Financial and Non Financial disclosure of financial statement of some selected Insurance companies in Bangladesh

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Financial and Non Financial disclosure of financial statement of some selected Insurance companies in Bangladesh

Concepts of Insurance:-

Insurance is a co-operative device to spread the risk over a number of persons who are insured against the risk to share the loss of each member of the society on the basis of the society on the basis of probability of loss to their risk. Insurance is a contract whereby a certain sum of the money as a premium is paid in consideration of the insurers incurring the risk of paying a large sum upon a given contingency.

Principles of insurance:-

Insurance is based upon the two following principles:

· 2.2 Principles of co-operation – In insurance the loss is shared by a group of people who are willing to co-operate.

· 2.3 Principles of probability– The loss in the shape of premium can be distributed only on the basis of theory of probability. The probability tells what the chances of losses are and what will be the amount of losses.

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Ways how insurance companies can flourish:-

· Declaring insurance as a thrust sector

· Initiating micro insurance

· Establishing a regulatory body with adequate knowledge in insurance business

· Rule out the compulsory provision of re insurance with Shadharan Bima Corporation

· Both innovation and creativity can be the best ingredients.

Insurance contract:-

An insurance contract is a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder

Unbundling a Deposit Component:-

The definition of an insurance contract distinguishes insurance contracts that are subject to IFRS 4 from those contracts that are subject to IAS 39. The deposit component of an insurance contract is defined as a contractual component that is not accounted for as a financial instrument under IAS 39, but that would be within the scope of IAS 39 if it were a separate instrument.

The failure to separately account for the deposit component inherent in an insurance contract may result in material liabilities and assets not being fully recognized on the balance sheet of an entity, under the existing accounting policies which continue to apply in terms of IFRS 4.

When To Unbundle The Deposit Component Of An Insurance Contract:-

Unbundling is required if both of the following conditions are met:-

· The insurer can measure the deposit component separately without considering the insurance component; and

· The insurer’s accounting policies do not otherwise require it to recognize all obligations and rights arising from the deposit component.

Unbundling is permitted (but not required) if:

· The insurer can measure the deposit component separately from the insurance component, but its accounting policies already require it to recognize all rights and obligations arising from the deposit component, regardless of the basis used to measure those rights and obligations.

Unbundling is prohibited if:

Ø The insurer cannot measure the deposit component separately.

Changes in accounting policies:-

An insurer may change its accounting policies for insurance contracts if, and only if, the change makes the financial statements more relevant to the economic decision-making needs of users and no less reliable, or more reliable and no less relevant to those needs. An insurer shall judge relevance and reliability by the criteria in IAS 8.

Accounting of Reinsurance:-

· Offsetting

· Impairment test

· Gain and losses on buying reinsurance

Offsetting

In general, IFRSs prohibit the offsetting of assets and liabilities and income and expenses, unless specifically required or permitted. In addition, IFRS 4 specifically prohibits offsetting reinsurance assets against related insurance liabilities; and income or expenses from reinsurance contracts against expenses or income from related insurance contracts.

Insurers are required to change existing accounting policies which allow for offsetting to comply with IFRS 4

· Impairment test

An insurer is required to consider, at each reporting date, whether its reinsurance assets are impaired. The impairment test to be applied is prescribed by IFRS 4.

A reinsurance asset is impaired if, and only if:

· There is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance assets, that the cadent may not receive all amounts due under the terms of the contract; and

· That event has a reliably measurable impact on the amounts that the cadent will receive from the reinsurer.

· Gain and losses on buying reinsurance

IFRS 4 does not prohibit recognizing gains on purchase of reinsurance in profit or loss but requires an insurer to disclose information in this respect. A cadent under a reinsurance contract, is required to disclose the following either on the face of the financial statements or in the notes:

· Gains and losses relating to the purchase of reinsurance contracts recognized in the profit or loss; and

· Where gains or losses arising from the purchase of reinsurance contracts have been deferred and amortized, the amortization for the period and the unamortized amount at the beginning and end of the period

Disclosure:-

The disclosure requirements in IFRS 4 are based on two main principles:

· Explanation of recognized amounts: and

· Amount, timing and uncertainty of cash flows

Disclosure principle- 1:-

· According to the first disclosure principle, an insurer shall disclose information that identifies and explains the amounts in its financial statements arising from insurance contracts. To comply with this requirement, an insurer should disclose the following:

· Accounting policies

· Accounting policies shall be disclosed for assets, liabilities, income and expenses relating to insurance contracts

· Identification of recognized assets, liabilities, income and expenses

Amount resulting from insurance contracts reported in the balance sheet or income statement are identified as such, either directly on the face or in the notes. Where an insurer prepares a cash flow statement under the direct method, the cash flows arising from insurance contracts should also be identified and disclosed.

