Agenda
Definition of insurance and its importance.
Origin of the insurance business.
Development of different types of
insurance.
Insurance in Bangladesh and Bangladesh
Insurance Academy.
Insurance is a cooperative device to spread burden of
the
loss of one caused by a particular risk over a number
of persons, who are exposed to it and who agree to
insure themselves against the risk.
So, The insurance is
A system of spreading the risk over a number of
persons who are insured against the risk
The principle to share the loss of each member of the
society on the basis of probability of loss to their risk
The method to provide security against losses to the
insured.
Definition of Insurance
Cont’d
Insurance is an agreement enforceable at law,
made between two parties whereby one party
(the insurer) agrees in consideration of money
paid to him called the premium by another party
(the insured) to indemnify the latter against loss
resulting to him on the happening of certain
events or to pay a certain specified sum on the
happening of a specified event or events.
Importance of Insurance
The role and importance of insurance has been explained in three
phases.
Uses to individual
1. Provides safety and security against the loss.
2. Affords Peace of Mind by eliminating fear and
uncertainty
of occurrence of loss.
3. Protects mortgaged property.
4. Eliminates dependency.
5. Life insurance encourages saving and profitable
investment.
6. Life Insurance fulfils the needs of a person (family
needs, old age needs and need for education &
marriage).
Uses to Business
I. Reduces uncertainty of Business
Losses.
II. Business-efficiency is increased with
insurance.
III. Indemnifies the key man.
IV. Useful for the enhancement of credit.
V. Helps continue business.
VI. Welfare of employees is ensured by
the
insurance.
Uses to Society
a) Protects the wealth of the society
against the possible losses.
b) Protects the society against
degradation providing financial
security.
c) Provides protection against loss
of property and adequate capital
for the economic growth of the
country.
d) Reduces inflation.
The concept of the insurance was developed in the 4 th century
which witnessed the practice of Bottomry Bonds and Respondentia
Bonds.
If at a time of distress in mid ocean, the master of the vessel was
in need of money at an intermediary port for the completion of the
journey, but he could not raise money on his own or on the ship
owner’s account, he was empowered to raise such fund by pledging
the vessel and the cargo.
Origin of The Insurance
Continued
Terms of the bond was that-
The loan was only repayable if the ship would
reach destination safe and sound.
Nothing was required to be paid incase of total
loss of the ship.
The creditors used to charge a premium, in
addition to interest.
The practice of this two bonds has been
abandoned
since 19th century because of the advancement
in the
communication system.
General Average
Means the system involving the element of
sharing of loss of one by all.
Very old custom and can be traced back to
916 B.C.
Affords indemnity only for losses voluntarily
incurred, such as throwing cargo overboard in
order to save the common venture.
The loss is made good by contributions from
all the interests (saved and lost).
Still in practice and closely identified with
marine insurance.
History and Development
Marine
Insurance
Oldest insurance and Started in 12-13th
century.
Spread out in UK as side business in 13-
14th century.
There were no set of rules and regulation
for settling dispute.
In 1601 Court of Arbitration was
established for settling disputes in marine
policy.
The Marine Insurance Act was passed
in1906 for regulating marine insurance
business.
Coffee House of London
Played a vital role in the development of business.
Established by Edward LLOYD in 1680 where the
merchants used to frequent visits, auctions of ship,
insurance coverage etc.
Contributed more for the development of marine
insurance.
In 17-18th century became the most popular
insurance house.
In 18th century it virtually turned into most famous
LLOYD’S- the strongest and most soundest
insurance organization all over the world.
Fire insurance
Came second in the insurance list.
The great fire in London in 1666 practically
demonstrated the necessity and urgency of
fire insurance.
About 7 companies came forward to provide
fire insurance protection.
Subsequently various bodies were formed for
the development of fire insurance including
the Fire Office Committee (FOC) in 1868.
Industrial revolution in 19th century had
increased the demand of fire insurance and
many company came in this business.
LIFE INSURANCE
Came 3rd to the list and introduced firstly in
1583.
At that time, only short term policy was used and
money is only given if the person died within the
policy time.
There were no fixed some assured and no
scientific basis at that time.
In 1693 Halley introduced the mortality table
giving a definite value to risk of death.
Subsequently, Dodson showed that it was possible
to charge level premium throughout the duration
of policy period.
In 1774 life assurance act was passed in British
parliament.
Accident
Insurance
Came last to the list.
Still an open branch of insurance
After industrial revolution accident
increased.
With the increased demand for accident
insurance, some insurances companies
started operating in this field as side business
and gradually developed.
Insurance developed basically in response to a
demand created by the insuring community.
Insurance spread out after the industrial revolution
of the 19th century.
The presence of reliable statistical data and
theoretical approaches and concerted action of
various associations gave legal, technical and
scientific soundness to the business of insurance.
