INSURANCE ACT, 2010: A STUDY
TABLE OF CONTENTS
- Definition of Insurance;
- Nature of insurance;
- Historical development of insurance in Bangladesh;
- Insurance Act, 2010;
- Important features of this Act;
- New accompaniments by this Act;
- Changes brought by this Act;
- Problems of insurance in Bangladesh;
- Prospects of insurance in Bangladesh;
- Present situation of insurance in Bangladesh;
Bangladesh economy holds huge risk in every sector because the country often faces natural disasters like flood, cyclone, draught, and hurricane. There are also other factors like political strikes, and economic issues like inflation, high interest rate, tax policy, deregulation, etc. that deepen the risks for the economy. There are no certainties or guarantees in life. There is no guarantee that the business will not suffer an unexpected loss or damages. So while we cannot protect our interests against all risks, we can option for some insurance.
However, Bangladesh’s, insurance market is not very large compared to the degree of risk. For a better functioning of the insurance industry and to attain good growth of this sector, it’s worthwhile to know the factors which are responsible for low growth of the insurance industry in Bangladesh.
As we have seen the possibility of loss creates uncertainty, which has undesirable economic and psychological effect. When we speak of methods of handling risks we are talking about efforts to reduce uncertainty. While no approach to risk problems is used to exclusions of all others the single most important a widely used alternatively for most families & business is insurance.
Insurance is defined as a contract, which is called a policy, in which an individual or organization receives financial protection and reimbursement of damages from the insurer or the insurance company. At a very basic level, it is some form of protection from any possible financial losses. The basic principle of insurance is that an entity will choose to spend small periodic amounts of money against a possibility of a huge unexpected loss. Basically, all the policyholder poor their risks together. Any loss that they suffer will be paid out of their premiums which they pay.
Different authors / authorities have defined the term ‘Insurance’ differently. Some of the popular definitions are as follows:
- Insurance is a co-operative form of distributing a certain risk over a group of persons who are exposed to it. [Ghosh and Agarwal]
- Insurance is a social device for eliminating or reducing the cost to society of certain types of risk. [Mowbray and Blan Chard]
- Insurance is a form of contract or agreement under which one party agrees in return for a consideration to pay an agreed amount of money to another party to make good for a loss, damage, or injury to something of value in which the insured has a pecuniary interest as a result of some uncertain events. [Dictionary of Business and Finance]
- Insurance is a device for the transfer to an insurer certain risks of economic loss that would otherwise come to the insured. [Allen Z]
NATURE OF INSURANCE:
There are three schools of thought, which have defined the nature of Insurance as follows:
- Insurance in terms of the relationship between the insured & the insurer – transfer device:
According to this school, Insurance may be defined as the transfer of pure risk from the insured to the insurer. The insured is the person or firm or company confronted by risk and the insurer is a person or firm or company, which specializes in the assumption of risk. The primary business of the insurer is risk assumption for a fee.
This school of thought defines Insurance in terms of techniques or mechanics it involves. According to Prof Mehr & Cammack, Insurance is a device for reducing risk by combining a sufficient number of exposure units to make their individual losses collectively predictable. The predictable loss is then shared proportionately by all units in the combination. Therefore, it implies both that uncertainty is reduced & losses are shared. Further, it is said that a device will be deemed Insurance if (i) it implies the law of large numbers so that the requirement of future funds to cover losses are predictable with reasonable accuracy. (ii) It provides some definite method for raising these funds by levies against the units covered by the scheme. In short, the essential features of Insurance are the manner in which losses are predicted & shared.
According to the third school of thought, Prof. Willet defines Insurance as a social device for making accumulations to meet uncertain losses of capital, which is carried out through the transfer of risks of many individuals to one person or to a group of persons. Wherever there is accumulation for uncertain losses, or wherever there is transfer of risk, there is one element of Insurance, only when these are joined with the combination of risk in a group is the Insurance complete. Another way to state this is to say that “Insurance is a transfer of risk with the added features of (i) combination of risks (ii) an estimate of future losses”. Although each of the authors have defined Insurance differently but they are all thinking about virtually the same thing when they use the term Insurance. If we sum up all schools of thought then the Insurance can be well defined as follows:-
“Insurance is a social device which combines the risks of individuals into a group, using funds contributed by members of the group to pay for losses.”
