CASE STUDY MICRO INSURANCE AND MICRO TAKAFUL IN BANGLADESH: HOW TO OPERATE VIABLE MICRO TAKAFUL SCHEME KAZI MD. MORTUZA ALI, (A.C.I.I.

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1 CASE STUDY MICRO INSURANCE AND MICRO TAKAFUL IN BANGLADESH: HOW TO OPERATE VIABLE MICRO TAKAFUL SCHEME AUTHOR KAZI MD. MORTUZA ALI, (A.C.I.I.) MANAGING DIRERCTOR PRIME ISLAMI LIFE INSURANCE LIMITED POSTAL ADDRESS RAJ BHABAN (6 TH FLOOR) 29, DILKUSHA C/A, DHAKA-1000, BANGLADESH PHONE , , (Off.) Mobile: FAX : Website : pililbd@gmail.com : mortuzaalimd@yahoo.com : 1

2 MICRO INSURANCE AND MICRO TAKAFUL IN BANGLADESH: HOW TO OPERATE VIABLE MICRO TAKAFUL SCHEME 1. Introduction 1.1 Micro-insurance refers to protection of assets and lives against specific perils of target population, usually low income households at affordable prices through formal and informal institutions. Microinsurance products usually provide coverage to health crises, death, accidental injuries etc. Endowment type microinsurnce is emerging in one form or other in recent years and is highly demanded in Bangladesh. 1.2 Bangladesh has an agriculture based economy with majority of people living in villages where income per household is low with very little opportunity for saving. Therefore, the prospect of micro-insurance in Bangladesh is very good. However, there are certain inherent problems associated with this type of insurance. If these problems can be managed micro-insurance in Bangladesh would flourish. 1.3 In Bangladesh, micro-insurance started during late 1980s when the private life insurance companies came into operation. Since then, its growth has been phenomenal. So much so that today a large part of the life insurance industry premium comes from micro-insurance and it is still growing. The main providers of micro-insurance in Bangladesh are the commercial life insurance companies directly or indirectly and the non-government organizations/micro finance institutes(ngo/mfi). 1.4 There was a growing realization among the MF-NGOs that savings and credit can not protect the poor households against day to day risks. As a result, the large MF-NGOs gradually moved into the area of micro insurance and started offering insurance products to their members outside the umbrella of any regulatory framework. 1.5 Risk of the poor or that of under privileged people are either natural, social or economic. Unfortunately, the question of security of the poor people has drawn little attention of the policy makers. The poor in Bangladesh do not form a homogenous group. It has been estimated that the weakest in the rural areas consist of approximately 23% extreme poor, 52% moderate poor and 25% vulnerable non-poor. 2. Bangladesh Insurance Industry at a glance 2.1 Insurance industry of Bangladesh has a long history of evolution. About a century back, couple of insurance companies started both general and life insurance business during the British regime in India. However, insurance business got the momentum during the East Pakistan regime. In the pre-liberation period, there were as many as 49 privately owned insurance companies underwriting life and non-life insurance business along with one central government run-organization, namely, Pakistan Insurance Corporation. After liberation, the insurance industry was nationalized excepting postal life insurance and foreign life insurance companies. By virtue of nationalization order, five public sector Corporations were set up to manage the insurance industry of which four were subsidiary corporation, two each for life and general and an apex body, viz., Jitiya Bima corporation as a controlling corporation. 2

3 2.2 Presently, 71 insurance companies are operating in the country, of which 46 are in general business and the remaining 25 are in life business, even though the two state-owned corporations, along with some private sector companies, are dominating the market. The gross premium of life insurance business stood Tk. 55 billion and 15 billion taka for non life in 2011 with a considerable growth over previous year. However, presence of large number of companies in a small market leads to tough market competition and unethical practices has already created a significant number of sick insurance companies in the industry. Considering the importance of revitalizing the sector in line with the international norms, the regulatory authority has decided to introduce mandatory credit rating requirement in the industry. 2.3 For further enhancing the solvency position, the paid up capital for general and life insurance companies have been raised to Tk. 400 million and Tk. 300 million respectively. The number of directors in the company has also been reduced to 15 from 20 with the participation of independent directors. The law also debarred the directors of an insurance company to be a director of a bank simultaneously. The new Insurance law 2010 also introduced mandatory solvency margin for the insurance companies. Beside, the insurance companies will be required to ensure international accounting standard, separate Islamic insurance (Takaful) from conventional ones and put a limit on commission expenses. Moreover, life insurance companies will be required to make the valuation of liabilities on yearly basis to reveal the real strength of the company. The law also allowed foreign investment in insurance sector. 