance companies are not delivering their information (regarding company and insurance policy) properly or evenly which is another problem of the insurance companies.
Inefficiency in problem solving: Inefficiency in problem solving is another problem of the insurace companies. If any customer comes to then to solve some problems, they do not solve those problems efficiently.
High service/processing cost : Insurance companies charges high service/processing cost from their customers.
Less convincing sales people: Some insurance companies appoint sales people at a very lower cost. These sales people are not much convincing. They can not convince effectively to purchase insurance pollicy. This is another problem of insurance companies.
Lengthy process to get payment after incidents: Insurance companies take a lenthy process to get payment after incidents. Sometimes they take one or two years to pay their customers. This is one of the major problems of insurance companies.
Steps to overcome the problems of insurance business:
The demographic trends suggest that as private insurance companies (both local and multinational) have proliferated in Dhaka city, better educated and more affluent people have gravitated to these insurance companies for insurance services. These people/clients are likely to have better information about the quality of services provided by both public and private insurance companies and their inclination to select private insurance companies suggests, implicitly, that the quality of service is better at these private firms even though their (private insurance companies) service cost is somewhat higher. Moreover, many branch operation of private insurance companies help the people to make evaluation among them and making an insurance decision in favor of those which are trustworthy. But between the private local and foreign insurance company choice, clients are mostly considering foreign private insurance companies due to its trustworthiness, experience in operation and wide area coverage. Less number of branches of the public insurance companies may be another prime reason of not being preferred by the local clients. By definition, it might be more authentic if the clients were inclined towards the public insurance companies from trustworthiness point of view, but as statistics suggests in favor of choosing foreign private insurance firms, probably we have to be satisfied by saying that it is in many respect guided by client’s psychology of getting better and prompt services. The incentive structure must also play a role in ensuring the quality services delivered by the public insurance companies. One solution is to tie part of the compensation of insurance personnel in public companies to services rendered and feedback received from clients. This, of course, is a complex issue and has implications for pay scale administration, since public bank staffs, as government servants, are paid according to certain pay structures. While beyond the scope of this paper, authors feel that compensation flexibility is necessary to reward those who are dedicated to providing quality insurance services. If compensation adjustments can’t be incorporated, benefits-including promotion, transfer in more valued branches, study leave, performance bonus and the like-could be tied to performance evaluation mechanism. There must be a formal procedure of evaluating the employees by the clients through some questionnaire type performance appraisal form. A suggestion, objection or recommendation book in the branch can be introduced where the clients can even complain or appreciate about a specific employee. Public awareness and the transparency of the high official may have a positive impact on that issue. A rating scale could also be established to rate the quality of services based on insurance company’s facilities, past performance records, and client’s evaluations. The rating factors and mechanisms would have to be developed on the basis of inputs from clients and the profession. It would also be important to determine, specify, and strongly enforce the legal consequences for tampering with client records and their evaluations. This process will lead to qualifying and ranking each and every insurance company (Private and public). We think the insurance policy collection and profit margin should not be the only benchmark to position a specific insurance company. As the number of insurance companies continues to grow, it is important to develop a national capability to periodically evaluate and publicly disseminate (As University Grants Commission did for the private universities) the ratings or rankings of all insurance companies so that each service provider’s reputation is widely known. Armed with this information, clients can make more informed choices.
In addition, as an important determination of insurance company choice, firms must invest in building their reputation/reliability which will hel
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