· Assumptions

An insurer shall disclose the process used to determine the assumptions that have the greatest effect on the measurement of the recognized amounts. In addition it should disclose the effect of changes in these assumptions. Changes that have a material effect on the financial statements should be shown separately

Disclosure principle- 2:-

The second high-level disclosure principle in IFRS 4 requires an insurer to disclose information to help users of the financial statements understand the amount, timing and uncertainty of future cash flows from insurance contracts.

The standard requires an insurer to disclose the following

· Risk management objectives and policies

· Terms and conditions of insurance contracts

· Information about Insurance risk

Key features of IAS 1:-

· IAS 1 includes guidance on the meaning of ‘present fairly’ and emphasizes that the application of IFRS is presumed to achieve a fair presentation. It requires departure from a standard in very rare circumstances where compliance would be misleading (except where not permitted by the relevant regulatory framework).

· The contents of a complete set of financial statements are specified and there is a general requirement for comparatives. Criteria for the classification of assets and liabilities as current/ non-current are defined.

· A choice is given as to the presentation of the balance sheet between separating current and non-current assets and liabilities, and presenting assets and liabilities in order of their liquidity (or in reverse order of liquidity) without a current/non-current distinction. Liquidity presentation of assets and liabilities is required only when it provides a more relevant and reliable presentation.

· The standard specifies minimum items on the face of the balance sheet and minimum items on the face of the income statement. Additional items may be needed to comply with another standard or to present fairly the entity’s financial position or when such presentation is relevant to an understanding of the entity’s financial performance.

· Disclosure of “extraordinary items” is prohibited. An analysis of expenses, either by nature or by function, should be given either on the face of the income statement or in the notes. A statement of changes in equity is to be presented although this requirement may be met in various ways.

· Disclosure in the notes is required of accounting policies followed, information required by other IAS, narrative descriptions or detailed analyses of items shown on the face of the financial statements, and other disclosures necessary for an understanding and fair presentation of the financial statements.

· Judgments of estimations and key assumptions concerning the future that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year must be disclosed.

· Key impact on Bangladeshi Companies:-

· Income statement headings under IAS 1 are less detailed than in the Companies Act formats

· IAS 1 describes two classifications for expenses (nature and function) which equate to Companies Act formats 1 and 2.

· There is more flexibility over balance sheet formats than permitted by the Companies Act formats.

· There is no equivalent under IFRS of the requirement in FRS 3 to disclose the effects of acquisitions.

· IAS 1 goes further than FRS 18 in respect of the disclosure of judgments made in the application of accounting policies and key sources of estimation uncertainty.

· There are some differences in the definitions of current assets and current liabilities. For example, a liability will be classified as current when it is expected to be settled in the entity’s normal operating cycle, even if it is not due to be settled within twelve months after the balance sheet date.

· IAS 1 does not use the term “exceptional item” and, in particular has no equivalent of the FRS 3 “paragraph 20 items” which are shown below operating profit. But there is a requirement for separate disclosure of material items of income and expense. Companies wishing to show operating profit would need to include in it items such as reorganization and restructuring costs.

· The statement of recognized gains and losses and reconciliation of movements in shareholders’ funds are combined into a single statement of changes in equity under IAS 1. But the statement of changes in equity is not a performance statement and, therefore, amounts reported in certain cases are required to be “recycled” to the income statement.

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Overview of Insurance Sector in Bangladesh

Background of insurance business in Bangladesh:-

Origin of insurance in Bangladesh

Most victorious nationalist movements have been in later years reneged from their earlier commitments and few developing countries to day are nationalist, socialist or democratic. But that is a different story. When the Awami League cane to power in Bangladesh and the peoples party in Pakistan in 1972. It was inevitable that nationalization a wide scale would take place, for both parties had flaunted socialism as part of their political rhetoric. In Pakistan the administrative mechanism for nationalization of banking, insurance and some industries was carefully worked out by the bureaucracy under political leadership, and the takeover in a feel swoop passed of smoothly. Heads of insurance companies, for instance, where invited to tea at a Karachi Hotel. Where they told that while they were having teas the head offices of their companies were being sealed and Government appointed administrators were being put in charge. This was done to ensure that the assets of the companies remained intact and no tempering with accounts, records and documents was possible. In Bangladesh an effective government machinery did no exist in the chaotic conditions obtaining an independence following a bitter and brutal war industries was taken over without any inventory, and erstwhile owners, who were being dispossessed, were allowed to administer their mills and factories till statutory corporations were established.