2.4 The Insurance Act 2010 prohibits anyone from carrying on any class of insurance business in Bangladesh unless certificate of registration for that class of business is obtained from the Insurance Regulatory Authority. Micro-credit Regulatory Authority Act, on the other hand, allows Microfinance Institutions to provide insurance services to their members. Many Non Government Organizations (NGOs) in Bangladesh have been providing micro-insurance services in one form or other to their members outside the radar of any regulatory framework. 2.5 It is no denying the fact that presently, insurance products are mainly focused on lives and properties of the richer class or the middle and lower middle class of the society. The indigenous insurance schemes of some of the micro-credit operators in Bangladesh are mostly life insurance products in nature. But the poor people need security both for their lives and properties(whatever they have). It has been observed that an individual member of MF-NGOs on an average has saved more than one thousand taka per annum. It is, therefore, envisaged that a reasonable amount out of this saving could be used for paying premium against insurance policies in order to protect them form any accidental loss of their lives and properties. Since micro-credit constitutes the central component of development progrmmes of most N.G.Os in Bangladesh and it is getting more priority than any tools for alleviating poverty; it is envisaged that a Comprehensive Micro-insurance Policy (C.M.P) for the micro-credit users will play an important role to achieve the desired goal. Some MFI-NGOs that are now offering insurance services to the micro-credit clients are in true sense self insurance. These are being provided mainly because of following reasons: i) Non availability of appropriate product/services. ii) Non confidence on the insurers in general. iii) High cost of commercial insurance. 3

4 These schemes of MFI-NGOs have some inherent weaknesses as follows: i) The basic principle of spreading the risk is defeated. ii) The fund which is built up may not be sufficient to meet the large and unusual losses. iii) There is no protection from reinsurance and absence of pooling arrangement. iv) There is lack of executive talent needed for underwriting, claim and fund management. v) If insurance reserve fund is not set aside and only a book reserve is made the purpose is defeated. 3. Distinguishing Features of Microinsurance Schemes 3.1 Microinsurance products now being marketed by life insurers are not very different from the traditional ordinary endowment insurance products. However, some of the distinguishing features are given below: Generally, Premium rates for microinsurance products are uniform for all ages at entry, whereas for traditional insurance products premium rates are age dependent. Mode of premium is monthly/quarterly whereas in the case of traditional insurance products premiums are paid less frequently; In most cases, premiums in the case of microinsurance schemes are collected from door to door through pass book. Maximum sum assured is usually fixed at Tk. 1,00,000. Policies above Tk. 1,00,000 may be issued whereas there is no uniform policy with regard to prescribing celling on sum assured for traditional microinsurance products. Average sizes of the sum assured of microinsurance products are lower than those under traditional insurance products with similar benefits but the difference is gradually diminishing over the years. Commission rates for new business and other forms of remunerations for marketing of microinsurance products are lower compared to those for traditional insurance products. However, renewal commission of micro insurance products are higher than ordinary traditional life products. Administrative expenses are higher in micro insurance than those incurred for traditional insurance products because of small sizes of microinsurance policies. Premium rates of microinsurance plans are lower than those of traditional insurance plans with similar benefits. Documentation is relatively simple compared to the requirement under traditional insurance business. 3.2 Main feature of microinsurance products offered by the formal sector insurance companies in Bangladesh is endowment type life insurance of small amout the premiums of which are collected monthly from door to door from the policyholders whose family income are less than below certain amount as specified by the respective insurers. Some of the life insurers also provide health coverage, accidental injuries and accidental death in combination with life insurance coverage but such schemes are very rare. However, the distinction between the life micro insurance products and the traditional life insurance products is eroding over the years. 4. Microinsurance in Bangladesh 4.1 Most of the large Micro finance non government organizations (MF-NGOs) in Bangladesh offer a variety of microinsurance products to their clients. These MF-NGOs had several thousand clients, strong information-tracking capabilities through their large network of branches throughout the country, and a stable saving and credit portfolio before they developed insurance product on their own. Insurance coverage reduced the vulnerability of their clients against unforeseen risks and enabled the MF-NGOs to run their credit programs without undertaking undue risks of loan default due to death of the borrowers. They offer mainly term life insurance. 4