The essence of the Insurance scheme is that it is a-
- Social science,
- Accumulation of funds,
- It involves a group of risks,
- Transfer of risk to the whole group.
HISTORICAL DEVELOPMENT OF INSURANCE IN BANGLADESH:
The British rule ended in the Indian sub-continents in the year 1947 from when Bangladesh (the then East Pakistan) was a part of Pakistan (the then West Pakistan). During that period, there were 49 insurers operating in the East Pakistan with offices in Dhaka and Chittagong; but their reporting was to the principal offices located in the West Pakistan.
Subsequently Bangladesh achieved independence in 1971 from Pakistan. Just after 02 years of independence, abolishing all insurance companies of the country under the provisions of Insurance Corporation Act 1973, the government of Bangladesh has set up two corporations i.e. Sadharan Bima Corporation (SBC) and Jiban Bima Corporation (JBC) to deal with non-life and life Insurances respectively.
Thereafter; Insurance Corporations Act 1973 was amended to allow private insurance companies to operate side by side with these two state-owned corporations, providing direct insurance to the policyholders, and reinsurance to private insurers being functional under the auspices of Insurance (Amendment) Ordinance, 1984.
Besides; 1984 ordinance has compelled private companies to seek 100% reinsurance from corporations, and also reserved the public sector business (approximately accounting for 80% of the then market premium) to be underwritten exclusively by corporations. This limitation creates operational difficulties for private insurers.
Thereafter; for facilitating private companies, the Government modified the insurance business procedures with the introduction of the Insurance Corporations (Amendment) Act 1990, which allows private insurers to underwrite 50% of the public sector business through a national coinsurance scheme, and to reinsure 50% of the re-insurable amount with state-owned reinsurers.
In the March 2008, the supervision of insurance industry has been shifted from Ministry of Commerce to the Ministry of Finance, to which IDRA itself report.
In 2010, Bangladesh Parliament passed two acts for strengthening the regulatory framework for the insurance industry. The new laws, came into effect on 18 March 2010, are Insurance Act 2010, and Insurance Development and Regulatory Authority (IDRA) Act 2010 (Insurance News, 2018). In the year 2018, 78 insurance companies have earned the gross premium amount of BDT 103.84billion equivalent to USD 1.22billion.
INSURANCE ACT, 2010:
Bangladesh‘s insurance industry is set to start a new journey with the passage of two new laws in the parliament recently. The House passed two insurance laws in a bid to further strengthen the regulatory framework and make the industry operationally vibrant. The new laws are Insurance Act 2010 and Insurance Development and Regulatory Authority Act 2010. The government has taken the pragmatic step to boost the insurance sector.
Insurance Development and Regulatory Authority of Bangladesh (IDRA) is the only government body for regulating and developing the insurance sector of Bangladesh since 2010. The Parliament of Bangladesh on 3 March 2010 has passed two insurance laws in a bid to further strengthen the regulatory framework for the insurance industry. The new laws came into effect on 18 March 2010, are the Insurance Act 2010 and IDRA Act 2010. A total of 78 insurance companies have been operating in the country. The companies are to be regulated under comprehensive laws and guidelines and to be supervised by IDRA. The IDRA Act 2010 has paved the way for better regulation of the sector by reducing business risks, and by harmonizing local and international insurance laws for the Economy of Bangladesh. IDRA attempts to protect the interest of insurance policyholders, beneficiaries and ensuring stability of the insurance sector. Two state-owned insurers -Sadharan Bima Corporation (SBC) and Jiban Bima Corporation (JBC) are also regulated by IDRA.
IMPORTANT FEATURES OF THIS ACT:
This law is related to the matters of Insurance. The much talked about the Insurance Act 2010 has some notable provisions as follows:
- Setting up of a Policyholders’ Protection Fund:
In order to make the overall claim settlement procedure smooth and timely, the insurance companies have to set up a special fund named ―Policyholders’ Protection Fund as per the new requirements of the newly passed and being implemented Insurance Act 2010.
