Regulator proposes steep cuts to insurers’ management costs

The Insurance Development and Regulatory Authority (Idra) has proposed stricter limits on how much life and non-life insurance companies can spend on management costs, aiming to strengthen financial discipline and reduce delays in claim settlements.

The draft proposal, however, has met strong opposition by insurance firms, as they argue that the existing rules should remain in place for a few more years to allow the sector to adjust.

Under the new draft, both life and non-life insurers would face deep cuts in allowable management expenses. These expenses include operational costs such as agent commissions, staff salaries and administrative overheads.

For life insurance, the management cost for annual premium policies will be cut from 5 percent to 4 percent, while for instalment-based policies it will drop from 10 percent to 7 percent.

In group insurance, management costs on annual premiums will fall from 15 percent to 10 percent.

For policies lasting one to five years, the first-year cost will drop from 95 percent to 85 percent and renewal costs from 25 percent to 20 percent.

For six to 10-year policies, first-year costs will decline from 94 percent to 84 percent, and renewal costs from 22 percent to 17 percent.

Policies with a term of 10 years or more will see a sliding scale based on total premium value.

For premiums under Tk 100 crore, first-year costs will fall from 95 percent to 82 percent; for Tk 100-500 crore, from 92 percent to 81 percent; and for over Tk 500 crore, from 91 percent to 76 percent.

Renewal costs across all tenures will also be reduced from 15 percent to 10 percent.

In the non-life segment, which covers areas such as fire, marine and general insurance, management cost limits will also be reduced.

For example, for the first Tk 15 crore in premiums, fire and general insurers will now be allowed to spend 25 percent instead of 35 percent. For marine insurance, the cap will fall from 26 percent to 16 percent.

As premium income rises, the limits become even tighter. For premiums over Tk 120 crore, the cap will drop from 22 percent to 12 percent for fire and general insurance, and from 16 percent to 6 percent for marine insurance.

According to Idra, these expenses are set annually based on gross premium income, which refers to the total amount of premiums collected in a calendar year.

Idra data show that at the end of June this year, unpaid claims amounted to Tk 6,928 crore.

Over the past 14 years, more than 26 lakh insurance policies have lapsed. Around 11 lakh policyholders remain unable to recover their dues.

INDUSTRY REACTION

Md Jalalul Azim, managing director of Pragati Life Insurance PLC, said the existing expense rules introduced in 2018 for non-life insurers and 2020 for life insurers should remain in force for several more years.

"Since its implementation, we have already reduced expense rates gradually by 1 percent each year, bringing it down to 15 percent by 2023," he said.

According to Azim, nearly 20 life insurance companies are still failing to meet the current expense limits. "Before any further reduction is considered, the priority should be bringing these non-compliant companies within the existing framework," he said.

He added that around 60 to 70 percent of costs in the life insurance sector go towards agent commissions, which are fixed by the regulator. "Unless this commission structure is revised, it is unrealistic to expect further reduction in total management expenses."

Nura Alam Siddikie Ovee, chief executive officer of Alpha Islam Life Insurance, said the proposed reductions would pose serious challenges for most companies.

"Many insurers are unable to operate within the existing limits due to inefficient management and high marketing expenses," he said.

"Drastically lowering the slabs further would be detrimental," he said. "We believe the regulator should first ensure all companies follow the current limits before considering any reductions."

Syed Sehab Ullah Al-Manjur, chief executive officer of Pragati Insurance Limited, called the new limits "highly unrealistic" given rising operational costs, inflation and the broader economic slowdown.

He said, "The percentage of management expenses in our insurance sector remains comparatively low when measured against neighbouring and other international markets. The proposed limits are not practically feasible."

Md Khaled Mamun, chief executive officer of Reliance Insurance, said the 10 percent cut in management expenses could hit smaller insurers particularly hard.

He urged the regulator to focus on enforcing existing limits before introducing stricter ones. "Only once all companies are operating within the existing framework should further reductions be considered," he said.

Adeeba Rahman, first vice-president of the Bangladesh Insurance Association and sponsor director of Delta Life Insurance, said the draft proposal has both "strengths and challenges".

She said moderating the first-year slab and adjusting commissions for renewals were positive steps, but added that other areas have become "too restrictive".

Rahman said the association would soon submit its feedback to the regulator to help reach "a balanced solution".

REGULATOR'S DEFENCE

Idra spokesperson Saifunnahar Sumi said excessive management expenses are a key reason for delayed claim settlements, particularly among life insurers.

"These measures are intended to protect the interests of policyholders and shareholders, promote good governance, and restore public confidence in the sector," she said.

She added that high policy lapse rates were another major concern. "Currently, around 75 percent of policies lapse by the third year," she said.

'NECESSARY, BUT NOT SUFFICIENT'

Hasina Sheykh, professor of Banking and Insurance at Dhaka University, said the concerns about visible spending and delayed payments reflect deep-rooted structural issues.

"When insurers allocate large sums to grand projects or visible assets while failing to honour claims, public trust erodes," she said.

The professor said reducing management expenses is necessary but not sufficient. "Insurers must change their mindset. Premium money is a liability, not a source for unchecked expenditures," she said.

She urged Idra to pair tighter spending limits with stronger oversight so that policyholders' rights are protected and confidence in the industry is restored.