Summary of Insurance Background in Bangladesh

Triton insurance ,Calcutta pioneer in general insurance ,established in 1850 Oriental life assurance company, the first life insurance company, established in 1818 Were generally limited to the British people working in India Insurance business exclusively operated by private sector In Pakistani period On 14th May, 1973 the Insurance Corporation Act VI, 1973 was enacted and five corporations were abolished into the following two corporations Sadharan Bima Corporation for General Insurance Jiban Bima Corporation for Life Insurance

Historical Background of insurance Industry in Bangladesh:-

Insurance is not 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 like British, Australian, Indian, West Pakistan and local. Ten insurance companies had their head offices in East Pakistan, 27 in West Pakistan, and rest elsewhere in the world. These were mostly limited liability companies. Some of these companies were specialized on 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, saves 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 sector under fie operations. These operations were: the Jatiya Bima Corporation, Tista Bima Corporation, Karnafuli Bima Corporation, Rupsa Jibon Bima Corporation and Surma Jibon 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 Corporation were for general insurance and Rupsa and Surma for life insurance. The specialist life insurance companies or for a 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 nationalized 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 3 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.

The insurance corporations Act 1973 were amended in 1984 to allow insurance companies in the private sector to operate side by 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 business 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 company’s o obtains 100% reinsurance protection from the Sadharan Bima Corporation. This virtually turned Sadharan Bima Corporation into a reinsurance organization, in addition to its usual activities as direct insurer. Sadharan Bima Corporation itself had the right to reinsure its surplus elsewhere outside the country out 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 are insurance 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: 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 compute with the private sector insurance companies for the meager premium (20%) emanating from the private sector; Being a competitor in the insurance market, Sadharan Bima Corporation was hardly acceptable as an agency to protect the interest 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: Underwrite both public and private sector insurance business in competition with the Sadharan Bima Corporation, and The government modified the system through promulgation of the Insurance Corporation (Amendment) Act1990.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 reinsure of their choice, at home or aboard, keeping the remaining for placement with the Sadharan Bima corporation.

Insurance Core Principles in Bangladesh:-

The insurance sector in Bangladesh underdeveloped and poorly regulated. The Bangladesh Enterprise Institute concluded that the insurance industry suffered from undue political interference, fraudulent claims, inadequate risk assessments, and limited and poor quality private sector participation. In the light of the situation, the ADB sanctioned a technical assistance loan to Bangladesh in 2007 to, inter alia, overhaul the insurance legislation, create a new and autonomous regulatory authority in line with international best practices, and improve the governance of the sector as a whole. In the meantime, an independent Insurance Regulatory Authority (IRA) has been established as a unified regulator supervising all public and private insurance entities under the Insurance Regulatory Authority Ordinance and the Insurance Ordinance of 2008. The ordinances repealed the 1938 Insurance Act (as amended in 2010- Insurance Bill 2010’) that had governed the insurance sector in Bangladesh. Prior to the creation of the IRA, the Controller of Insurance in the Department of Insurance, housed within the Ministry of Commerce, regulated the insurance sector.

Prior to 2008, the insurance sector in Bangladesh was governed by the Insurance Act of 1938, as amended in 1993. The Office of the Chief Controller of Insurance (OCCI) in the Department of Insurance (DOI), housed within the Ministry of Commerce (MOC) provided regulatory oversight. The Asian Development Bank (ADB), in its several observations since 1998, had found the insurance sector in Bangladesh underdeveloped and poorly regulated. In 2001, the ADB had found that “insurance regulation and supervision… are extremely weak, putting participants at risk and retarding the mobilization of long-term savings” (p. 2). Further, the senior regulatory staff at the OCCI had neither industry experience nor formal training, and the organizational structure, policies, and procedures of the OCCI were also too deficient to enable effective enforcement of insurance laws. A 2006 news release by the ADB echoed a similar sentiment, stating that the insurance sector was “underdeveloped” and “characterized by a very limited range of products and services, poorly trained insurance staff, and few investment opportunities.” It also found the legal framework weak, which adversely impacted the reputation of the industry.

Following drawbacks in the insurance industry in Bangladesh:

· Undue political interference;

· Absence of or insufficient assessments for insurable risks;

· Policy issuance without premium payment;

· False insurance claims;

· Difficulties in realization of genuine claims; and

· Corrupt practices like accepting bribes for document processing or tax evasion on underwriting, etc.

Insurance Laws Passed: – ‘Insurance Regulatory Authority Bill 2010’

Bangladesh parliament passed two bills for regulating the insurance sector ‘Insurance Regulatory Authority Bill 2010’ and the ‘Insurance Bill 2010’ in the House. A provision of the Insurance Regulatory Authority Bill includes formation of an independent regulatory authority to monitor the insurance industry to help it achieve global standards.