5 4.2 The micro-finance market in Bangladesh is big and wide, with plenty of room for many players. There are more than 1000 NGO micro finance institutions (MFIs). Several banks, government agencies, and cooperatives are also active in the micro finance sector of the country. Apart from credit and savings, insurance is an important product of micro-finance services for both formal and informal financial markets for mobilizaing capital funds and ensuring incentive and encouragement for investment. 4.3 Micro insurance market is spread out all over the country covering the urban, sub-urban and rural areas of Bangladesh. The competitive environment in the insurance industry in Bangladesh is quite complex. There is one nationalized insurance corporation having extensive branch networks, holding huge premium deposit and enjoying certain prerogatives. There is one leading international insurance company branches with focused business objectives, experiences and highly skilled human resources. Further, there are the first generation private life insurance companies having comparative large branch networks, reasonable access to technology and market. 4.4 Besides, three second-generation private insurance companies (started operations in 1996) make the insurance business more competitive. The relative position, focus and competition are so diverse that it is difficult for any new insurance company to make a favorable market entry and day-by-day the competition is increasing. Although there are more competition in the insurance sector, Prime Islami Life Insurance Limited a third generation company operating since 2001 has earned a notable position within a short time in this risky market through its performance, reliabilities, efficient management and wide acceptance by its clients. 5. Micro Takaful schemes of PILIL 5.1 At present, Prime Islami life insurance (PILIL) is marketing three individual micro insurance products. "Small Saving" assurance plan, the first micro insurance product of PILIL was introduced in The second micro insurance product (PIDPS) was introduced in The third micro insurance product- "Two payment Deposit Scheme"(Kalyan Bima) was introduced in After the introduction of PIDPS; share of small savings plan decreased substantially. With the introduction of Kalyan Bima (anticipated endowment policy) the demand for this product is continuously increasing. This means people are more keen to buy short term anticipated endowment type of plan. 5.2 Small Savings Assurance Plan (Mukto Bima):- It is an endowment assurance plan where the assured is given back the money deposited in his Mudaraba fund (participant s account) with accrued bonus. At maturity of the policy, the participants will get the full sum assured along with the profit. At the death of assured during policy period, full sum assured is paid to the mominee. 5.3 Prime Islami Deposit pension Scheme (PIDPS):- It is an endowment plan with alternative option of annuity (pension). After completion of policy term, the assured can take the benefits of the policy as lump sum with accrued profit, alternatively the assured can take the benefit in the form of pension. Pension is given for 5, 10 or 15 years at the option of policy holders. The nominee gets full sum assured with accrued profit or pension for fixed period at the death of the assured during policy period. The policy term is 10 to 15 years. Minimum monthly installment is Tk Double Indemnity Accidental Benefit (DIAB) cover is inclusive in this plan without any additional premium (Contribution). 5

6 5.4 Features of two-payment Kalyan Bima:- It is an anticipated endowment plan with the option of pension. Thirty five percent of sum assured is paid on the completion of half of the policy term. Balance 65% is given at maturity. But the nominee gets the full Sum assured irrespective of receipt of installment of 35% sum, at death of the assured during the policy period. At the maturity of the policy the assured can take the benefit in the form of pension for ten years. 5.5 The comparative features of three micro insurance products are given below:- Features Small Savings Assurance Plan (Mukta Bima) Prime Islami Deposit Pension Scheme Two-payment Deposit Scheme (Kalyan Bima) 1. Marketed since Mode of Monthly Monthly, Quarterly Monthly, Quarterly payment 3. Policy term 10 years (fixed) 10 to 15 years 08,10,12,14,16,18,20 years 4. Nature of the products Endowment plan Endowment plan with option of annuity Anticipated endowment plan with option of annuity 5. Special feature DIAB (Double indemnity & accident benefit) is not covered. 6. Min-Max of monthly Installments Minimum: taka100 Maximum: taka1500 DIAB is included without any additional premium Minimum: taka200 Maximum: No limit DIAB is included by paying extra premium Minimum: taka200 Maximum: taka Underwriting features of Micro takaful Products of PILIL :- a) About 45% policies are below taka 30,000 sum assured. b) Average Sum assured of micro polices is Taka 64,000 (2012). c) Only 7% policies Sum Assured is taka 1,00,000 or above (2012). d) 55% of policyholders are female (2012). 