What is an insurance company?
An insurance company is a financial institution that takes your risk onto its own shoulders in exchange for a premium. You pay a small, certain cost regularly, and the company promises that if a large, uncertain loss happens (death, an accident, a fire, an illness) it will pay according to the contract. That promise, or contract, is called a policy.
Insurers in Bangladesh come in two kinds. Life insurers deal with people’s lives: the family is paid if the insured person dies, and many policies also pay money back at the end of the term. Non-life, or general, insurers deal with property and other risks: vehicles, factory fires, imported goods on ships, travel and so on.
Say 1,000 motorbike owners in an area each pay a premium of Tk 2,000 a year. The pool collects Tk 20 lakh. In a year perhaps 10 of them have a serious accident, each losing Tk 1,50,000. Nobody knows who those 10 will be, but by each paying a small cost, everyone is freed from the fear of a large loss. The numbers are only an example.
Why it matters to an investor
- A policy is really a promise: how useful it is depends on whether the company can pay claims when needed. So it matters to understand how the company works.
- To separate protection from investment: part of every premium goes to risk cover and the company’s costs. So the return on a savings-style policy cannot be compared directly with other savings.
- Insurers are big investors themselves: they put premium money into government securities, bank deposits and shares. So their income moves with interest rates and the stock market.
- Many insurers are listed on the DSE: as a shareholder, it is hard to judge their price without understanding the business model (premiums, claims, costs, investment income).
How insurers make money
The first source of income is underwriting: what is left of the premiums collected after paying claims, agents’ commissions and running costs. If risks are not priced properly, or premiums are set too low to compete, this part can make a loss.
The second source is investment income. Premiums arrive first and claims come later, sometimes many years later. In between, the money sits with the company, known as the “float”, and it is invested to earn income. A large part of Warren Buffett’s business famously rests on this float.
- Reinsurance: rather than carrying a very large risk (a big factory or an aircraft) alone, an insurer insures part of it with another company. This is reinsurance, an “insurer’s insurance”.
The insurance sector in Bangladesh
The insurance sector in Bangladesh is regulated by the Insurance Development and Regulatory Authority (IDRA), which began work in 2011 under the Insurance Development and Regulatory Authority Act 2010. Companies operate under the Insurance Act 2010. A February 2025 report put the number of insurers at 36 life and 46 non-life, 82 in all.
Despite the number of companies, the sector is small relative to the economy. Total premiums as a share of GDP is called insurance penetration. In Bangladesh it was roughly between 0.4% and 0.55% from 2018 to 2022, and a 2025 report citing IDRA data still put it at about 0.5%. In other words, about Tk 1 of every Tk 200 of national income goes on insurance premiums.
- Investment rules: so that policyholders’ money does not end up in risky places, IDRA sets rules on where and how much can be invested. For example, under 2019 regulations non-life insurers must keep at least 7.5% of their assets in government securities. Rules like these can change over time.
Worked example
- Say 1,000 customers each pay a Tk 2,000 premium. Total premiums: Tk 20,00,000.
- Ten claims of Tk 1,50,000 each: total claims Tk 15,00,000. Commissions and running costs: Tk 4,00,000.
- Underwriting profit: Tk 20,00,000 − 15,00,000 − 4,00,000 = Tk 1,00,000.
- Until claims are paid, say an average of Tk 10 lakh is placed in government securities and deposits and earns 8%: Tk 80,000.
Result: total profit of about Tk 1,80,000, nearly half of it from investments. Just three more claims would have turned underwriting into a loss. So pricing risk properly and investing carefully matter equally. The numbers are only an example.
Common mistakes
- Thinking of insurance first as an investment. Its main job is protection from large losses; return comes second.
- Relying on the agent’s words without reading the policy terms. At claim time, only the written terms count.
- Assuming “there are so many companies, they must all be alike”. Claim-payment records and financial health can differ a lot between companies.
- Deciding on a low premium alone, without checking what the cover includes and excludes.
An insurer pays a few people’s losses from many people’s premiums; a policy is a promise only as strong as the company’s ability to pay claims.