According to the law, the government will appoint a chairman and four members for three years. The authority will register and regulate the professional insurance and reinsurance institutions and their intermediaries. It will arbitrate disputes, had there been any, among the insurers, intermediary and their clients. The authority will be a statutory body that will replace the Directorate of Insurance under the finance ministry. The staff of the Directorate of Insurance will be considered to be the staff of regulatory authority unless they are unwilling to continue their service under it.

According to the provisions of the insurance law, a general insurer requires to raise its paid-up capital to Tk 40 crore from Tk 15 crore, while a life insurance company will have to raise its capital to Tk 30 crore from Tk 9 crore.

An insurance company will not be allowed to operate both traditional and Islamic insurance business simultaneously. Besides, the companies, particularly the general insurers, should have brokerage houses. The government, however, accepted several amendments to a number of articles of the bills.

As many as 62 insurance companies are currently operating in the country. Of them, 19 are life insurance and 43 general insurance companies. With manpower of less than 20, the office of the chief controller of insurance is overseeing the insurance sector with about 1.5 crore policy holders. The law will replace the Insurance Act 1938.

The Insurance Ordinance will repeal the Insurance Act of 1938 and the Insurance Rules of 1958, the Review adds. The Ordinance has some notable new stipulations.

They include:

· Setting up of a Policyholders’ Protection Fund;

· Greater capital requirements for insurers;

· Creation of brokerage houses for insurance policies;

· Mandatory solvency margins for insurers;

· Allowing foreign investment in the insurance sector;

· Reduction of the number of directors from 20 to 15.

Insurance entities will have their paid-up capital increased from 200 million takas to 400 million takas (in the case of the life sector) and from 90 million takas to 300 million takas (in the case of the non-life sector). They will be required to meet the new requirements in five years. The web version of the Daily Star of Bangladesh, the largest English language daily newspaper in the country, adds that under the new regime, the IRA will be a five member body led by a Chairman. The ordinances also put a limit on commission expenses, and stipulate the valuation of life insurance companies on a yearly basis, as well as a separation of conventional and Islamic insurance businesses. Per the newspaper, the new ordinances “have been drafted in line with international best practices, particularly with the model of India’s Insurance Regulatory and Development Authority” and aim to modernize the insurance sector and provide proper guidelines to the businesses.

Present position of insurance business in Bangladesh:-

Summary of Current scenario of insurance industry in Bangladesh

62 insurance companies. 2 state-owned corporations 43 general & insurance companies 17 life insurance companies Bangladesh Government allowed the private sector to conduct business in all areas of insurance for the first time in 1984.

Unlike world economy, may be because of isolation, Bangladesh Insurance market continued to achieve a remarkable progress in growth in terms of total assets, revenue and investment. Major focus was more on strengthening and enhancing the development of insurance control and legislation. After a long persuasion by the Association, the insurance subject has been finally transferred from the Ministry of Commerce to the Ministry of Finance. This will definitely help the insurance industry to walk in the glorious path of solving issues related to taxation, VAT, enlistment of insurance companies with Banks other related matters.

During the year 2008, the insurance industry has achieved a record amount of gross premium of BDT 12,447 million including Sadharan Bima in context. This figure is 15.96% higher than that of the gross premium of 2007. With a combined life and non-life insurance market premium BDT 325.57 billion, Bangladesh ranks 85th in the world and has a world market share of 0.01%. Per capita spending on insurance is only $2.6. Insurance penetration (premium as a 5 of GDP) remains low at 0.6% (0.4% for life and 0.2% for non life). However the market has been steadily growing at a double digit rate as non life premium income increased by 17.70% to BDT 9.38 billion during 2007. The gross premium income (GPI) of non-life private sector insurance companies increased from BDT.7,975.70 million in 2006 to BDT.9,417.32 million in 2007 registering a growth rate of 18.08%. GPI of the year 2008 has not yet been published.

Unfortunately the current state of affairs of general insurance market in Bangladesh is far from satisfactory .The operation of a large number of companies at present is certainly not commensurate with the size of the market that has lead to cutthroat competition and many unhealthy practices which is detrimental to the industry as a whole.

Regulatory reforms to modernize strict enforcement thereof and whole hearted adherence to all, are needed to free the industry from unwanted practices and to glorify its dignity.

However, therefore this is really a ray of hope that despite political uncertainty, natural calamities, economic slowdown and lack of major investments the insurance premium growth shows a higher growth in 2007. The growth of private sector non-life insurance business was primarily due to the drive given and initiative taken by the private insurers in exploring new avenues while to some extent it was due to increase in project value and commodity prices in the international market.

