Introduction Chapter

Covered Topics: Meaning, Evaluation of Insurance, Functions of Insurance, Nature of Insurance;

Kinds of Insurance from the risk point of view; The role and importance of insurance; and
Problems and the ways of overcoming the Problems of Insurance; and prospects of insurance
business in Bangladesh.

❖ Insurance:
Insurance is a contract, which is represented by a policy, where a person or entity receives financial
protection or reimbursement against the loss incurred by the insurance company.
Insurance is a cooperative device to spread the loss caused by a particular risk over a number of
persons, who are exposed to it and who agree to insure themselves against the risk. Prof. M. N.
Mishra
According to M. K. Ghosh and A. N. Agarwala, Insurance is a cooperative form of distributing a
certain risk over a group of persons, who are exposed to it.
Insurance may be defined as legal agreement or a contract between two parties i.e. the insurance
company (insurer) and the individual (insured) whereby one party insurer undertakes, in exchange
for a fixed sum called premiums, to pay the other party insured a fixed amount of money on the
happening of a certain event.
The insurance, thus, is a contract whereby:
1. Certain sum. called premium, is charged in consideration;
2. Against the said consideration, a large sum is guaranteed to be paid by the insurer who
received the premium;
3. The payment will be made in a certain definite sum; and
4. The payment is made only upon a contingency

❖ Evaluation of Insurance (History of Insurance):

The key points regarding the history of Insurance:
• The first written insurance policy was found on an ancient Babylonian monument.
• In the Dark and Middle Ages, the guild system emerged—members paying into a larger pool
that covered total loss.
• Later, in the 1600s, voyages to the New World would secure multiple investors in each
voyage to spread the risk around.
• After the fire of London destroyed a large portion of the city in 1666, fire insurance became
available.
• While insurance was common in Europe at the time, the first insurance in America didn't
come around until the 1750s.

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 ❖ Functions of Insurance:
The most important function of insurance is to spread the risk over a number of persons who are
insured against the risk, share the loss of each member of the society on the basis of the probability
of loss to their risk and provide security against losses to the insured.
So, insurance functions are;
a) The system to spread the risk over several persons who are insured against the risk;
b) The principle to share the loss of each member of the society based on the probability of loss
to their risk; and
c) The method to provide security against losses to the insured.
The functions of insurance can be studied into two parts (a) Primary Functions and (b)
Secondary Functions.
➢ Primary Functions of Insurance:
a) Insurance provides certainty: Insurance provides certainty of payment at the uncertainty of
loss. The uncertainty of loss can be reduced by better planning and administration. There is the
uncertainty of happening of time and amount of loss. Insurance removes all these uncertainties and
the assured is given certainty of payment of loss. The insurer charges the premium for providing the
said certainty.
b) Insurance provides protection: The main function of insurance is to protect the probable
chances of loss. The insurance cannot check the happening of risk but can provide for losses at the
happening of the risk. The time and amount of loss are uncertain and at the happening of risk, the
person will suffer the loss in the absence of insurance. The insurance guarantees the payment of loss
and thus protects the assured from sufferings.
c) Risk-Sharing: The risk is uncertain, and therefore, the loss arising from the risk is also
uncertain. When risk takes place, the loss is shared by all the persons who are exposed to the risk.
➢ Secondary Functions of Insurance
Besides the above primary functions, the insurance works for the following functions:
a) Prevention of loss: The insurance joins hands with those institutions which are engaged in
preventing the losses of the society because the reduction in loss causes the lesser payment to the
assured and so more saving is possible which will assist in reducing the premium.
b) It Provides Capital: The insurance provides capital to society. The accumulated funds are
invested in the productive channel. The industry, the business, and the individual are benefited by
the investment and loans of the insurers.
c) It Improves Efficiency: Insurance eliminates worries and miseries of losses at death and
destruction of property. The carefree person can devote his body and soul together for better
achievement, it improves not only his efficiency but the efficiencies of the masses are also
advanced.

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 d) It helps Economic Progress: The insurance by protecting the society from huge losses of
damage, destruction, and death, provides an initiative to work hard for the betterment of the masses.
The next factor of economic progress, the capital, is also immensely provided by the masses. The
property, the valuable assets, the man, the machine and the society cannot lose much at the disaster.

