New ordinance stipulates mandatory solvency margin for insurance cos

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FE Report
The insurance companies are required to maintain a mandatory solvency margin under the new insurance ordinance.
Two ordinances -- one relating to amendment of Insurance Act 1938 for regulating the insurance business and other concerning the powers and functions of the new regulatory authority, replacing the erstwhile Department of Insurance, in the insurance sector -- have been promulgated by the government.
The ordinances already made effective and will now lead to formulation of detailed rules and regulations in the light of their provisions.
According to the new insurance ordinance, the number of members in every insurance company board will be limited to 15, instead of the existing 20. Of the 15 board members, six directors should be taken from policyholders, six from sponsors and three independent.
Sources said under the new legal framework, there can be no director of any insurance company who holds directorship in any banking institution.
Under the new legal framework, the companies, both life and general, are also required to ensure international audit and accounting practices, offer the clients new insurance products, put a limit on commission expenses and reduce the number of directors in their respective boards.
However, insurers see the provision of higher capital requirement as a timely move to eliminate those firms, which have inadequate solvency, implying shortfall of financial resources or adequate margin requirements as the safety-value to meet the standard obligations. New rules will require to be framed for this purpose also.
The new law has allowed foreign investment in the insurance industry. Its main features include an increase in paid-up capital for both local general and life insurance companies. The amount of paid-up capital for a general insurance company has been raised to Tk 400 million from Tk 200 million, and that for a life insurance company, to Tk 300 million from Tk 90 million. The companies will get five years time for raising the paid-up capital.
However, insurance companies registered outside Bangladesh and who would like to start business operations in the country will have to have a minimum paid-up capital of Tk. 300 million. The minimum paid-up capital of such non-life insurance companies registered outside Bangladesh will be Tk. 400 million. In both cases for operations within Bangladesh, the paid-up capital of foreign insurance companies will have to be deposited through transfer of funds from outside the country.
Small companies are likely to face troubles in meeting the capital requirement, but the situation may lead to merger of those companies, an insurer added.
President Iajuddin Ahmed gave his assent to the Insurance Regulatory Authority (IRA) Ordinance 2008 and the Insurance Ordinance (IO) 2008 recently. The law ministry later made the gazette notifications last October 13.
With enforcement of the IRA Ordinance 2008, the Department of Insurance will no longer exist. On the other hand, the insurance sector will get rid of the 70-year-old Insurance Act, 1938, once the IO 2008 comes into effect.
Sources said the new regulatory authority in the insurance sector will come within the overall operational domain of the ministry of finance. The ministry of commerce exercised control over the erstwhile Department of Insurance. The new ordinance has not clearly specified under which ministry the IRA will come. The decision to this effect will be taken later and notified under separate rules and regulations, to be framed later, upon clearance by the government.