A total of 62 insurance companies are operating in Bangladesh till date. Of these companies, 59 are private, two state-owned and one is foreign. Insurance Directorate, under the Ministry of Commerce, is the regulatory-body of the country’s insurance sector. At present there are 44 general insurance companies running in Bangladesh. Many other private companies are about to commence business.

Problems of Insurance Business in Bangladesh:-

In a developing country like Bangladesh, insurance companies are playing a very important role in the economy. Though insurance industry has very prospect in the economy but for some reasons it’s totally failed to achieve its goal. If we want to know the reasons behind this hen we should look forward the following according to Bangladesh General Insurance Company Ltd. In this report the major problems in performing insurance business has been classified into some major criteria which are social, economic, political, legal and other reasons. The actual problems are discussed in detail within these criterions.

· Social Problems

• Less Public awareness:

A vast majority of people especially in rural areas are left outside the insurance coverage. This mainly results from the unawareness among the people. Even a large portion of people don’t have the minimum idea of insurance. People are not aware of the benefits from the insurance policy and a great number of people believe that insurance business is nothing but cheating and assume that insurance policy is quite unnecessary. This negative attitude from the people is lessening the importance of absorbing insurance policy in a large extent.

• Centralization:

Most of the insurance companies in our country are located in urban areas and there are few branches in rural areas. They think that they might have better scope for performing their business as the economic condition of the urban is better than the rural areas. They don’t think that the large number of our population reside in rural areas and if branches are expanded in rural areas then the business can thrive if proper motivation policy is taken to aware the mass people of the rural areas. Thus this centralization policy acts as an obstruction for the growth of insurance business in our country.

· Economic Problems

• Poor economic conditions

Bangladesh is one of the poorest countries in the world and most of the people in this country live under extreme poverty level. All of these people fight hard to earn their livelihood and are marginal in relation to the expenditure with the income. It is quite impossible for them to save some money for future need. Therefore they are quite unable to give the amount to the insurer which is called as premium and regarded as safety or precautionary measures against any accident. The number of people who can bear the premium to the insurance company is very few in regard to those mentioned above. Therefore the overall poor economic condition is creating obstacle to flourish the insurance business in Bangladesh.

• Poor financial position of the insurance companies

Most of the insurance companies of our country are facing financial problems. Recently government is trying to take initiative to close some of the insurance companies because they are not maintaining the minimum standards. They are investing their money in poor securities and business which is vulnerable regarding getting back the money with profit. As a result most of the insurance companies are suffering from loss years after years and for poor financial condition the insurance companies are also unable to expand their branch which is a barrier for the growth of insurance business in Bangladesh.

• Higher cost of business

Growing cost of business is another problem that insurance companies are facing now a day. They urge that government tax, house rent, utility, commission fee, stationeries are growing day by day. But their businesses are not growing so fast with that rate. Besides this the policy holders are not willing to pay too much premium with growing cost that is hampering the strategies of insurance companies. So they are facing difficulties in running their business efficiently.

• Problems of economic bases and effective principle

Before independence insurance business was control by private company. But after independence maximum insurance company take over by the government. For that reason government changed the company management, policy and applies new rules and regulations which system was very tricky and uncomfortable for the mass people.

· Political problems

• Political instability

Political instability is a major problem in Bangladesh. For the instability in politics, many disruptive situations are often created which are bad for any businesses. The people who operate various businesses in our country often experience various types of inconvenience in running their business. Insurance business is not an exception 0of this. Political instability and inconsistency of political courses are a serious problem for the insurance business.

• Lack of supervision from the government

Lack of surveillance from government ministry encourages many insurance companies to follow some unethical practices like make harassment to policy holder and showing less in the financial statement. This not only destroying the reputation of the well known insurance companies but also creates negative impact in the mind of the people about insurance. Besides this government sometimes impose some conflicting rules and regulation without discussing with insurance companies governing body. It creates conflict among insurance companies with government and act as one of the main hindrances of growing insurance business.

• Problem of planning and administration

After the change of the government, the whole planning and administrative measures are changed which is the main constraint for long term plans. Without long term planning any permanent development or solution of existing problems are impossible.

· Legal Problems

• Too much complexity

To take an insurance policy there are great number of rules and regulations which must be compelled by the insured person. And into those rules a vast number of complexities is present there. Therefore the people are discouraged to take insurance policy because they think that the complexities will create extra pressure on their mind which may hamper other jobs.

· Other problems

• Lack of qualified officials

Insurance companies perform their activities by recruiting marketing agent and they try to convince the people to take a policy. Most of the cases the agents are not properly trained and they don’t know the right process to catch potential people to make their policy holders. Therefore these field level agents are unable to fulfill their target and act as a constraint in the insurance business.

