Bangladesh insurance regulator devises bond coverage

Published 28 Aug,2021 via The Financial Express - The regulator is aggressively working to introduce insurance products for bond issuers that will guarantee repayment of the principal and all associated benefits to the bondholders in the event of issuer default.

Officials said the Insurance Development and Regulatory Authority or IDRA, the regulator of 81 life and non-life firms in insurance sector, took the move for insurance coverage of the fixed-income instruments on the capital market.

It has already formed a 10-member high-powered committee headed by general manager of the state-owned non-life insurer, Sadharan Bima Corporation (SBC), Mr. Bibekananda Saha.

The panel, which has sat twice so far, is now exploring product design for risk coverage of the bonds which will raise funds from eligible and general investors in the capital market.

"We're now working on how to design bond-insurance products for the insurers," said one member, wishing not to be named.

He said there are some challenges in designing the tools as there are very limited numbers of re-insurance firms in the world for risk-sharing. Besides, such bond- insurance markets existing in the world have not conformity to one another.

"Actually we've no one formula or umbrella to go forward, but we are exploring every possibility," he said.

In the meantime, the IDRA has drafted a guideline on the bond insurance. It has been taking opinions from other experts and stakeholders on the issue.

The bond insurance may protect interests of the investors, it said.

The insurance coverage is aimed at giving back the principal and interests to the investors in case of default on part of the issuer.

The guideline says these will be absolutely non-life products as per the Insurance Act 2010.

The insurance coverage should be taken prior to placing application for bond issuance before the securities regulator. "This is a precondition for bond-issuance approval."

However, the securities regulator-Bangladesh Securities and Exchange Commission-in a note on the proposed guidance said that bond insurance cannot be made mandatory. If any issuer offers credit enhancement in the form of insurance, then it will be applicable.

"Bond issuer may decide to seek bond-insurance facility based on its own financial strength or creditworthiness," BSEC said.

It also noted that cost of insurance premium must be less than bank guarantee, otherwise product cannot be lucrative.

It said for 'Sukuk' or Islamic securities, bond insurance should not be mandatory or may offer the facility in the light of Sharia.

However, Bangladesh so far has had no major reforms conducted on the bond market in terms of defaults of the issuers.

If a bank invests in any bond, it can report to the CIB of the central bank. But in case of individual investors, there is no such protection measure.

Many of the committee members, however, said that such type of insurance coverage may help develop the secondary bond at the bourses which now is equity-based. Currently, only two bonds are being traded on Dhaka Stock Exchange.

According to S and P Global Ratings, the number of defaults by the bond issuers is rising alarmingly in the USA.

Between 2010 and 2018 some 20 entities became defaulters on the US bond market.

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