5.7 PILIL has designed and developed a group micro takaful product in the name of Samajik Nirapatta Bima. (Social Security takaful) being marketed since The main features of the plan are: * It is a group assurance plan where premium is refunded at maturity. * Term of plan is 10 years. * Yearly mode of payment. * Amount of group premium:- minimum taka 5,000/-(five thousand) per anum. * Number of members of a group:- Minimum 10, Maximum unlimited. * Age of the member at commencement of policy:- Minimum 18 and maximum 50 years. * Age at maturity:- Maximum 60 years. * Target Group:- workers of factory, offices, club, association, professional groups etc. At maturity, the assured will get back the amount deposited in mudaraba fund and maximum 90% of surplus of tabarru fund (if any). In case of assured s death within policy period; in case of normal death, nominee(s) will get 30 (thirty) times of individual yearly contribution. At accidental death; nominee(s) will get 60(Sixty) times of assured s individual yearly contribution. In case of permanent disability, assured will get 30(thirty) times of his individual yearly premium. 6

7 5.8 In order to bring rural communities of the society, Prime Islami Life Insurance has introduced Karmajibi Kalyan Bima for warkers in home and abroad. It is a group term insurance which provides full face value of insurance at normal death and other additional benefit like accidental death benefit, permanent disability benefit, repatriation of body from abroad/funeral cost of the deceased assured and stipend at death & disability. This product is specially designed for low income people working in home and abroad. This product is a unique example of providing maximum benefits to paricipants of low income group of the society at the least amount of contribution. People belongs to various income group in Bangladesh, such as weavers, industrial workers, employees of government and nongovernment offices, members of various trade and professional organizations. agricultural workers, fishermen, craftsman, teachers and employees of small enterprises are the main target group of this product. 5.9 The benefits of the plan are as follows: i) Full Sum assured at normal death ii. Double of Sum assured at accidental death iii) Full sum assured at permanent & total disability of the assured. Such as in case of assureds loss of both eyes, both hands or both foot. iv) 50% of Sum assured payable at partial disability of assured such as loss of one hand or one foot. v) 20% of sum assured payable for repatriation of the body of the deceased assured/funeral cost of deceased assured. vi) Stipend payable to the nominee on normal death of the life assured 5% of basic SA to be divided equally and payable monthly for 12 months. vii) Stipend payable to the nominee on accidental death of the assured 5% of basic SA to be divided equally and payable monthly for 24 months. viii) Stipend payable to the assured at total and permanent disability 5% of basic Sum assured to be divided equally and payable monthly for 24 months Price range of the product: The product offer a range of benefits at very competitive price. Premium per one hundred thousand taka Sum assured up to assured s maximum age 39 years is Taka 562/- (Five hundred sixty two) for one year. At the age of 45, one year premium is Taka 617/- (six hundred seventeen) A proposer of 59 years old will have to pay taka 1189/- annual premium for Sum assured of Taka one hundred thousand. PILIL has introduced this product in the market recently. It is expected that this low cost group insurance plan will encourage other operators to launch similar type of product in the market which will be ultimately beneficial for the people of the country. 6. Advantages of group micro takaful 6.1 In Bangladesh, micro-insurance is basically designed to cater to life insurance needs of the poor and the marginal poor people. Micro-insurance in Bangladesh is distinct from the ordinary live insurance on several basic issues such as:- a) The premium or the contribution is collected on flat basis irrespective of age of the insured. Entry age is limited to maximum 45 years to 50 years. b) Premium payment mode is usually monthly and the insurance is written on non medical basis. 7

8 c) In case of micro-insurance, in contrast to individual life insurance, renewal commission is paid at higher rate regardless of the subsequent years for which premium is paid under the policy. d) Overhead expenses and lapse ratio of micro-insurance are more than those under conventional life insurance schemes. 