Performance of General Insurance Companies in the Public and Private Sectors in Bangladesh: A Comparative Study

Abstract

General insurance sector in Bangladesh is now owned by both public and private sectors. Insurance in Bangladesh including general insurance had provided funds to developmental initiatives of the government and industrialization process of the country during the early years of independence. The government allowed the private sector to conduct business in all areas of insurance for the first time in 1984. The private sector availed the opportunity and promptly came forward to establish firms. The general insurance market in Bangladesh now consists of one state-owned corporation (SBC) and forty-three private sector general insurance companies. One of the objectives of privatization or shipment of the ownership pattern was to ensure better services and general insurance facilities to all areas of the country and to all sectors of the economy for the smooth development of the nation as a whole. Moreover, it was desired that competitive activities of both public and private sector would pave to the ownership reforms, some regulatory reforms were also executed with a view to support the profitable outcomes of the general insurance sector. By this time, the general insurance sector experienced two decades of coexistence of both public and private sectors. Except a few journal articles, no in-depth study was done as yet to examine and evaluate the comparative performance of the public and private general insurance companies. The present study, therefore aims at analyzing historical background and legislation of general insurance business in Bangladesh as well as to examine present structure and strategies of general insurance industry in Bangladesh. It includes growth trends of the general insurance facilities or variables as well as growth trends of their branches and manpower indicating performance of public and private general insurance companies. It also tries to identify the factor influencing productivity and profitability performance of the general insurance sector. Moreover, the study wants to measure the performance of public and private general insurance companies (PrGICs) in Bangladesh through some indicators, ratios or tests. This study examines the problems of general insurance companies and their remedial measures. It further attempts to suggest some policy measures for better performance of the general insurance sector. Present pattern of management and organization structure of SBC and private general insurance companies have different shapes and different manners. Because SBC is a state owned enterprise and its nature is autonomous. On the other hand, private general insurance companies are established by company act. The activities and functions of them are similar; because both of them are conducted by Insurance Act and Rules. The public and private general insurance companies are extending their insurance coverage to traditional, profitable service oriented businesses. They have already directed their attention to develop new types of insurance categories to meet the requirements of present situation. SBC and private general insurance companies are contributing handsome amount of money to national exchequer as tax for economic development of the country. There are various factors of port-folio management namely funds available, surplus in credit transactions, funds on account of claims due or intimated, investment mix and return on investment. In some cases which are considered as factors of port-folio management; public general insurance company (PuGIC) has better position than that of PrGICs. In respect of Human Resource Development, in fact no general insurance company (both public and private) follows a systematic method for applying HRD system. A general insurance company has different types of assets like earning assets and non-earning assets. SBC didn't concentrate to lift up earning assets at the level of requirement for profit maximization than non-earning assets. On the other side, private general insurance companies have deliberated to pick up earning assets and side by side non-earning assets for building up strong and sound long-term financial position. In SBC the trend of percentage of owners' equity was on the increase and trend of percentage of liabilities was on the decrease. While the private general insurance companies increased their owners' equity and liabilities. In this connection both sectors have good position to survive their existence in long-term duration, where as private general insurance companies have better position than that of SBC. The proportion of paid up capital in gross premium of SBC was much higher than that of private general insurance companies in all the years during the study period. In open market investment private general insurance companies are better than that of SBC. But, in cases of bridge finance, mortgage loan and real estate, SBC has improved positions than that of private general insurance companies. Private sector has better position than SBC in investment in capital market. In contrast, SBC has relatively superior situation than that of private general insurance companies in respect of other investments. It is found that SBC has strong position in the context of risk management programmed than that of private general insurance companies. Though SBC has separate MIS department but, it is interesting to note that most of the functions, practices and limitations of MIS are similar for both types of general insurance companies. Marketing strategies in a systematic manner are absent in the general insurance sector in Bangladesh. Because, no general insurance company (public and private) has individual Marketing division or department. Every general insurance company does it in a sprinkled way and on a very inadequate level. The scenario of research and innovation of SBC and private general insurance companies of the