• Traditional method

Still Bangladesh insurance company using or follows traditional methods on insurance policy. Where as foreign companies are using modern systems like computerized system. Our local company does not want to change themselves.

• Lack of training for the employees

Spread of insurance business in Bangladesh failed for lack of proper training by the employees specially the field employees of insurance companies. Still there are not enough training center to provide proper training regarding insurance activities for the officials of insurance company. Though there is one insurance training center in Bangladesh it totally failed to achieve its target in insurance field.

• Lack of exposure

Another main problem in the country is that the media is unconcerned to send the right message regarding insurance to the people. As a result a large portion of population is completely unaware about the insurance policy. Another problem is that the insurance company does not provide adequate information in the company’s websites which can fulfill the queries of their potential customers and satisfy themselves to buy an insurance policy.

• Absence of business ethics

Some insurance companies create harassment on the policy holders or sometimes on the dependents of the policy holders when they want back their money after death or maturity. The insurance companies show different causes in order to make delay to return back the money at expected time. Sometimes they are eager to pay less than the desired amount by creating various circumstances such as they try to say that the disaster of the subject matter of the policy is not responsible due to their activities. Besides this some field officials also create some illegal acts. They often try to give false information to the people for buying a policy. And these kind of illegal acts create bad reputation to the insurance companies and hindrance the overall insurance business. Those who are harassed by the insurance companies discourage other not to take an insurance policy.

• Lack of motivation program towards public

According to Green Delta Life Insurance Company the people of our country are not much motivated by the company to take insurance policy for safeguarding themselves against any kind of risk. Almost every time they failed to understand the people that insurance policy makes their life risk free all time. For lack of motivation among the mass people insurance companies are always lagging behind from their expected target.

• Lack of information technology

Another problem is they do not use any web address, which is essential for a large leasing company. They can provide more information to its client by using web site.

• Insufficient service

In Bangladesh insurance company people failed to provide better service to the mass people that’s why the people who want to take the insurance policy they loss their interest from insurance. At same time in foreign country insurance workers goes to customer’s house and offices regularly to aware themselves and influence them to take insurance policy. In that’s case Bangladesh insurance company people are not that much expert.

• Lack of marketing policy

One of the major problems in insurance company is lack of marketing policy. Management is not taking initiative to increase their marketing expansion. They provide tiny amount advertisement, which is not sufficient for increasing business development.

Prospects of insurance business in Bangladesh:-

As well as the problems mentioned above, there are many good signs for the insurance business in Bangladesh. The factors that can facilitate the insurance business in our country are discussed below. These facts can be measured as the prospective fields for insurance business in Bangladesh.

• Higher GDP

The GDP of our country is increasing than the previous years which results in increase of per capita income. So this growing GDP and income holds bright prospects for insurance companies. The major problem is the incapability of our people to pay the premium charged by the insurance companies. . With the growth in the income more and more people are now willing to take an insurance policy for safeguarding themselves from any danger.

• Increased population

There is a big opportunity lies ahead for the insurance companies as the population of our country are increasing day by day. Although most of people of our country live under extreme poverty level and want to avoid insurance policy number of potential policy holders in Bangladesh is growing with growth of the population. There is somewhat relationship between growing populations with the number of public vehicle. As we know all public vehicle must have an insurance policy. So growing population also increase the motor insurance too. That is growth in population opens greater scope for every kind of insurance business that results in growing prospect for insurance companies.

• New business’s individual insurance

There are so many new businesses starting every day and manufacturing sector is booming with global demand. Every business is insured under an insurance company to protect its company from any kind of accident. Therefore growing industry, mill, factories are creating better scope for the insurance companies to flourish their business.

• Developing mass awareness about insurance

People are now much more conscious about their safety. So they are encouraged to take an insurance policy for making their life free from any unexpected occurrence. Increase in literacy rate is helping predominantly to create awareness among the people regarding taking insurance policy. Besides this insurance companies are also trying to eradicate the negative attitude of people towards the insurance company by organizing various programs such as seminars, programs including social responsibilities etc.

• Micro insurance

Micro insurance can be a great prospective area for the insurance business in our country. Most of the people of our country are unable to have costly and long term insurance policies. Micro insurance can be provided to individual personnel or to small business owners against little insurance premiums and with easy terms and conditions. When they will afford to minimize their risks at a lower price, they will take that opportunity and they will become to get used to it. This can cover a huge portion of the society who can be a prospective target market for this business.