6.2 In Bangladesh, NGO s are increasingly involved in the implementation of schemes for reducing poverty. They are providing credit. A few of them are also extending insurance services to their members and credit users. These services are being provided more or less on rule of thumb basis. Since insurance is a scientific way of dealing with risks and providing security to people it is necessary that this is handled professionally. It has been observed that micro credit programmes are to some extent effective in fighting poverty. However, it is unlikely that microcredit alone can be the solution to poverty reduction. The government/donors and micro-credit providers must find ways to extend micro-insurance services to the poor. 6.3 It is felt that micro takaful operators should offer group policies for the poor. Group insurance enables a large number of people being covered under one contract. In case of individual insurance, the contract is with the individual policy holder. The decision to take out the policy is voluntary and the amount as well as plan of insurance is decided by the individual. On the other hand, in case of group insurance, the contract is with the group/association. A single master policy is issued covering all the members, as per agreed terms. Therefore, group policy for micro-credit borrowers, can be issued. The premium will be paid by the respective MFI/NGO or whoever represents the group and takes out the master policy from a takaful operator. 6.4 Group term insurance is renewable every year and is the simplest and cheapest of all the schemes that a family takaful operator can offer. Under this scheme, a fixed sum is paid on the death of a member covered under the scheme. This scheme would be also appropriate to meet the outstanding loans. MFI s, therefore, should take such policies to cover borrowers at least to the extent of outstanding loans. When a MTO offers group-term insurance, the contribution will be charged according to the loss experience of the group. In case of favorable experience, premiums may be brought down or the surplus that emerges can be passed on to the members of the group. 6.5 Apart from micro-credit borrowers, group term insurance cover can be made available to other poorer sections of society like landless agricultural laborers, handloom workers, rickshaw pullers, artisans, taxi drivers, cooperative milk producers, tailors, barbers, masons, carpenters etc. In this respect, Social Security Fund need to be created by the government with the help of donors in order to meet emergency. Social Security Fund could be utilized in times of need for providing reinsurance cover of micro insurance. 6.6 It is no denying the fact that the lack of access to insurance is one of the reasons of our inability to achieve any sustainable and substantial increase in living standards for the poor. On the other hand, we must remember that Islamic Shariah prohibits conventional insurance in its present form and methodology. As a result, penetration of insurance in Bangladesh has been very negligible. It is primarily limited to the urban elite sector. However, Muslim Jurists of recent age have concluded that insurance schemes comprising the elements of shared responsibility, joint guarantee and solidarity is permissible. The fundamental philosophy of Islamic Insurance (Takaful) and Mutual Insurance is the same. 6.7 Theoretically, Takaful is perceived as cooperative insurance, where members contribute a certain sum of money to a common pool. The purpose of this system is to uphold the Islamic principles of bearing one another s burden. Takaful, from the practical point of view means mutual guarantee provided by a group of people living in the society against defined risks of life & property. A Takaful scheme aims at undertaking a joint responsibility towards financially 8

9 safeguarding the widows, orphans and helpless ones in the society, and also the one who faces unexpected loss or damage. therefore, conceptually mutual insurance is in harmony with the central philosophy of Takaful. 6.8 The fundamental principles of Takaful may be summarized as follows : a. Policyholders cooperate among themselves, for their common good. b. Policyholders contribute to help those who need. c. Liabilities are spread out according to the community pooling system. d. Transparency, fairness, equity and justice is maintained in the operation. e. Shariah based investments are made on the basis of profit & loss sharing. 6.9 The basic idea of Takaful system has stemmed from the principle of Tabarru (donation) and Tawoon (cooperation) whereby each participant of the scheme contributes to a fund that is used to support one another. The objective of Takaful is to pay a defined loss from a common fund created by all the members of the scheme It is, observed that in Bangladesh micro takaful products are more in demand. Therefore PILIL based on its last 12 years experience in individual micro-takaful, has launched too group micro takaful products for the poor people of Bangladesh. This will help to minimize very high lapsation ratio and reduce distribution cost and management expenses. The poor people will be then having their risks covered at the minimum cost. 7. Need for Micro Takaful 7.1 It is estimated that over three billion people of this world require micro-finance, who earn less than USD 2.5 per day. It has been further estimated that approximately 44% microfinance clients reside in Muslim countries. This means there is a great need of micro takaful products among the poor people throughout the Muslim world. Micro-takaful can be utilized as a beneficial tool and socio-economic security by both Muslim and Non Muslim Communities. Micro-takaful, alongwith Islamic micro finance can play an important role to eradicate poverty and generate social development in third world countries. (Islamic Microfinance- A hope for the poor: Detailed report of Global Islamic Microfinance Forum held in Dubai, December 2012). 