A Comparative Study On Insurance Act 1938 And Insurance Act 2010



3.1 Overview of the New 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.

3.2 Important Features

This law is related to the matters of Insurance. The much talked about the Insurance Act 2010 has some notable provisions as follows:

(1) 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.

(2) 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.

(3) Creation of brokerage houses for insurance policies

The new Insurance Act 2010[1] 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.

(4) 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.


(5) 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.

(6) 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.

(7) 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.

3.3. New accompaniments 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:

3.3.1. 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.


3.3.2 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.

3.3.3 Micro Insurance Business 

The new Insurance Act 2010 is making way for the Micro Insurance Business opportunities in the insurance sector of Bangladesh which has a great prospect for the small and medium enterprises as well as the growing businesses especially in the rural areas.

Micro insurance can be a great prospective area for the insurance business in our country especially in the rural areas. Most of the people of our country are unable to have costly and long term insurance policies since a great portion of the country‘s population is from lower & middle income class.

Micro insurance can be provided to individual personnel or to small business owners against little insurance premiums and with easy terms and conditions. When they will afford to minimize their risks at a lower price, they will take that opportunity and they will become to get used to it. This can cover a huge portion of the society who can be a prospective target market for this business.

3.4. 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–

3.4.1 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.

3.4.2 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.


3.4.3 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.

3.4.4 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.

3.4.5 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).

3.5 Conclusion

The Act was enacted in 2010 repealing of Insurance Act 1938. The Act prescribes several important rules for caring insurance business. Some new features are vital insertion in the law. Overall the law incorporates all the previous amendments in a single Act.


[1] Section 33


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