A Comparative Profitability and Operating Efficiency Analysis of Public and Private Insurance Company's in Bangladesh

Executive Summary

In this study a comparative performance analysis between privately-owned and state-owned or public insurance company of Bangladesh is carried out over the period between 1952 to 2011.The insurance company have encouraged the provision of financial services including the Government principles. As a result a number of insurance companies established to provide services as well as business both in private and public. These insurers are found all over the countries with a strong participation. In this study, a comparative performance analysis between Private and Public Insurance Company of Bangladesh is carried out over the period between 2005 and 2009. The results suggest that Private Insurance Company is as efficient as public Insurance Company, and even more efficient at some aspects.

1.0 Introduction

1.1 Brief history of insurance in Bangladesh

Insurance is a system of spreading the risk of one to the shoulders of many. It is a contract whereby the insurers, on receipt of a consideration known as premium, agree to indemnify the insured against losses arising out of certain specified unforeseen contingencies or perils insured against.

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 specialized in dealing in a particular class of business, while others were composite companies that dealt in more than one class of business.

The government of Bangladesh nationalized insurance industry in 1972 by the Bangladesh Insurance (Nationalization) Order 1972. By virtue of this order, save and except postal life insurance and foreign life insurance companies, all 49 insurance companies and organizations transacting insurance business in the country were placed in the public sector under five corporations. These corporations were-

 Jatiya Bima Corporation

 Tista Bima Corporation

 Karnafuli Bima Corporation

 Rupsa Jiban Bima Corporation

 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.

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 liberalization.

Private sector insurance companies demanded withdrawal of the above restrictions so that they could-

 Underwrite both public and private sector insurance business in competition with the Sadharan Bima Corporation.

 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.

1.2 The Current view of the Insurance Industry in Bangladesh

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.

 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.

 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.

Rules regarding formation: 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.

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