❖ Nature of Insurance:
The insurance has the following characteristics which are, generally, observed in the case of life,
marine, fire, and general insurances.
a) Sharing of Risk: Insurance is a device to share the financial losses which might be fall on an
individual or his family on the happening of a specified event. The event may be the death of an
employed person to the family in the case of life insurance, marine-perils in marine insurance, fire
in fire insurance and other certain events in general insurance etc. If any loss arising from these
events the insurance company will share the loss against their insurance contract.
b) Co-operative Device: The most important feature of every insurance plan is the co-operation
of a large number of persons who, in effect, agree to share the financial loss arising due to a
particular risk that is insured. An insurer would be unable to compensate for all the losses from his
own capital. So, by insuring or underwriting a large number of persons, he is able to pay the amount
of loss.
c) Value of Risk: The risk is evaluated before insuring to charge the amount of share of an
insured, herein called, consideration or premium. Valuation of risk is determined as per predefined
terms and conditions of the insurance policies. If there is an expectation of more loss, a higher
premium may be charged. So, the probability of loss is calculated at the time of insurance.
d) Payment at Contingency: Insurance provides facility of financial help in case of
contingency. If the contingency occurs, payment is made; otherwise, no amount is given to the
policy-holder. Similarly, in certain types of policies, payment is not certain due to the uncertainty of
a particular contingency within a particular period.
For example, in term-insurance, payment is made only when the death of the assured occurs
within the specified term, maybe one or two years.
e) Payment of Fortuitous Losses: Another characteristic of insurance is the payment of
fortuitous losses. A fortuitous loss is one that is unforeseen and unexpected and occurs as a result of
chance. In other words, the loss must be accidental. For example, a person may slip on an icy
sidewalk and break a leg. The loss would be fortuitous. Insurance policies do not cover intentional
issues.
f) Amount of Payment: The amount of payment depends upon the value of loss that occurred
due to the particular insured risk provided insurance is there up to that amount. In life insurance, the
purpose is not to make good the financial loss suffered. The insurer promises to pay a fixed sum on
the happening of an event. It is immaterial in life insurance what was the amount of loss was at the

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time of contingency. But in the property and general insurances, the amount of loss, as well as the
happening of loss, is required to be proved.
g) A large Number of Insured Persons: To spread the loss immediately, smoothly and cheaply,
a large number of persons should be insured. The co-operation of a small number of persons may
also be insurance but it will be limited to the smaller area. The cost of insurance for each member
may be higher. Therefore, to make the insurance cheaper, it is essential to insure a large number of
persons or property because the lesser would be the cost of insurance and so, the lower would be
premium.
h) Insurance is not gambling: The insurance serves indirectly to increase the productivity of
the community by eliminating worry and increasing initiative. The uncertainty is changed into
certainty by insuring property and life because the insurer promises to pay a definite sum at damage
or death. Insurance is just the opposite of gambling. In gambling, by bidding the person exposes
himself to the risk of losing, in the insurance; the insured is always opposed to risk, and will suffer
loss if he is not insured. Insurance is a policy regulated under laws and therefore the amount of
insurance can neither be paid as gambling nor as charity.
i) Insurance is not charity: Charity is given without consideration but insurance is not possible
without premium. It provides security and safety to an individual and to the society although it is a
kind of business because in consideration of premium it guarantees the payment of loss.

❖ Kinds of Insurance from the Risk Point of View:

Personal Insurance: The personal insurance includes insurance of human life which may suffer
loss due to death, accident and disease. Therefore the personal insurance is further sub-classified
into life insurance, personal accident insurance and health insurance.

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 Property Insurance: The property of an individual and of the society is insured against the loss
of fire and marine perils, the crop is insured against unexpected decline in production, unexpected
death of the animals engaged in business, break-down of machines and theft of the property and
goods.
Liability Insurance: The liability insurance covers the risks of third party, compensation to
employees, liability of the automobile owners and reinsurance.
Fidelity Insurance: Insurance to protect a company against the dishonest or illegal behavior of
its employees. Employers who are willing to take on ex-offenders can find it difficult because of the
restrictions insurance companies place on fidelity insurance.