- Greater Capital Requirements for Insurers:
The new Insurance Act 2010 raised the paid-up capital of life and non-life insurance companies to make them financially sound. The minimum paid-up capital of a life insurance company will now rise to Tk. 300 million from Tk. 75 million and for nonlife the capital size will be Tk. 400 million from Tk150 million under Basel-II. For Financial Institutions (FIs,) full implementation of Basel-II has been started in January 01, 2012 (Prudential Guidelines on Capital Adequacy and Market Discipline (CAMD) for Financial Institutions). Now, FIs in Bangladesh are required to maintain Tk. 1 billion or 10% of Total Risk Weighted Assets as capital, whichever is higher.
- Creation of brokerage houses for insurance policies:
The new Insurance Act 2010 said that brokerage houses (Banks, financial institutions or any middleman company/organization) should be created for insurance policies. Under the section 58 (1), none can give money of commission to anybody except the certain agents or brokerage houses in order to launch or expand any insurance business in Bangladesh. The distribution of the commission must be as follows:
- 35% of the premium in the first year.
- 10% of the renewed premium in the second year.
- 5% of the renewed premium in the 3rd year and on after.
- Mandatory Solvency Margins for Insurers:
All authorized life assurance companies are closely regulated by the IRA. Regular internal and external audit activity and strict reporting requirements ensure that the companies comply with the regulator‘s safeguards; one of those safeguards is a solvency margin. The solvency margin is the comparison between what a company owns (its assets) and what it owes (it liabilities) and indicates the ratio of assets to debt. Therefore the solvency margin provides a good indicator of the financial stability of that company. The IRA/IDRA, as the regulator, monitors any falls in solvency below a certain percentage.
Each and every insurance company has to keep a mandatory solvency margin following a certain percentage (which has not yet been fixed) and by using a certain formula (which has not yet been established) according to section 43 (1) of the Insurance Act 2010.
- Allowing foreign investment in the insurance sector:
The Insurance Act 2010 said the sector needs to be managed properly and be strengthened by reducing business risks, and local and international insurance laws need to be harmonized considering the socio-economic aspects of the country and protect the interest of policy-holders and other beneficiaries.
- Reduction of the number of directors from 20 to 15:
The insurance act bars a director of an insurance company to become director of any other financial institution including banks. Under the Insurance Act 2010, the number of the directors cannot exceed 15, while it was 20 under the Insurance Act 1938.
- Categorization of Insurance Business:
The section 5 (1) of the Insurance Act 2010 proposed that insurance company to be categorized as life and non-life instead of life and general and it have replaced the Insurance Act 1938. So, from now on the insurance companies in the entire insurance sector in Bangladesh will be categorized as life and non-life insurance companies under the new insurance Act.
NEW ACCOMPENIMENTS BY THE ACT, 2010:
The newly passed Insurance Act, 2010 has some notable new additions, which were absent in the previous Insurance Act of 1938. Therefore, the entire insurance industry is facing some new practices while implementing the new act in the insurance business. The new additions by the new Act are as follows:
- Creation of New Regulatory Authority:
Insurance Regulatory Authority (IRA) will be established for the Insurance sector. There are 62 insurance companies operating in the country and they need to be regulated under comprehensive laws and guidelines and need to be supervised by a strong regulatory authority. The Insurance Act 2010 said the sector needs to be managed properly and be strengthened by reducing business risks, and local and international insurance laws need to be harmonized considering the socio-economic aspect of the country, and to protect the interest of policy holders and stakeholders of the insurance industry in Bangladesh. The New Insurance Act provides for the composition of such Authority, its terms & conditions. The IRA will have the power to: Making regulation for Insurance Industry and delegation of powers, Establishment of the Insurance Regulatory Fund, Establishment of Insurance Advisory Committee, Power to make any future rules or amendments, etc.
The Insurance Development and Regulatory Authority Act 2010 said the authority will comprise a chairman and four members and they will look after the whole sector. The enactment of the law will abolish the department of insurance under the Finance Ministry of Bangladesh.
Premium charged by the companies will be determined by a committee formed by the authorities and it will also investigate any irregularities of the companies, the Act said. To create a vibrant insurance sector, the industry got its recognition from the government and a new Insurance Act 2010 has been passed to replace the old Insurance Act of 1938.
