As one of the pillars of the financial sector, the insurance industry plays a critical role in supporting the economic infrastructure of a nation. By providing essential financial protection and risk mitigation to individuals, businesses, and communities, it fosters long-term investment, encourages prudent risk-taking, and promotes economic stability. 

For a developing country like Bangladesh, the industry is particularly pivotal, contributing to socioeconomic development, capital formation, and the mobilization of national savings. However, its ability to perform these roles effectively hinges on a robust governance framework. Good governance in the insurance industry safeguards the interests of policyholders, maintains insurer solvency, and upholds overall confidence in the financial system. The complexity of insurance business models, coupled with the long-term nature of insurance contracts and potential information asymmetry, make governance crucial. 

This article provides an in-depth analysis of the importance of good governance in the insurance industry of Bangladesh, exploring the key elements of governance, the regulatory landscape, as well as the challenges and opportunities therein.

The Role of Governance in Insurance

Insurance is fundamentally a promise – a long-term commitment to compensate policyholders in the event of specified losses or damages. For policyholders to trust this promise, they must believe in the solvency and reliability of the insurance providers. They must trust that, should a claim event occur - whether tomorrow or in several decades - the insurer will honor its commitment. This trust is fostered through good governance.

Insurance governance refers to the mechanisms, processes, and relations by which corporations are controlled and directed in the insurance industry. They delineate the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders, and other stakeholders, and spell out the rules and procedures for making decisions on corporate affairs.

At its core, insurance governance serves three fundamental functions. First, it provides strategic direction to the company, ensuring the alignment of business activities with the company's mission and vision. Second, it monitors the performance of the company, safeguarding the interests of stakeholders, particularly policyholders. Third, it ensures compliance with legal and regulatory requirements, promoting ethical business practices and risk management.

The board and management of an insurance company have a crucial role in fulfilling these governance functions. They are tasked with setting the company's strategic objectives, establishing the means to attain those objectives, and monitoring progress towards them. 

One of their primary tasks includes risk management. Insurers bear various types of risk, including underwriting, market, credit, operational, and liquidity risks. Good governance demands a proactive and systematic approach to identify, assess, manage, monitor, and report these risks, ensuring the insurer maintains adequate capital and reserves to meet its obligations.

The board is also responsible for establishing a strong corporate culture, one that values ethical behavior and best customer service. For example, information asymmetry, a common characteristic of the insurance industry, is an aspect that underscores the need for governance. Insurers typically have access to more, and better quality, information than their policyholders. This disparity can lead to unfair practices, such as misrepresentation or non-disclosure, and it can undermine trust in the industry. Good governance measures, such as transparency, fairness, and regulatory oversight, can help mitigate this issue and promote trust.

It is worthwhile to draw some comparisons between the roles and responsibilities of boards and management in the insurance industries of Bangladesh, the USA, India, and the UK.

In Bangladesh, the board is primarily responsible for setting the company's strategic objectives and overseeing the management's execution of these strategies. They also play a significant role in risk management, ensuring compliance with regulatory requirements.

Contrastingly, in the USA, where insurance regulation is primarily at the state level, the roles of boards and management can vary significantly between states. However, in general, there is a strong emphasis on the fiduciary duty of the board towards shareholders, which may sometimes lead to conflicts with policyholder interests. The Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010 have also strengthened accountability and transparency requirements for boards and management.

The governance structures in the UK insurance industry have been strongly influenced by the Corporate Governance Code, which emphasizes the role of the board in risk management and accountability to shareholders. The Solvency II, subsequently Solvency UK after Brexit, directive has further reinforced these responsibilities, particularly in relation to risk management and capital adequacy.

India's insurance industry, like Bangladesh, has a board structure that is responsible for setting strategic objectives and overseeing management. However, corporate governance in India has been significantly shaped by the guidelines issued by the Insurance Regulatory and Development Authority of India (IRDAI), which focus on ensuring fair and transparent business practices, enhancing risk management, and safeguarding policyholder interests.

Governance in Bangladesh Insurance Industry 

In Bangladesh, the governance landscape of the insurance industry has evolved over the years. The Insurance Development and Regulatory Authority (IDRA), established in 2010, has been instrumental in this journey. IDRA oversees and regulates the insurance sector in Bangladesh with the objective of ensuring that insurers operate in a financially sound, fair, and transparent manner.

The regulation of the insurance sector by IDRA involves various components. For one, insurance companies must obtain a license from IDRA to operate in Bangladesh. The licenses are periodically reviewed, and companies failing to meet regulatory requirements may face suspension or revocation of their license.

The capital adequacy of insurance companies is another area of focus. Insurers are required to maintain a certain minimum level of capital, depending on the nature and volume of their business. This requirement, along with rules on investment and asset-liability management, is critical for insurer solvency and the protection of policyholder interests.

Internal controls and risk management are also vital elements of governance in the insurance sector. Insurance companies are expected to have effective systems for identifying, assessing, and managing risks, as well as robust internal controls to prevent fraud, protect assets, and ensure accurate financial reporting.

