What is the role of insurance industry in Bangladesh economy?

Answer 1

The Roles Played by The Insurance for Our Economy

INTRODUCTION

Insurance is a written contract, taken with the insuring company that transfers the risk of loss to the insurer according to the terms of the contract. However, not all risks are insurable. If an insurance company would have difficulty calculating the likelihood that a loss would occur because of some risk, it is reluctant to insure against that risk. Risks of this type are generally called un insurable risks.

TYPES OF INSURANCE

• Home insurance

• Health

• Disability

• Casualty

• Life

• Property

• Liability

• Credit

• Insurance financing vehicles

INSURANCE FEATURES IN BANGLADESH

The insurance is a contract whereby the insurer will pay the insured (the person whom benefits would be paid to, or on the behalf of), if certain defined events occur. Subject to the "fortuity principle", the event must be uncertain. The uncertainty can be either as to when the event will happen (i.e. in a life insurance policy, the time of the insured's death is uncertain) or as to if it will happen at all (i.e. a fire insurance policy).

• Insurance policies are sold without the policyholder even seeing a copy of the contract.

• The amounts exchanged by the insured and insurer are unequal and depend upon uncertain future events.

• The insured is not required to pay the premiums, but the insurer is required to pay the benefits under the contract if the insured has paid the premiums and met certain other basic provisions.

• Insurance are also governed by the principle of utmost good faith which requires both parties of the insurance contact to deal in good faith and in particular it imparts on the insured a duty to disclose all material facts which relate to the risk to be covered.

THE INSURANCE CORPORATIONS ACT 1973

The Insurance Corporations Act 1973 was amended in 1984 to allow insurance companies in the private sector to operate side by side with Sadharan Bima Corporation and Jiban Bima Corporation. The Insurance Corporations Amendment Act 1984 allowed floating of insurance companies, both life and general, in the private sector subject to certain restrictions regarding business operations and reinsurance. The Act of 1984 made it a requirement for the private sector insurance companies to obtain 100% reinsurance protection from the Sadharan Bima Corporation.

The restriction regarding business placement affected the interests of the private insurance companies in many ways. The restrictions were considered not congenial to the development of private sector business in insurance.

According to the new rules the capital and deposit requirements for formation of an insurance company are as follows:

Capital requirements:

For life insurance Company - Tk 75 million, of which 40% shall be subscribed by the sponsors.

For mutual life insurance company - Tk 10 million.

For general insurance company - Tk 150 million, of which 40% shall be subscribed by the sponsors.

For cooperative insurance society - Tk 10 million for life and Tk 20 million for general.

Deposit requirements (in cash or in approved securities):

For life insurance - Tk 4 million

For fire insurance - Tk 3 million

For marine insurance - Tk 3 million

For miscellaneous insurance - Tk 3 million

For mutual insurance Company - Tk 1.4 million

For cooperative insurance - Tk 1.4 million

For general insurance - Tk 1 million for each class

Numerous institutions, associations and professional groups work to promote the development of insurance business in Bangladesh. Prominent among them are the Bangladesh Insurance Association and Bangladesh insurance academy.

Considerable attention has been devoted to evaluating the relationship between economic growth and financial market deepening. Most of what we have learned relates to banking systems and securities markets - with insurance receiving only a passing mention. Yet, while insurance, banking, and securities markets are closely related, insurance fulfills somewhat different economic functions than do other financial services, and in turn requires particular conditions to flourish and to make a full economic contribution.

Fortunately, in the past few years, several interesting lines of research have begun to map the specific contributions of insurance to the economic growth process as well as

to the well-being of the poor. The evidence suggests that insurance contributes materially to economic growth by improving the investment climate and promoting a more efficient mix of activities than would be undertaken in the absence of risk management instruments. This contribution is magnified by the complementary development of banking and other financial systems. Empirical studies suggest that non life insurance contributes to growth in countries at many different levels of development. Life insurance makes a substantial contribution to growth mostly in wealthier countries, since life insurance is typically a smaller part of the total insurance market in low income countries. The relationship between per capita income levels and insurance penetration is also strong in the reverse direction - with rising income a strong driver of life insurance coverage. However, it is difficult to disentangle whether lower insurance consumption at lower income levels reflects reduced demand for life insurance products or constraints on the supply side associated with weak regulatory and supervisory environments and high costs of insurance provision. Of course, even if the data did not support a strong causal role for insurance as an engine of overall aggregate growth, there might be a strong case for insuring the poor on social welfare grounds that those at or below the poverty line are particularly vulnerable to catastrophic shocks to income and consumption. And indeed, it appears that the gap between the potential social value of insurance and the transactions costs of provision might be unusually wide for the poorest segment of society, which explains the growing interest in micro insurance on the part of non governmental organizations and philanthropic foundations, some of whom are partnering with commercial providers. Contributions of Insurance to Growth and Development Insurance serves a number of valuable economic functions that are largely distinct from other types of financial intermediaries. In order to highlight specifically the unique attributes of insurance, it is worth focusing on those services that are not provided by other financial services providers, excluding for instance the contractual savings features of whole or universal life products. The indemnification and risk pooling properties of insurance facilitate commercial transactions and the provision of credit by mitigating losses as well as the measurement and management of non verifiable risk more generally. Typically insurance contracts involve small periodic payments in return for protection against uncertain, but potentially severe losses. Among other things, this income smoothing effect helps to avoid excessive and costly bankruptcies and facilitates lending to businesses. Most fundamentally, the availability of insurance enables risk adverse individuals and entrepreneurs to undertake higher risk, higher return activities than they would do in the absence of insurance, promoting higher productivity and growth.

The management of risk is a fundamental aspect of entrepreneurial activity. Entrepreneurs manage the risk of accidental loss by weighing the costs and benefits of each alternative. In a structured risk management process, this involves:

1. Evaluating alternative techniques for treating each loss exposure;

2. Treating each loss exposure;

3. Choosing the best alternative; and

4. Monitoring the results to refine the choices.

In most cases, insurers need to form partnerships with governments, communities and non-governmental organizations (NGOs). NGOs may be able to identify opportunities and support initial research and community organizations may be able to provide a low cost means of distribution. But it also requires a shift in thinking. NGOs will need to understand that the primary motivation for commercial engagement is profit, and insurers will need to understand that, for NGOs it is about development.

CONCLUSION:

Developed countries have stronger rule of law, so insurance companies have to pay on claims. In developing countries with their weaker law enforcement, an insurance company can refuse to pay and bribe the judge if the customer goes to court. Or the owners of the company can close it and run off with the money. We can say that Insurance must be developing our country and our economy.