- Legal Framework for Islamic Insurance:
Islamic Insurance was already in Bangladesh but it was now bought under legal framework by this new Act 2010. Under the section 7 (1) of the Insurance Act 2010, no insurance company is allowed to do both Islamic Insurance business and non-life insurance business together. If any company have both of this business, then according to section 7 (2) of the new Act it has to give up one and can continue any of these two. And the decision has to be informed to the insurance authority within six month of forming the business authority. However, the claim of the previous policy holders shall be settled according to the previous Insurance Act of 1938.
During 1999 & onward many insurance companies have been given license to underwrite Islamic insurance business without having proper laws, rules and regulations to guide them. It is not proper to allow Islamic insurance business without having legal backing and, therefore, this business has been brought under the ambit of new law.
CHANGES BROUGHT BY THE NEW ACT:
The Insurance Act has not only brought the new additions, but also has brought some eye-catching changes in some significant areas that existed in the previous insurance Act. The changes brought by the Insurance act 2010 are described shortly below–
- Capital Requirements:
An insurer transacting life insurance business would be required to have a minimum paid-up capital of Tk. 300 million while the minimum paid-up capital for non-life insurer would be Tk. 400 million.
- Spread of Business in Rural Areas:
Provision has been made to induce insures to undertake such parentage of his business in the rural areas or in social sectors as may be specified by the Authority, This provision would encourage savings among the people in the rural areas and social sectors on the one hand, and provide financial security to the insurer, on the other.
- Reinsurance Abroad:
The present mandatory provision for reinsurance of general insurance with the state-owned Sadharan Bima Corporation (SBC) has been relaxed. An insurer may reinsure with any other insurer inside or outside Bangladesh.
- Penalty Under the new Insurance Law:
Maximum penalty for any violation will be Tk. 10 lakh in fine while the minimum fine will be Tk. 50,000. If the violation continues, an additional fine of Tk. 5,000per day will be imposed.
- Provision for Foreign Investment:
With a view to attracting foreign investment in the insurance sector in Bangladesh, foreign investors would be allowed to hold or subscribe to the share of an insurance company up to a prescribed maximum (the maximum limit has not yet been set).
PROBLEMS OF INSURANCE IN BANGLADESH:
The following problems of the insurance industry in Bangladesh are identified in the present study:
- Lack of Public Faith: Insurance agents are responsible for creating negative image of insurance to the public. It shrinks the scope of insurance business. Poor public image is mainly responsible for not expanding the sector. This opinion is held by 94.80 percent respondents in the study.
- Lack of Public Awareness: Mas illiteracy hinders the growth of the insurance sector. A vast majority of people especially in rural areas are left outside the insurance coverage. This mainly results from the look of awareness among the people. This problem is supported by 93.60% in the study. Even a large portion of people in the country have no minimum idea about insurance. People are not aware of the benefits from the insurance policy and a good number of people believe that insurance business is nothing but cheating and they assume that insurance policy is quite unnecessary.
- Poor Economic Conditions: Bangladesh is one of the poorest countries in the world and most of the people in this country live under extreme poverty. All of these people fight hard to earn their livelihood. It is quite impossible for them to save some money for future need. Therefore, they are quite unable to give the amount to the insurer which is called premium and regarded as safety or precautionary measure against any accident. This problem is mentioned by74.80% people in the study.
- Lack of Supervision from the Government: Lack of surveillance from controlling agency of government encourages many insurance companies to follow some unethical practices like delay in claim settlement, harassment to policy holders and showing fake financial statement. This is not only destroying the reputation of the insurance companies but also creates negative impact in the mind of the people about insurance. This problem has been mentioned by 80.80% respondents of the study.
- Lack of Training for the Employees: Spread of insurance business in Bangladesh failed for lack of proper training of the employees, especially the field employees of insurance companies. Still there are not enough training centers to provide proper training regarding insurance activities for the officials of insurance company. This problem is cited by 81% respondents of the study.
PROSPECTS OF INSURANCE IN BANGLADESH:
There are many good signs for the insurance business in Bangladesh. The factors that can facilitate the insurance business in our country are discussed below:
- Large Population: There is a big opportunity for the insurance companies as the population of our country is increasing day by day. The growth of population opens greater scope for every kind of insurance business.