❖ The role and importance of insurance:

➢ Insurance has evolved as a process of safeguarding the interest of people from loss and
uncertainty. It may be described as a social device to reduce or eliminate risk of loss to life and
property. The importance of insurance can be shown in two ways (1) insurance in the world economy
and (2) effects of insurance to macroeconomic indicators.
➢ The role of insurance in the world economy
People use insurance to keep their assets and life under guarantee. So, insurance gained
popularity in the world. Insurance plays great role both in developed and developing countries’
economy. We can show the roles of insurance in world economy like that.
a) Insurance provides safety and security: Insurance provides financial support and reduces
uncertainties in business and human life. It provides safety and security against particular event. As
we know there is always a fear of sudden loss. For example we can say that, in case of life
insurance financial assistance guarantee to the family of the insured on his death. In case of other
insurance security is provided against the loss due to fire, marine, accidents etc.
b) Generates financial resources: One of the main roles of insurance in economy is that, it
generates financial resources by collecting insurance premiums. These funds are invested in
government securities and stock. This process increases development economy of each country.
Employment opportunities are increased by big investments leading to capital formation.
c) Life insurance encourages savings: Insurance does not only protect against risks and
uncertainties, but also provides an investment channel too. Life insurance increases people’s
savings due to payment of regular premium and it provides regime of investment. It develops a
habit of saving money by paying premium. So, insured get the lump sum amount at the maturity of
the contract. Thus life insurance encourages savings.
d) Promotes economic growth: Insurance generates significant impact on the economy by
mobilizing domestic savings. Insurance turn accumulated capital into productive investments.
Insurance enables to mitigate loss, financial stability and promotes trade and commerce activities
those results into economic growth and development. Thus, insurance plays a crucial role in
sustainable growth of an economy.

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 e) Insurance spreads risk: Insurance always protect people from loss, from danger. Many
people know that danger can occur every time. In general, insurance spreading of risk from the
insured to the insurer. But reality is different from this; the basic principle of insurance is to spread
risk among a large number of people. A large number of persons get insurance policies and pay
premium to the insurer. Whenever a loss occurs, it is compensated out of funds of the insurer.
f) Medical support: A medical insurance considered essential in managing risk in health.
Anyone can be a victim of critical illness unexpectedly. And rising medical expense is of great
concern. Medical Insurance is one of the insurance policies that cater for different type of health
risks. The insured gets a medical support in case of medical insurance policy.
➢ The effect of insurance to macroeconomic indicators
Insurance includes financial relations which perform specific functions in economy. In addition to
playing great role in society insurance effects to macroeconomic indicators positively. So we can
show effects of insurance to macroeconomic indicators like that.
a) Insurance provides increasing employment in economy: One of the main problems in
economy is unemployment. But insurance system can helps to solve this unemployment problem in
economy. So, insurance companies provide increasing employment with hiring new workers. Many
people from different countries work in insurance companies. This process provides employment in
economy.
b) Insurance provides increasing GDP: One of the main macroeconomic indicators of each
country is GDP. In modern period insurance companies offer different insurance products to people.
When people use these insurance products they pay insurance premiums to insurance companies.
Insurance companies use these premiums in financial and investment activities of economy. So, this
process increases GDP in economy.
c) Insurance effects to economic growth positively: It is known that, insurance provides
employment in economy and it provides increasing GDP. With these advantages insurance also
effects economic growth positively.
d) Insurance effects stability of financial system positively: Insurance companies are primary
part of financial system. Insurance companies play great role in forming state budget. Because they
are big tax payers of the state. As we know the big part of the state budget is formed by taxes. For
this reason, insurance sector plays great role in providing stability of tax and financial system.
e) Insurance provides prosperity of people: Availability insurance in the world is the best
advantage. Nowadays people from different countries can use different types of insurance. All these
insurance types provide people’s safety and security. It impacts on their life style positively. When
people use insurance their property, also their life is under guarantee. These good advantages
provide prosperity of people.

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 ❖ Problems of Insurance Business in Bangladesh
For the development of economic infrastructure of a developing country like Bangladesh, there
is a great role of insurance. But the insurance business in our country is not satisfactory. Though
insurance industry has very prospect in the economy but for some reasons it’s totally failed to
achieve its goal. If we want to know the reasons behind this hen we should look forward the
following according to Bangladesh General Insurance Company Ltd. In this report the major
problems in performing insurance business has been classified into some major criteria which are
social, economic, political, legal and other reasons. Mainly these reasons are:
1. Social Problems
1.1. Less Public awareness: A vast majority of people especially in rural areas are left
outside the insurance coverage. This mainly results from the unawareness among the people. Even a
large portion of people don’t have the minimum idea of insurance. People are not aware of the
benefits from the insurance policy and a great number of people believe that insurance business is
nothing but cheating. This negative attitude from the people is lessening the importance of
absorbing insurance policy in a large extent.
1.2. Centralization: Most of the insurance companies in our country are located in urban
areas and there are few branches in rural areas. They think that they might have better scope for
performing their business as the economic condition of the urban is better than the rural areas. Thus
this centralization policy acts as an obstruction for the growth of insurance business in our country.
2. Economic Problems
2.1. Weak Economy: Bangladesh is one of the poorest countries in the world and most of
the people in this country live under poverty level. 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 as premium and regarded as safety or precautionary measures against any accident. Therefore
the overall poor economic condition is creating obstacle to flourish the insurance business in
Bangladesh.
2.2. Poor financial position of the insurance companies: Most of the insurance
companies of our country are facing financial problems. Recently government is trying to take
initiative to close some of the insurance companies because they are not maintaining the minimum
standards. They are investing their money in poor securities and business which is vulnerable
regarding getting back the money with profit. As a result most of the insurance companies are
suffering from loss years after years and for poor financial condition the insurance companies are
also unable to expand their branch which is a barrier for the growth of insurance business in
Bangladesh.
2.3. Problems of economic bases and effective principle:Before independence insurance
business was control by private company. But after independence maximum insurance company
take over by the government. For that reason government changed the company management,
policy and applies new rules and regulations which system was very tricky and uncomfortable for
the mass people.