country is not appreciated. They have no particular division or department or cell or unit for this purpose. The administration departments of these companies are normally doing this activity. They are operating their business through some traditional insurance policy. They are trying to diversify or increase their insurance products at present, but it is not sufficient in terms of optimum level for doing excellent business. During the last fifteen years (1990-2004) the general insurance companies in Bangladesh experienced uneven growth pattern of general insurance facilities. The private general insurance companies expanded their web of branches with a higher growth rate while the same of SBC was zero or negative. In spite of that, public sector owned over 50% of the total number of general insurance sectors' branches. But it is interesting to note that, the number of branches of both public and private sector is concentrated in urban areas. The both objectives of nationalization and privatization were to spread out general insurance services throughout the country particularly in rural areas. But, this objective did not achieved by both the general insurance sectors. In terms of the number of employees, the growth rates of private general insurance companies were higher than that of SBC. But, in terms of percentage share of employees, the dominance of SBC (69%) over the private general insurance companies (31 %) remains still now. SBC attained the higher average growth rates of gross premium from total insurance business than that of PrGICs. The growth trend of net premium income of SBC is found more progressive than that of PrGICs. In the case of earnings of net reinsurance premium, SBC (50.25%) and PrGICs (49.75%) possessed about equal average share of overall general insurance sector. The public sub-sector accounted for higher proportion of net reinsurance commission from total insurance business than that of the private sub-sector. The net claim settlement activities of the PrGICs are in favour of large policyholders than that of SBC. The PrGICs expensed larger amount of money for the purposes of management expenses than that of PuGIC. SBC achieved the higher average growth rates with about 60% on average share of overall general insurance companies in terms of net underwriting profit from total insurance business during the study period. The analysis of the performance of SBC and PrGICs based on various financial ratios or tests (liquidity ratios, leverage ratios, activity ratios, and profitability ratios) reveals that operating performance of both general insurance sectors was impressive in equally. Multiple Discriminate Analysis (MDA) of the both sectors suggests that the possibilities of insolvency of SBC were relatively less than that of PrGICs. The total productivity performance measures suggest that their (SBC and PrGICs) total productivity levels were sound and stable. But, the partial productivity performance measures denote the alarming condition of both the sectors. SBC was comparatively in a better position in context of alarming condition than that of PrGICs. It is found that the overall decreasing trend of the profitability levels of general insurance sector is really discouraging. In this regard, the position of SBC is much more discouraging than the same of PrGICs. The condition of the total productivity performance can be improved through converting working fund producing abilities of the general insurance companies to higher income generating abilities as well as to reduce management expenses. For this purpose, the establishment of an effective cost accounting system is a must. In order to ensure transparency and full discloser of facts and information to internal and external stakeholders, both types of general insurance companies should follow the International Accounting Standards (IAS). To improve the condition of the manpower productivity performance of each category of general insurance companies, the increasing trend of manpower expenses should be managed in such a manner that, the proportionate increase in working fund per employee takes place. Moreover, on the basis of the activity analysis and productivity criteria, placing the right man in the right place, enhancing institutional facilities for training and education, rendering incentives (financial and non-financial), providing better working environment and service facilities and above all by giving freedom of works, the companies can improve their productivity and profitability performance. However, the general insurance companies should put their attention on core underwriting activities side by side to increase additional income and to control other expenses with a view to improving the overall productivity and profitability performance. Empirical estimates suggested that the general insurance companies should expand their network in rural areas side by side in urban areas for the balanced economic growth and development of the country. Moreover, the empirical estimates suggested that the general insurance companies should give attention to raise earning assets instead of non-earning assets. Because, the high proportion of earning assets in total assets, significantly affected the productivity and profitability performance of the general insurance companies. The general insurance sector has some problems. Most of the problems are coming from back dated insurance acts and rules. Lack of proper controlling and prudential supervision or monitoring are main reasons of functional shortcomings and efficiency backwardness of the general insurance industry. This study suggests that remedial measures for the growth of general insurance sector. In fine, this study recommends that the performance of the general insurance sector could be improved through ensuring some external factors like, changing existing Insurance Acts, Rules, socio-economic stability and by improving the level of morality of both insurers' and insured’s.