- Higher GDP: The GDP of our country is increasing which results in the increase of per capita income. With the growth in the income more, people are now willing to take an insurance policy for safeguarding themselves against any danger.
- Investment Scope: Bangladesh has large scope of investment in trade, commerce and industry. The insurance fund is now invested in government bonds, ICB projects, marketable securities, and FDR which are not much profitable. The private insurance companies are realizing this fact. There are opportunities to enhance profit through effective and efficient money management by employing capable and experienced personnel. There is scope of investment expansion in the areas leasing, housing, health and moneymaker.
- Government Aid: Government is the key player of all development. In order to boost the growth of the insurance sector, the government should frame a liberal tax policy, reform the legal structure and set up a strong regulatory body. Since the government is liable to ensure the safety and security of people, it can obligate the people to take policy in some cases and also attract investors in this sector.
- Developing New Insurance Products: In course of time, there is a great change in climate and atmosphere over the world that adds new pattern of risk in trade and commerce. The insurance should add new products to cover the additional risk and to meet the new tastes of entrepreneur. There is considerable scope of developing new product and service in insurance sector to cover all sectors of our economy. In our study, some insurance companies are being advancing in product modification and attempt to introduce new products. This action of generating new product and service will considerably expand the demand for insurance products.
INSURANCE SCENARION IN BANGLADESH:
In Bangladesh, during the 1970s, government-owned JBC and SBC was the only provider of life and general insurance coverage for individual and business properties. During that time insurance products were very few in number and the industry did not take innovative efforts for product development. In the country the first private insurance company was set up in1985. Since then non-government insurers have shown rapid growth in terms of institutional set-up, policy design and business expansion. When non-government insurers gradually have gained the foothold in the country, real competition in the sector has begun. However, the insurance industry in Bangladesh is very small compared to its economy and the number of insurance policyholders is still not increasing satisfactorily (Islam & Mamun, 2005). At present, there are 43 general (non-life) insurance and 17 life insurance companies are operating in Bangladesh which are inadequate to provide insurance services to about 150 million people (BIA, 2000; Ahmed,1977; Siddiqui, Islam and Chowdhury, 1995).
The insurance companies of our country perform a wide range of activities such as service designing, preparing contract and policy, marketing and selling, underwriting, rating, reinsurance and other services and claim settlement. The two governments owned insurance companies i.e. The Shadharan Bima Corporation and Jiban Bima Corporation get all the government insurance business by virtue of the Insurance Act of Bangladesh. According to the rule, all insurance in the government sector is done through these two nationalized insurance companies, so they enjoy a monopoly. None of the private insurance companies is allowed to offer insurance services to government organizations. Furthermore, these two corporations are also allowed to underwrite private businesses, and people feel confident about their reliability. So they have not yet felt any strong need to practice marketing properly.
Insurance is a form of risk management, used to hedge against the risk of a contingent loss. It involves the transfer of the risk of potential loss from one entity to another, in exchange for a risk premium. Given this role, the insurance sector fosters financial stability by enabling economic agents to undertake various transactions with the facility of transfer and dispersion of risks. As a crucial component of the financial system, life insurance plans are an important source of savings and long-term institutional investments essential for the development and growth of bond markets. The role of insurance as a financial intermediary is particularly important in countries like Bangladesh with low levels of financial penetration. Overall insurance penetration itself is also just 0.9 percent in the country; much lower than the regional average of 2 percent.
The role of insurance in developing our economy is increasing so it is necessary to give importance in this sector for giving protection of the people in general and the society in particular. Insurance Industry is playing a significant role in the economic progress of Bangladesh through its risk sharing operations which motivate investment in many important businesses. The Government has now embarked on a reform program in the insurance sector to promote a vibrant insurance sector in our country. As a first step towards achieving he objective, the Insurance Act, 2010 in replacement of the previous Insurance Act, 1938, and the Insurance Development and Regulatory Authority Act, 2010 also has been passed for establishing a stronger insurance sector in Bangladesh In the era of globalization, domestic market should be well organized while the legal framework should be effective to address the changed circumstances in the business and socio-economic entities.