New life insurance cos in challenge of survival

Life Fund jeopardized

Most of the companies have eaten up their capitals. On the other hand, people have lost their confidence on insurance due to the breach of contact by not paying claims, long years together

Zarif Mahmud: The new generation life insurance companies facing the challenge of survival due to acute fund crisis. Most of the companies have eaten up their capitals. On the other hand, people have lost their confidence on insurance due to the breach of contact by not paying claims, long years together.
New generation life insurance company Diamond Life Insurance has been overspending the insurance customers’ money year after year in violation of the law. Every year, the majority of the new insurance policies that the company sells are sold. As a result, the company’s financial base is becoming very weak. In the future, this life insurance company may fail to pay the claims of the customers.
With that, the insurance development and regulatory authority (IDRA) feels that the company’s survival will become a challenge.
The investigation team of IDRA has prepared such an investigation report investigating the financial picture of the life insurance company. The regulatory body of the insurance sector conducted this investigation in view of an instruction of the Ministry of Finance. From the Financial Institutions Department of the Ministry of Finance to investigate the financial capacity of 13 insurance companies on July 24 last year in view of the complaint that ‘excessive commissions and administrative expenses and other irregularities and corruption may result in failure to pay the customer’s insurance claims in the future’.
In view of this, the regulatory body of the insurance sector formed several investigation committees. Recently, the investigation team of IDRA submitted an investigation report on Diamond Life. The investigation revealed several irregularities against Diamond Life including excess management expenses, high policy surrender rates, low second year renewals, low cash flow of the company.
The investigation revealed that almost all of the premium income that Diamond Life earns every year is spent on management. The investigation committee reviewed the financial picture of the company for five years from 2017 to 2021. In these five years, the company illegally spent Tk 12 crore in violation of the law in the management sector.
The amount a life insurance company can spend on management is set by law. According to the law, the maximum expenditure limit for Diamond Life in the management sector in 2021 was Tk 12.14 crore. But the company spent Tk 13.95 crore. In other words, Tk 1.81 crore has been illegally spent in this sector in violation of the law.
In the previous year in 2020, the maximum expenditure limit of this sector was Tk 9.85 crore. But the company spent Tk 11.35 crore. Tk 1.50 crore has been spent in excess of the legal limit. In 2019, Tk 2.53 crore were spent in violation of the law. According to the law, the maximum expenditure limit in the management sector for the year is fixed at Tk 9.09 crores. But the company spent Tk 11.62 crore.
Similarly, in 2018, the maximum expenditure limit is fixed at Tk 8.37 crore. In contrast, the company spent Tk 12.14 crores. In other words, Tk 3.77 crore were spent in violation of the law. In 2017, Tk 2.39 crore was spent in excess of the legal limit. The maximum expenditure limit for the year was Tk 11.21 crore. But the company spends Tk 13.6 crore.
The life fund or life fund of the organization is also negatively affected due to excessive expenditure. Almost a decade after starting the business, the company has no money in its life fund. That is, the life fund of the company has been in negative condition for years.
At the end of 2021, the life fund of this life insurance company stood at negative Tk 72 lakh. A year ago in 2020, Life Fund was negative at Tk 1.95 crore. In addition, Life Fund was in a negative state of Tk 3.40 crore in 2019, Tk 4.18 crore in 2018 and Tk 3.38 crore in 2017.
IDRA’s investigation revealed that every year a large number of companies’ policies are lapsed or closed. In 2021, the company issued 5 thousand 336 new policies. 4 thousand 508 policies were issued during the year. In the previous year in 2020, 5 thousand 216 new policies were issued. And policy cancellations are 3 thousand 907.
Similarly, in 2019, the company issued 5 thousand 394 new policies and 3 thousand 924 policy cancellations. In 2018, 5 thousand 943 new policies were issued and 4 thousand 897 policy cancellations. In 2017, 7 thousand 701 new policies were issued. During the year, the number of laps policies stood at 2 thousand 868.
Thus, the renewal premium income of the company has also collapsed due to huge policy lapses every year. Every year the company sells new insurance policies that generate premium income, the majority of which is not collected the following year. Renewal premium collection rate of the company in 2021 is 18.76 percent. Renewal premium collection rate in 2020 was 14.84 percent. Before this, 19.33 percent was collected in 2019 and 13.19 percent in 2018.
After reviewing the financial picture of Diamond Life, the investigation team of IDRA opined that the financial foundation of the company appears to be very weak. The second-year premium renewal rate (average 16.53 per cent per annum) is very low meaning that the policies issued by the company are for paper business or to meet targets. This will challenge the survival of the company.
The investigation team further opined that more of the policies issued by the company lapsed. The current financial condition of the company may cause concern for customers. In the future, Diamond Life may fail to pay insurance claims raised by customers due to low cash flow of the company. Therefore, second year renewal should be brought above 60 percent and other administrative expenses including commission expenses should be reduced.
The inquiry report has recommended that additional management expenses, lower rate of renewal premium, life fund of the company over 9 years and failure to preserve proper assets may be taken under the Insurance Act, 2010. It has also been recommended to emphasize the issue of genuine insurance policies, reduce commission costs, bring the policy lapse rate to a tolerable level and direct investment of the company’s assets as per investment rules.
A top-level official of several life insurance companies said that the financial picture of Diamond Life in the investigation report is very alarming. Over 80 percent policy lapses every year and negative life funds year after year means the company has virtually nothing. The status of this company is zero. If there is no money in the life fund, the customers are naturally at serious risk of getting their claim money. Regulatory agency IDRA should take swift action against such companies.
When contacted, Chief Executive Officer (CEO) of Diamond Life told, “We have not yet received the investigation report of IDRA.” So, I can’t say anything about what is in the investigation report. However, there will be no problem in the next seven years in getting the customer’s claim money from our company.
We are trying to reduce the management cost when asked about the excessive spending of money in the management sector after years of violating the law and majority of the policies being invalid, he said. Various steps are being taken for this. Along with this, various steps are being taken to reduce the policy copper rate.
Chairman of IDRA Mohammad Zainul Bari said that the 13 insurance companies that were asked to be investigated by the Ministry of Finance have been investigated. Now we will take the necessary steps as per the law. We cannot go beyond the law. Shutting down the company is not a solution. Still, if necessary, I will take such steps.