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 3. Political problems
3.1. Political instability: Political instability is a major problem in Bangladesh. For the
instability in politics, many disruptive situations are often created which are bad for any businesses.
Political instability and inconsistency of political courses are a serious problem for the insurance
business.
3.2. Lack of supervision from the government: Few unethical practices like make
harassment to policy holder and showing less in the financial statement not only destroying the
reputation of the well-known insurance companies but also creates negative impact in the mind of
the people about insurance. Sometimes government imposes some conflicting rules and regulation
for insurance companies. It creates conflict among insurance companies with government and act as
one of the main hindrances of growing insurance business.
4. Legal Problems
4.1. Too much complexity: To take an insurance policy there are great number of rules
and regulations which must be compelled by the insured person. And into those rules a vast number
of complexities are present there. Therefore the people are discouraged to take insurance policy
because they think that the complexities will create extra pressure on their mind which may hamper
other jobs.
5. Other problems
5.1. Lack of skilled staff: There needed a lot of educated and skilled staff for insurance
business. But Insurance companies perform their activities by recruiting marketing agent and they
try to convince the people to take a policy. Most of the cases the agents are not properly trained and
they don’t know the right process to catch potential people to make their policy holders. Lack of
skilled and trained staff the insurance business in our country is not wide.
5.2. Limitations of insurance knowledge: The scope of education about insurance is so
much little in our country. The education about insurance is very limited in syllabus of our primary
and higher education. It is a hindrance in our insurance business.
5.3. Insufficient service: The insurers or companies are not able to give the proper
services to the insured people. In Bangladesh insurance company people failed to provide better
service to the mass people that’s why the people who want to take the insurance policy they loss
their interest from insurance. So the people are not interested to involve themselves and their
properties with insurance business.
5.4. Absence of business ethics: Some insurance companies create harassment on the
policy holders or sometimes on the dependents of the policy holders when they want back their
money after death or maturity. The insurance companies show different causes in order to make
delay to return back the money at expected time. Sometimes they are eager to pay less than the
desired amount by creating various circumstances. Besides this some field officials also create some
illegal acts. These kind of illegal acts create bad reputation to the insurance companies and
hindrance the overall insurance business. Those who are harassed by the insurance companies
discourage other not to take an insurance policy.

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 5.5. Delay in payments of claims: The insurance companies in our country are not fully
able to pay the claim of insured as when claimed. That is another problem of insurance in
Bangladesh.
5.6. Lower Rate of Savings: People of Bangladesh have a very small saving potentially
and thus have less or no disposable income. Life insurance and other insurance are mostly
dependable on the saving of the people. Thus they are left with little amount, which may not
deemed to sufficient for the payment of premiums. This factor discourages many to buy life
insurance policy. So it creates the Problems.
5.7. When Promises Do Not Match Delivery: Customers perceived that organizations are
delivering low-quality service when a gap appears between promised levels of service and the
service that are actually delivered. This gap is created when advertising, personal selling or public
relations Over-promise or misrepresent service levels.
5.8. Religious Superstition: Religious attitude of the people also stands against efficient
insurance. The religious people believe that the future is uncertain, it is in the hand of Allah and
they do not think it necessary to buy life insurance policy for them.