Transparency and accountability form the backbone of governance in the insurance industry. IDRA requires insurers to disclose significant information about their financial health, business performance, risk profile, and management practices. This transparency is vital to enable policyholders, investors, and other stakeholders to make informed decisions.

In comparing the regulatory landscape of Bangladesh with those of the USA, India, and the UK, we can observe some distinct differences and similarities.

The state level regulation in the United States implies that each state has its own insurance department and commissioner. This decentralized structure contrasts with the centralized regulation of Bangladesh's insurance industry by the IDRA. While state-based regulation allows for more regional flexibility in the US, it can also result in a more complex and fragmented regulatory environment. Centralized regulation, as in Bangladesh, can offer more uniformity and consistency.

The UK follows a dual-regulatory approach, where the insurance industry is overseen by both the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). The PRA focuses on the prudential regulation of insurers, ensuring they have adequate financial resources, while the FCA is responsible for protecting consumers and ensuring market integrity. This division of responsibilities provides a balanced focus on both insurer solvency and consumer protection. However, it requires effective coordination and cooperation between the two regulators, something that is not a concern in Bangladesh's unitary regulatory system.

India, like Bangladesh, has a centralized regulatory body for its insurance industry - the IRDAI. Established around the same time as Bangladesh's IDRA, the IRDAI has played a crucial role in reforming India's insurance sector, improving its transparency, and enhancing policyholder protection. The IRDAI also oversees the licensing of insurance companies, similar to the IDRA. However, the IRDAI has more autonomy than the IDRA, and it has a broader scope, including the promotion of competition to enhance customer satisfaction.

The licensing processes, capital adequacy requirements, and disclosure rules also differ across these countries, reflecting their unique market conditions, risk profiles, and regulatory philosophies. For instance, capital adequacy rules in the US and UK are typically more risk-sensitive, reflecting the complexity and diversity of their insurance markets. In contrast, India and Bangladesh, with their developing insurance sectors, follow simpler, more rule-based capital requirements.

These comparisons highlight the diversity of governance and regulatory approaches in the global insurance industry. They underscore the importance of context in shaping regulatory practices and the need for continuous learning and adaptation. For Bangladesh, understanding these international practices can provide valuable insights and lessons as it continues to strengthen its own insurance industry governance.

Challenges in the Current Regulatory Environment

The regulatory environment for the insurance industry in Bangladesh faces a multitude of challenges, which impede the sector's growth and functioning.

Firstly, the regulatory framework is grappling with some inherent issues. Despite the efforts of IDRA to improve industry standards and compliance, several insurance companies continue to flout rules and regulations. This non-compliance is partly due to the current regulations being inadequately enforced or not sufficiently clear. For instance, some insurers are known to violate the mandatory solvency margins, while others do not maintain the required reserves for policyholder liabilities.

The situation is further compounded by outdated regulations that do not cater to the fast-paced changes in the insurance industry. For example, the regulations around digital selling of insurance products or the use of data analytics for pricing and risk management are not yet adequately defined or guided. This lack of regulatory clarity creates an uncertain business environment and discourages innovation.

Moreover, the Insurance Act, which was last updated in 2010, is in need of further revision to address emerging global trends and risks. The advent of cyber risks, the impact of climate change on insurance policies, and the disruptions caused by technology, notably insurtech, all pose new challenges that need to be reflected in the regulatory framework.

Secondly, there is a notable skills and knowledge gap within the regulatory authority and insurance companies. A comprehensive understanding of new insurance products, advanced risk management practices, corporate governance norms, and the implications of integrating technology in operations is crucial for effective regulation. This current shortfall has resulted in inconsistent application of regulations, oversights in surveillance, and inability to deal with complex issues.

Finally, a lack of transparency and inadequate disclosure practices among insurers further strain the regulatory environment. The absence of reliable and timely information about insurers' financial health and operations makes it challenging for policyholders to make informed decisions and for regulators to effectively supervise insurers. For example, some companies do not regularly update their solvency status on their websites, while others are not forthcoming about their investment strategies or risk exposure.

In sum, the current regulatory environment faces the daunting task of overcoming non-compliance, modernizing regulations, bridging knowledge gaps, and improving transparency and disclosure practices. Tackling these challenges is critical for creating a robust and resilient insurance industry in Bangladesh.

Opportunities for Improvement 

The governance of the insurance industry in Bangladesh offers a myriad of opportunities for improvement and growth. The focus should be on four core areas: enhancement of the regulatory framework, capacity building of the IDRA and insurance companies, improvement in transparency and disclosure practices, and elevation of financial literacy among the public.

To begin, the regulatory framework can be bolstered. A robust and responsive regulatory framework is crucial for a dynamic and sustainable insurance industry. In the context of Bangladesh, where the industry is still evolving, refining existing regulations and introducing new ones to address emerging risks and challenges can substantially boost governance. For instance, regulations around cyber risk management can be strengthened, considering the rising incidence of cyber threats and their potential to disrupt insurance operations. Similarly, given the adverse impacts of climate change, regulations could be developed to encourage insurers to integrate environmental risks into their risk management frameworks. Finally, with technological advancements revolutionizing the insurance landscape, regulations need to keep pace, addressing challenges around data protection, privacy, and ethical AI use, while fostering innovation.