• Development of new policy

SBC has long been the sole reinsures 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 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 reinsures abroad. Permissions to private insurance companies to act as reinsures will open up new opportunities to them. This will initiate open competition between the SBC and the private reinsures within the country and will reduce the reinsurance cost and increase efficiency. This amendment of the existing rules can be another important policy making that will facilitate the insurance business in Bangladesh. The private insurance companies can argue in favors of their capability to act as reinsures on the basis of the fact that the total capital belonging to the government owned general insurance company’s is Tk. 550 million while the private sector insurance companies own Tk.2500 million.

• Scope in non-traditional sector

Nowadays, along with traditional insurance services, they can offer various non-traditional insurance services to their customer. Target market of insurance company may expand and they can offer different types of non-traditional insurance services such as health insurance, personal accident insurance, travel insurance, burglary insurance and pension scheme.

• 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 role in the financial market. Insurance companies are making large investment 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 leasing, housing, health and money market.

• 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 which means service diversification. In a dynamic insurance market one can expect to see new products being promoted at regular intervals. So far very little efforts have been taken to innovative and introduce need oriented insurance services in response to existing threats. The prospect of the insurance business in various sectors that affect our economy can be differentiated in the following way.

• Agriculture sector

The economy of Bangladesh is predominantly an agrarian one, with most people engage in farming and fishing. The uncertainty of agriculture due to crop failure caused by climate variation, 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 agricultural sector. Increase in investment in the agricultural 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.

• Business sector

Nowadays in Bangladesh the SME plays a important role in the economic development. But they are deprived from taking loans from bank for large amount. If insurance business focuses this section in Bangladesh they are able to contribute more in the economy .Thus insurance business has a bright prospect in business sector in a developing country like Bangladesh

Impact and Consequences of Globalization in Bangladesh Insurance Industry:-

Globalization means the breakdown of boundaries. Every country rich or poor would have access to the markets of other country. As a matter of right, the rich will have access to the markets of the poor and the poor countries would have access to the markets of the rich. This sounds quite fair as it will be a borderless world. Everyone will be equal citizens of the globe. But what is apprehended by many that this might lead to loss of the independence of the poor countries. This is simply because the poor may lose their economic independence under globalization. If there is only one global entity, there can not be nations and or can not be independence of nations.

Globalization has profound implications for Bangladesh. It creates new opportunities and threats. The increased competition that is driving globalization will always produce both winners and losers. For some people, it is a great threat, and others view it is an opportunity. It is no denying of the hard truth that liberalization of insurance makes it a game of survival of the fittest. It is clear that those who are able to add capital, underwriting and management strengths to their arsenal are in a stronger position than those who do not. Therefore, it is very essential that the local insurers should strengthen their competitiveness in order to survive in the liberalization process.

We must not forget the fact that local insurers are lagging behind in terms of information technology, financial resources and human resource development. The process of liberalization is a challenge and stimulus to local insurers to reach international standard. However, it must be remembered that reckless opening of unsound insurance business to foreign competition can lead to costly failures in the domestic insurance sector. In order to have an equal footing, the insurance industry of Bangladesh need to be protected from foreign competition until the local insurers develop sufficient financial capacity and insurance expertise to compete with foreign insurers.

In a liberalized market, local insurers must take measurers to compete more effectively. The pertinent question is how quick we can prepare ourselves and how effectively we handle the situation. In case, we fail to move fast, the market is likely to be threatened with more fierce and unethical competition. On the other hand, if we move too fast, it is likely that some of the insurance companies will lead to insolvency. It is, therefore, prudent to choose a mid way.

Much of the developments in our market will depend on how insurance is being regulated. For this matter, we need to build regulations in tune with the changing times. The new regulations ought to be formed for sound growth of the industry as a whole. This places the regulatory authority in a position of immense responsibility. It is necessary to devote attention to professionalize the regulatory body and to ensure a broad form of continuity in terms of skilled personnel. This would ensure the continued good health of the insurance sector.

The most important in this respect is cooperation between the industry and the regulator. The development of regulation should be advanced through an open and enjoying dialogue between industry and regulator with input from consumers, intellectuals, and legislators. We need an alliance between the regulator and the industry to examine in a constructive and transparent way those areas where regulation is necessary. We need to adopt a culture of cooperation and free communication. There is the need for partnership in the planning of regulation. If the supervisory authority and the market jointly develop a regulation there is a much greater probability that it will achieve the purpose. Dialogue is also important for identifying the true and real problems of the industry.

The Regulatory authority therefore, must promote professional education and training, and the industry must get ready to face the challenges only by developing themselves professionally. For this we need a positive shift in attitudes of the insurance industry and the regulator.