❖ Ways of Overcoming the Problems of Insurance

In our country the problems that exist in insurance business cannot be overcome overnight .It
needs long term planning. Besides making the people aware the insurance businessman should
come forward with govt. to make this business famous. Coming from the existing problems
following steps should be taken to make this business famous.
a) Spread of insurance education: To make the insurance business popular, people should be
made aware about the necessity of insurance. For this purpose effective steps must be taken too
speared of insurance education.
b) Publicity & increase of awareness: It is very easy to make a market of any product through
publicity and advertising. Insurance is one type of unsought goods. So, people are not so much
aware of it. Mass publicity activities are very essential to overcome from unwillingness wrong idea,
doubt & unbelief of the people this country.
c) Increase of training facilities: Insurance business is very complex and technical. To
continue the insurance business effective standard training facilities must be arranged for the
manager & workers who are employed in this business. To perform this business properly,
obviously it needs vast knowledge regarding its performance.
d) Formulation of effective Principles: Long term formulation of effective principles is
compulsory to continue the insurance business successfully. To run the insurance smoothly, it is
mandatory to implement the principles strictly. If everyone follows principles and rules, achieving
goal is possible.

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 e) Uphold the interest of policy holder: Success of this type of business is depended on the
trust of insured persons. To gain the trust insurance companies should come forward to compensate
the real injured as soon as possible.
f) Modernization of insurance business: Modernization of insurance business means to make
the business much more modern and suitable for new generation. New policies can be introduced if
it is familiar to other world. More modern insurance business must attract the clients.
g) Govt. monitoring system: The private insurance companies are not so much aware about the
govt. rules and regulations. For this reason, sometimes unreal competition created in the market. So,
proper govt. monitoring system should be introduced.
h) Modernized the insurance Acts and Ordinances: Government should amend the insurance
related acts and ordinances because this is traditional acts that create problems for insurance
business in our country. That is very necessary for our economy.
i) Emphasize on other sectors development: Insurance business development depends on the
development of other sectors. So, it is possible to develop insurance sector by developing other
sectors like, industry, mining, agriculture etc.
People of Bangladesh are so much aware of their future. They try their best level to be insured
themselves against any type of hazard. It is a good sign for insurance market in Bangladesh. Every
insurance company also tries to overcome the problems.

❖ Prospects of Insurance Business 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. These facts can be measured as
the prospective fields for insurance business in Bangladesh.
a) Increased population: There is a big opportunity lies ahead for the insurance companies as
the population of our country are increasing day by day. That is growth in population opens greater
scope for every kind of insurance business that results in growing prospect for insurance companies.
b) Higher GDP: The GDP of our country is increasing than the previous year’s which results
in increase of per capita income. With the growth in the income more and more people are now
willing to take an insurance policy for safeguarding themselves from any danger.
c) New business’s individual insurance: There are so many new businesses starting every day
and manufacturing sector is booming with global demand. Every business is insured under an
insurance company to protect its company from any kind of accident. Therefore growing industry,
mill, factories are creating better scope for the insurance companies to flourish their business.
d) Developing mass awareness about insurance: People are now much more conscious about
their safety. So they are encouraged to take an insurance policy for making their life free from any
unexpected occurrence.

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 e) Micro insurance: Micro insurance can be a great prospective area for the insurance business
in our country. Micro insurance can be provided to individual personnel or to small business owners
against little insurance premiums and with easy terms and conditions.
f) Health Insurance: The insurance companies of Bangladesh can be developed health
insurance policy as large scale like other developed and developing countries. That increases the
scope of insurance business in Bangladesh. Though there are some insurance companies created this
at small range but that not enough to meet the crying need of health insurance in nearby decades.
g) Scope in non-traditional sector: Nowadays, along with traditional insurance services, they
can offer various non-traditional insurance services to their customer. Target market of insurance
company may expand and they can offer different types of non-traditional insurance services such
as, personal accident insurance, travel insurance, burglary insurance and pension scheme.
h) Scope of investment: Insurance companies are making large investment in government
bonds, ICB projects and in private sector business. Scope of investment expansion persists in the
areas leasing, housing, health and money market.
i) Business sector: In Bangladesh the SME plays an important role in the economic
development. But they are deprived from taking loans from bank for large amount. If insurance
business focuses this section in Bangladesh they are able to contribute more in the economy. Thus
insurance business has a bright prospect in business sector in a developing country like Bangladesh
j) Education sector: Insurance companies can provide different types of scheme to expand
education plan insurance. In Bangladesh the higher educational facilities is not as rich as developed
countries. It is very costly except public sectors educational institutions. So, education sector should
create vast facilities for insurance business in future.
Finally, if the above steps can be taken, more and more people in Bangladesh will be interested in
buying insurance.

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