7.2 A recent research finding in India has brought out the fact that common people are not able to comprehend the extent of coverage being offered by particular insurance plan resulting in low insurance penetration. A large section of uninsured households (56%) indicated that insurance is "too expensive". However, nearly one third of the uninsured households indicated that they are willing to go in for insurance if it is customized to their needs. The researchers concluded that there is a great need to offer insurance package for the poor and hence micro insurance is a necessity. (Prelaunch Survey Report of Insurance Awareness Campaign National Council of Applied Economic Research, 2011) 7.3 Micro-takaful is not for Muslims only and need to be targeted to Non-Muslims also. It is interesting to note that in Indonesia, the biggest growth area for takaful is the country's largely non-muslim eastern region. In Bangladesh, micro-takaful products are sold to both Muslim and non Muslims. Approximate 9% of total policies are sold to non Muslim community. 8. How Micro-takaful operates 8.1 Micro-takaful is the Islamic counter part of conventional micro insurance and exists both in life (family takaful) and nonlife (general takaful). Under micro-takaful scheme a group of participants agree among themselves to support one another jointly for financial help of the distressed or loss of property arising from specified risks. Under takaful scheme, each participant contribute a sum of money as a tabarru ( donation) into a common fund which is used for mutual assistance of the participants. 9

10 8.2 The underwriting in a takaful scheme is undertaken on a mutual basis almost similar to conventional mutual insurance. Takaful is a Shariah based insurance scheme which is a hybrid of a mutual and a commercial from of company. Under micro takaful scheme, the underwriter needs to conform to the principles of mutuality. Thus the underwriting fund belongs to the Takaful participants, who share the risks, and not to the share holders. Takaful undertaking is responsible for the sound management of the underwriting, investment and administration as manager and trustee(mudarib and or Wakil). 8.3 If a family takaful scheme is designed for savings as well as protection of the risks of death, injury, illness etc, the contribution of a participant is segregated into two accounts, which feed two different funds. For example, in case of family takaful with savings/investment element, the paid takaful contribution is segregated into Participant's Investment Fund (PIF) and Participant's Risk Fund (PRF). The later is created out of tabarru commitment of the participants. However, When no savings element is there in micro-takaful scheme, entire contribution is credited directly into the PRF. This is also the case for micro general takaful schemes. Micro general takaful schemes are designed to meet the needs for protection of individuals or institutions in relation to material loss or damage resulting from catastrophe or disaster inflicted upon property or belongings of participants. 8.4 The distinctive features of micro takaful schemes from conventional micro insurance schemes are as follows: (a) Takaful undertakings must adhere to the Sharia core principles of cooperation (Tawoon), donation (Tabarru) and the prohibition of interest (Riba). (b) Takaful undertakings are generally structured as hybrids between mutual and proprietary entities. (c) Takaful participants share the risks among themselves and not transferred to shareholders. In view of the different nature of contracts, the fiduciary relationship between the takaful operator and takaful participants differ substantially from those in conventional micro insurance practices of the formal and non formal micro insurance organizations. 9. How to make Micro takaful operation viable and sustainable 9.1 Micro Takaful Operators (MTOs) act in a fiduciary capacity on behalf of the participants in performing underwriting and managing the takaful funds. It is, therefore, imperative for the takaful operators to cultivate a culture of accountability and transparency for the benefit of the takaful participants. They should uphold the objective of a micro takaful scheme which is a vehicle for mutual assistance among the takaful participants. The MTOs shall have in place an appropriate code of ethics and business conduct requiring employees and agents to observe high standards of integrity, honesty and fair dealing. Specifically for family micro takaful investment products, the pre contract illustration should be expressed and presented from a layman's point of view in a clear and understandable manner. The information ought to be accurate in all material respects and not misleading. 9.2 In principle, a clear separation is required in micro family takaful between the assets of PRFs and those of the PIFs, as well as between the assets of the Takaful Fund and those of the shareholder's fund. Microtakaful operators should provide information in respect of the investment performance of assets and the takaful model they follow. Operators shall disclose the policies in aspect of reserving, surplus sharing, deficit mitigation and distribution of underwriting surpluses and/or investment profits etc. It is imperative that micro takaful operators be transparent in all respect. 10