Evaluation of Financial & Non Financial Disclosures

Financial Disclosure: –

Green Delta Insurance Company Limited (GDIC)

· Basis of Presentation of Accounts and significant Accounting Policies

Basis of Presentation of Accounts

These accounts have been prepared on the basis of going-concern concept under generally accepted accounting principles according to the historical cost convention. Requirements as to disclosure of financial information warranted by the Insurance Act 1938 have been adhered to in presenting financial statements. Such financial statements comprises of the Balance Sheet, Profit and Loss Account and Revenue Accounts for specific classes of business in the form set forth in the first, second and third schedule of the Insurance Act 1938. A Cash Flow Statement is also included as per requirement of the Securities and Exchange Rules 1987.

· Significant Accounting Policies:-

• Depreciation on fixed assets:

Depreciation on fixed assets has been calculated on all assets using straight line method at varying rates depending on the class of assets. Methods and Rates of depreciation are consistently applied in relation to previous year.

· Furniture & Fixtures 10%

· Office & Electrical Equipments 15%

· Vehicles 20%

Revenue Recognition

The total amount of premium earned on various classes of insurance business during the year, the gross amount of premium earned against various policies, the amount of re-insurance premium due to Private and Public Sector, the amount of re-insurance commission earned and the amount of claims less re-insurance settled during the year have all been duly accounted for in the books of account of the Company and while preparing the final statement of accounts, the effect of re-insurance accepted and re-insurance ceded as well as the effect of total estimated liabilities in respect of outstanding claims at the end of the year whether due or intimated have also been duly reflected in order to arrive at the net underwriting profit for the year.

• Management Expenses

Management expenses are charged to Revenue Accounts amounting to Tk. 209,415,829 is approximately 14.95% of gross premium of Tk. 1,400,753,536. The expenses have been apportioned.

• Public Sector Insurance Business:

As of 1st April 1990, following a Government decision, Public Sector Insurance business is being underwritten jointly by Sadharan Bima Corporation and 43 private sector insurance companies on co-insurance basis; 50% being underwritten by Sadharan Bima Corporation and the balance equally by 43 Private Sector Insurance Companies.

Company’s share of Public Sector Business is accounted for in the year in which the complete statement of accounts from Sadharan Bima Corporation is received. Accordingly, the company has been considered its share of public Sector Insurance Business this year, based on the Sadharan Bima Corporation’s statement of year 2007.

• Authorized Share Capital:

5,000,000 Ordinary Shares Of Tk. 100 each 500,000,000

The GDIC increased its authorized capital from Tk. 100 million to Tk. 500 million by passing a special resolution in the Companies 4th Extra Ordinary General Meeting (EGM) held on 7th October, 2004 at 11.00 A.M at Hotel Purbani International Ltd., Dhaka, Bangladesh and Certified by the Registrar of Join Stock Companies and Firms on April 11, 2005.

· Other Significant Financial Disclosure data Disclose In the Financial Statement:-

• Reserve or Contingency Account Tk. 1,303,976,287
• Reserves for Exceptional Losses Tk. 379,655,923
• Balance of Fund Account Tk. 314,564,231
• Premium Deposits TK. 23,180,097
• Estimated Liability in Respect of Outstanding Claims whether Due or Intimated Tk.116, 227,225
• Amount Due to Other Persons or Bodies Carrying on Insurance Business Tk. 405,739,476
• Sundry Creditors Tk. 277,120,809
• Investment Tk. 1,561,551,772
• Sundry Debtors Tk. 250,073,740
• Details of Cash & Cash Equivalent Tk. 649,780,061
• Land Property Tk. 21,036,075
• Fixed Assets (at cost less depreciation) Tk. 15,288,399
• Stock of Printing, Stationery & Stamps Tk. 1,822,751
• Audit Fees Tk. 200,000
• Investment and others Income Tk. 253,288,706
• Claims under Policies less Re-insurance Tk. 117,233,663
• Premium less Re-Insurance Tk. 627,213,841

Pragati Life Insurance Limited

· Basis of Preparation and Statement of Compliance

Statement of Compliance

The basis of presentation and disclosures of information are based on the relevant and applicable requirements of the:

· Insurance Act, 1938, · Companies Act, 1994, · Securities and Exchange Commission (SEC) Rules, 1987, · Listing Regulations of Dhaka and Chittagong Stock Exchanges and · Bangladesh Accounting Standards (BAS).

· Basis of Presentation

Financial Statements have been prepared on the historical cost basis except as disclosed in the accounting policies mentioned below.

· Reporting currency and level of precision

The financial statements are prepared in Bangladeshi Taka, which is the Company’s functional currency. All financial information presented has been rounded off to the nearest taka. Figures in brackets indicate deduction.

· Use of estimates and judgment

The preparation of financial statements requires management to make judgments, estimates and assumptions that effect the application of accounting policies and the reported amount of assets, liabilities, income and expenses. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates