Biman: When your insurer causes you big loss

Your insurer is supposed to protect you against losses. But for Biman Bangladesh Airlines, its insurer has caused it to face loss, allegedly. And it is not any small loss.

The airlines has suffered a loss of around Tk37 crore on insurance of its aircraft fleet this fiscal year for, what it says, the Sadharan Bima Corporation's deviation from guidelines to be followed and causing delay in its reinsurance.

Biman has to bear reinsurance premium of $9.69 million, or Tk82.37 crore, a big jump of 83 percent in this fiscal year compared to the previous year's rate.  It had paid $5.3 million or Tk 45 crore last year for insurance premium.

Biman says a 20 to 25 percent rise in premium cost was logical as the number of passengers and flight frequency increased by 18.16 percent in the current fiscal year compared to the previous year.

Biman's insurance premium had been declining since 2015. 

Reinsurance is a practice when multiple insurance companies share risk by purchasing insurance policies from other insurers to limit their own total loss in case of disaster. 

Biman says its insurer, Sadharan Bima, was slow in arranging meetings with reinsurers to get rates quotes.

When the reinsurers asked for higher rates, Biman was not in a position to reject such high premiums and ask for further negotiations with new reinsurers because they were running out of time for their aircraft fleet insurance expiry. It was no choice but to accept the high premiums.

An airline cannot operate its fleet without insurance.

Biman says Sadharan Bima had not followed Biman's guideline for calling offers for its reinsurance.

According to Biman guideline, participation of 10 top rated brokers in the London Lloyds market have to be ensured for seeking reinsurance offers.

This year, only three brokers participated in the reinsurance offer, Biman said, resulting in less competitive pricing of reinsurance.

A London-based brokerage firm, United Insurance Brokers Limited, issued the reinsurance policy for this year.

Biman raised concern 

Biman recently sent a letter to Sadharan Bima raising its concern over the unusual hike in premium cost.

The Ministry of Civil Aviation and Tourism held a meeting on 14 January this year over the reinsurance issue in presence of high-ups from the finance ministry, Sadharan Bima and Biman.

The meeting minutes say the high premium cost and delay in calling for price offers were 'regrettable'.

However, Sadharan Bima has its own explanation for the high rate.

Shibli Rubayat-Ul-Islam, chairman of Sadharan Bima, said, internationally reinsurance offer meetings are traditionally held at Lloyd's market in London. But this time it was held in Dhaka for the first time following instructions from the finance ministry.

When offer meetings are held in London, a large number of insurers take part. Shibli said he has no idea why the finance ministry wanted to hold the price offer meeting in Dhaka.

Moreover, global insurance companies have become more cautious with the aviation sector after they suffered losses following the grounding of Boeing 737 MAX. This is also a reason for lower participation in the offer request, he claimed.

He also justified high premium cost saying that aviation insurance cost increased on the global market because of the two Boeing 737 MAX accidents last year, killing 346.

Moreover, Biman's own plane crash in Yangon, Myanmar last year cost its insurers three or four times higher than their premium. This also contributed to the higher premium cost, he said.

A Dash-8 aircraft of Biman was damaged after it skidded off in Myanmar's Yangon airport on 8 May last year.

When contacted, Biman's Managing Director Md Mokabbir Hossain refused to make any comment on the reinsurance issue.

Deviation in calling price offer

Biman has been taking reinsurance policy through leading Lloyd's brokers like Marsh, AON and Willis since 1973. The insurance coverage is given over the total value of the fleet.

According to the process, a committee is formed with members from the finance ministry, Biman and Sadharan Bima.

Sadharan Bima selects at least 10 top-rated brokers as approved by its board and ensures their participation in the price offer.

The committee then goes to London and briefs the selected brokers about Biman.

In this year's price offer, only three brokers – UIB, GBJ and K.M. Dastur participated and the aviation ministry says not all of them are from the top-ten Lloyd's-based brokers.

K.M. Dastur was the existing reinsurer of Biman.

The ministry says this is a deviation of the process and has suggested action on this.

Of the price quotation of three companies, UIB bid the lowest premium of $9.037 million which was 70 percent higher than the previous year's.

The highest bid was $9.68 million by GBJ.

As the premium rate was high, Sadharan Bima requested K.M Dastur to extend its policy for two months because there was not enough time in hand to invite new offers before policy expiry.

But Dastur's demand for two months' coverage was not meaningful because if it was translated into a 12-month total, it would come to more than the full year's lowest rate offered by UIB.

So, Biman was compelled to take UIB's policy instead of going for further price request, said a senior executive of Biman.

After finalising the deal with UIB at $9.037 million, Sadharan Bima suddenly wrote to Biman to increase the deal to $9.69 million which was even higher than the highest bid offered by GBJ.

Industry experts say policy price cannot be changed once it is accepted by the customer.

How the process was delayed

Sadharan Bima took initiative of starting the reinsuring process four months before the expiry date of the running policy. But three and half months were spent just exchanging letters with the finance ministry, according to finance ministry minutes.

On 26 May last year, Sadharan Bima first sent a letter to the finance ministry requesting consent for reinsurance related processed to be held in Dhaka.

A little over two months later, on 06 August, Sadharan Bima sent another letter to the finance ministry requesting consent for holding reinsurance negotiations in London.

The reply from the finance ministry came one month later on 5 September instructing Sadharan Bima to call for international auction for offering price and hold the program in Dhaka.

However, within 13 days, the finance ministry changed its decision asking Sadharan Bima to follow a price quotation system instead of calling for international auction.

Finally, on 23 September, only three broker companies submitted their price quotation.

All three companies submitted much higher price than previous year. At this time, Biman had no way to look for further price quotes before October 15, when the previous policy was to expire.