11 The disclosures should cover not only the investment activities of PIFs and PRFs but also Shariah compliance, risk positions, financial performance and ratios, solvency, adherence to sound risk management, internal control systems. 9.3 A micro-takaful operator shall strive to have in place the best appropriate mechanism to sustain the solvency. Besides having the appropriate provisioning and reserving methodologies, the Qard ( interest free loan) facility be ensured from shareholders fund for meeting deficits of PRFs. Micro takaful operators should regularly carryout actuarial investigation reports on the financial standing of Takaful Funds. In justifying any distribution of the underwriting surplus, the actuary should normally apply the same valuation methods and assumptions for accurate comparisons. 9.4 Micro-takaful operators shall use their best endeavors to implement a sound investment strategy, as takaful participants are mutually guaranteed among themselves. A sound and comprehensive risk management process should be established that measures, controls and reports the risks of the invested assets in an integrated manner. The MTO should put in place the appropriate processes to ensure that its investment portfolios are in compliance with Sharia rulings. The Board of the MTO needs to review the effectiveness of its investment policy and risk management approach, in order to determine whether there is a need to change its policies and procedures. 10. Summery and Conclusion 10.1 It is observed that in some countries such as Bnagladesh, commercial insurers have been offering micro-insurance in rural areas because there is demand for this type of product and because the multinational competitor is so strong that the local Insurance companies are unable to compete successfully in the urban areas. Community based micro-insurance operator in Bangladesh do not follow insurance principles and they are unregulated. The MFI-NGO operators primarily provide health care and or credit insurance. They are operating micro-insurance as an ancillary service on the rule of thumb method. It appears that if and when micro-insurance schemes are not regulated or monitored properly; anarchy might prevail in the market and unethical practices can destroy the whole system Unfortunately, in Bangladesh, mutual insurance providers have not developed because of lack of awareness and initiatives by the incumbents. It is likely that Micro-finance Institutions and NGOs will be forming mutual associations in near future in order to provide insurance covers (Life/Credit/Health/Property) to their members Success story of micro-health insurance is very rare in this part of the world, because of lack of experience, lack of proper support services and high moral hazard inherent in the system. Agriculture micro-insurance seems to be a far cry without initiative and or subsidily from donors/international agencies and government In Bangladesh, composite insurance companies are not allowed to operate. Therefore, it is very difficult to offer bundle/package product (Life & non-life together). It is felt that the Regulatory Authority should wave the legal barrier at least for micro-insurance schemes in order to promote combined/package plan for the poor householder/microenterprise. Donors/International Development partners for promoting Micro-insurance are not usually available. They should be keen to grant funds to develop & operate micro-insurance schemes. 11

12 10.5 It is urgently necessary to provide guidelines and support services to all micro-insurance operators (both formal & informal) by the Insurance Regulatory Authority. It will be unwise to allow informal insurers to continue their operation without having Prudential Regulation. Regulatory Authority need to formulate separate Rules, Regulations and guidelines for microinsurance. Under no circumstances, customers interest be overlooked If and when actuarial valuations may not be feasible and cost worthy the Regulatory Authority should at least scrutiny the accounts of all micro-insurers and may have to inspect the insurers office on a regular basis or as and when required. A separate department in the Regulatory Authority may be entrusted to supervise, inspect, scrutiny of accounts and to provide guidelines to all micro-insurers (both formal and informal) Insurance core principles including essential criteria and advanced criteria should form the basis of future work on the Regulation and Supervision of micro-insurance. However, the pertaining question is how these principles will be adopted. In a developing country like Bangladesh. The Regulatory Authority is weak because of lack of professionalism, lack of man power & lack to technology. Until and unless the Regulatory Authority is made strong enough and they adopt core principles for formal regulated insurance, we can not expect those to be applied to micro-insurance. We need to formulate strategies so that within a specified time frame, the core principles are adopted in Bangladesh in line with international best practices. 12