Next, capacity-building within IDRA and insurance companies is critical. Given the increasing complexity of the insurance landscape, enhancing the knowledge and skills of both regulatory and company staff is of utmost importance. Training programs could focus on contemporary issues such as risk management, regulatory compliance, corporate governance, and the integration of modern technology in insurance operations.

Modern technology adoption, in fact, offers extensive potential to revolutionize insurance industry governance. Insurtech, the use of technology to enhance and streamline the insurance industry, holds particular promise. By leveraging advancements such as AI, advanced analytics, and actuarial science, insurers can improve their risk assessment capabilities, optimize pricing, enhance customer service, and boost operational efficiency. 

For instance, AI and machine learning algorithms can help insurers analyze vast amounts of data, glean valuable insights, predict trends, and make better-informed decisions.

In addition, insurtech startups have been sprouting up globally, offering innovative solutions to traditional insurance problems. These solutions range from AI-based underwriting platforms, blockchain for fraud detection, and telematics for personalized auto insurance, to digital platforms that simplify the buying and selling of insurance. Bangladesh's insurance industry could potentially partner with insurtech firms or foster home-grown insurtech innovations to drive improvements in service delivery, customer experience, and governance.

Transparency and disclosure practices also present an opportunity for enhancement. Transparency fosters trust, a critical ingredient for the insurance business. Despite existing disclosure requirements, there is significant scope for enhancement. This could involve stipulating more comprehensive, timely, and easily understandable disclosures from insurers. For instance, insurers could be required to disclose their risk management practices, corporate social responsibility initiatives, customer complaints, and resolutions, among other things. Furthermore, the manner in which information is presented can be improved, using clear, plain language and visual aids to enhance comprehension.

Finally, addressing the lack of financial literacy among policyholders can yield considerable dividends. The promotion of educational campaigns, provision of consumer guidance, and development of resources to improve the public's understanding of insurance products, rights, and responsibilities should be integral parts of this endeavor. This effort could involve working with insurtech firms to develop user-friendly educational apps or online platforms. Collaboration with schools and universities to integrate financial education into their curricula could also be explored for long-term impact.

By harnessing the power of insurtech, investing in capacity-building, enhancing regulatory frameworks, and making concerted efforts to boost financial literacy, Bangladesh can significantly improve the governance of its insurance industry. Such advancements would not only foster a more robust and resilient insurance sector but also contribute meaningfully to the nation's overall economic development.

Final Words

The insurance industry is a key player in the economic development of a country. It plays an integral role in promoting financial stability, encouraging savings, and mitigating risks. However, the ability of the industry to fulfill these roles effectively hinges on good governance. Good governance, in turn, relies on a robust regulatory framework, competent and ethical management, effective risk management, transparency, and a culture of accountability.

While progress has been made in recent years in Bangladesh insurance industry, there remains significant room for improvement. By addressing the challenges and leveraging the opportunities discussed above, the country can strengthen governance in its insurance industry, protect the interests of policyholders, and contribute to the overall economic development of the country.

The enforcement of existing regulations can be improved, making the industry more compliant, trustworthy, and competitive. The capacity of IDRA and insurers can be built, improving oversight, risk management, and the industry's ability to respond to emerging risks and trends. Transparency and disclosure practices can be enhanced, making it easier for policyholders to make informed decisions. Efforts can be made to increase financial literacy, empowering consumers, and enhancing market discipline.

In a rapidly evolving global financial landscape, the importance of good governance in the insurance industry cannot be overstated. As Bangladesh's insurance industry continues to evolve, so too must the governance framework that underpins it. This requires a proactive, adaptive, and inclusive approach, involving regulators, insurance companies, and policyholders.

Indeed, good governance is not a destination but a journey - a continuous process of learning, improvement, and adaptation. By embracing this journey, Bangladesh can ensure that its insurance industry remains robust, vibrant, and well-equipped to support the nation's development goals. As the industry expands and becomes more complex, so too must the mechanisms that oversee it, ensuring the ongoing trust and participation of policyholders, the lifeblood of the industry. It is a challenging task, but one that is both necessary and worthwhile in the pursuit of sustainable and inclusive economic development.

A good governance is the lynchpin that can unlock the immense potential of the insurance industry in Bangladesh. With the right governance structures and practices, the industry can significantly contribute to the financial stability and economic progress of the nation, fostering an environment where businesses flourish, individuals thrive, and society as a whole prospers.

Dr. Nurur Rahman is the Founder and CEO of Somikoron, an AI-based insurtech startup in Bangladesh. Somikoron is paving the way for Bangladesh insurance, finance, and retails industries to be compatible with the Fourth Industrial Revolution. Contact: [email protected]; [email protected].