Multivarious demand induced the insurers to turn
into composite offices from specialist offices.
The necessity of re-insurance gradually developed
with increase in the insurer’s commitment on a
Development of Insurance
in Bangladesh
During the British rule in the then India , Some
insurance companies started transacting
insurance business, particularly life insurance.
During Pakistani period (1947-1971) there were
about 49 companies transacting both life and
general insurance business.
After the independence of Bangladesh, the
government nationalized the insurance industry
in 1972 by the Bangladesh Insurance
(Nationalization) Order, 1972 taking all types of
insurance business companies under this
nationalization, except postal life insurance and
foreign life insurance companies.
Development of Insurance in Bangladesh
Five insurance corporations were basically established,
such as
All the existing 49 companies were merged with the last
four Corporations.
Formation of two
corporation
In 1973, the previous 5 corporations were abolished and
instead two corporations were established. Such as
[Link] Bima Corporation –
Formed by the merge of two general insurance corporations
for transacting general insurance business only.
[Link] Bima Corporation-
Formed by the merge of two life insurance corporations for
transacting life insurance business only.
In this sector ,postal life insurance business and operation of
life business by foreign companies (other than Pakistan) are
still permitted as before.
This is the present structure under which insurance business
transacted in Bangladesh.
Permission for floating insurance
.
companies in private sector
• Until 1984 insurance activities in Bangladesh
were absolutely the domain of the two
nationalized insurance corporation ,excepting
a few foreign life companies.
• Because of public demand and necessity,
later insurance companies in the private
sector were allowed under the authority of
the insurance (amendment) ordinance 1984.
• Starting from 1984 to present day, 60 private
sector insurance companies have come up in
addition to Sadharan Bima Corporation and
Jiban Bima Corporation.
Until 1972 insurance industry in
Bangladesh faced with an acute shortage
of trained and professionally educated
personnel.
To meet this shortage and to make
insurance a better service institution, the
Bangladesh government established the
‘Bangladesh Insurance Academy’ in
November, 1973.
Imparting professional education, service
training, to the officers and employees
dealing in insurance and conducting
research on problem of insurance industry
was the main objectives of this academy.
Chapter II
Risk Management
Chance, Risk,
Probability
Risk Management
Necessarily deals with the control and
management of risk.
A logical process or approach that seeks to
eliminate or at least minimize the level of
risk associated with a business operation.
Essentially, the process identifies any type
of situation that could result in damage to
any resource within the possession of the
company, including personnel, then take
steps to correct factors that are highly likely
to result in that damage.
Elimination And Spreading Of Risk
& Method Of Risk Management
1. Risk Avoidance:
Selection of those business activities only
which involve the minimum amount of
risks.
2. Risk Prevention:
i) Eliminating the cause of loss and
protecting loss of things or persons
exposed to damage or injury.
ii) Minimizing the loss when it at all occurs.
3. Risk Assumption
Assuming the risk itself and bearing the
ensuing uncertainty.
Also known as Self- insurance.
Elimination And Spreading Of Risk
& Method Of Risk
Management(cont…)
4. Risk Distribution:
Spreading of risk by means of group sharing such
as partnership or company form of business
organization.
5. Hedging and Neutralization
Offsetting loss from occurrence of a risk by a
compensating gain from another activity.
6. Elimination of Risk:
Elimination of risks by taking much efforts made
by the business community to improve their
equipment and method of working.
7. Risk Transfer
One person guaranteeing another against the
risk of loss. Insurance is the form of risk transfer.
Mathematical Valuation of Risk
Theory of Probability
A mathematical quantitative expression of an unforeseen
happening or contingency.
Low of Large Number
The greater the number of instances considered the more likely the
anticipated event is expected to be repeated in future instances.
Example: The probability of falling either head or tail of a coin is one-
half that is 1 .50 and it will be true for every time of tossing.
2
Mathematical Valuation of Risk
The number of expected event(death, fire etc.) taking place, divided
by the number of cases investigated.
Example: If we consider 1000 lives under study and 50 die in the year,
then mathematical valuation of risk or rate of mortality is 50 .05
1000
Mathematical Valuation of Risk
• How do you explain the law of large numbers?
• The law of large numbers, in probability and
statistics, states that as a sample size grows,
its mean gets closer to the average of the
whole population.
• Example of Law of Large Numbers
• Let's say you rolled the dice three times and the
outcomes were 6, 6, 3. The average of the results
is 5. According to the law of the large numbers, if
we roll the dice a large number of times, the
average result will be closer to the expected
value of 3.5.
Insurance is the process of spreading
risk.
Different types of insurances has
developed over the times with their
demand for each.
Over the times, various organization
has come forward to render these
insurance services properly.
