The Nepali insurance sector has been going through a slew reforms after Chiranjibi Chapagain was appointed as the Chairman of the Insurance Board in January 2017. From paid-up capital increment of insurers to licensing of new companies, the last year has seen the board taking a range of steps to expand the market of insurance and insurance outreach among the citizens. Before taking on the chief post at the insurance sector regulator, Chapagain was a director at the Nepal Rastra Bank where he has worked for 18 years in different positions. He was also the project chief of the fifth Household Budget Survey 2014/15 conducted by the central bank. In an interview with Sanjeev Sharma of New Business Age, Chapagain talked about the achievements of the last one year, existing problems in the insurance sector, new initiatives of the board, and reasons for the delay in amending the Insurance Act. Excerpts:
It’s been a year since your appointment as the Chairman of the Insurance Board. What major accomplishments for the board would you like to highlight?
The past one year has become a turning point for IB and the entire Nepali insurance sector. I started prioritizing the weaknesses within the board and began working accordingly. The paid-up capital levels of the insurance companies were very low causing instability in the capital market. We revised the capital structures raising the minimum paid-up capital levels to Rs 2 billion for life insurers and Rs 1 billion for general insurance companies. It has given a sense of confidence not only to the companies but to investors as well to work and invest more efficiently.
Similarly, issues related to the licensing of new companies had been pending for the last 10 years. There was a state of confusion in the insurance sector as the licensing process was neither closed nor opened. Earlier, those who had access to power would acquire the licenses, while those who didn’t have such leverage couldn’t. Realising the need to formulate a clear policy on the licensing of insurance companies, we decided to give the applicants a chance this time and started approving those who met our eligibility criteria. After evaluating the long-pending 15 applications, we provided operating licenses to 12 companies, nine in life and three in non-life sectors that have fulfilled the criteria.
Likewise, we have also been enhancing the capacity of IB. Staff inadequacy has affected our institutional efficiency. At present, IB has been operating with only 35-40 employees and we have requested the Public Service Commission (PSC) for the appointment of an additional 32 staff. For the purpose, PSC will conduct examinations in Magh (January-February) and 30 will be appointed by Chaitra (March-April).
We were also significantly behind in terms of supervision and monitoring. Earlier, we were limited only to inspections related to complaints that are filed here. Now, we have started supervising and monitoring the entire insurance market to strengthen the companies and establish a good level of corporate governance in the sector. Over the last year, we have conducted compliance-based inspections of seven insurance companies.
What is IB doing to tackle the challenges in the next level?
There are challenges in making the Nepali insurance sector at par with the country’s banking sector. Challenges exist in developing a healthy market competition. We have been trying to introduce international standard levels of practice in supervision and monitoring in the insurance sector. The World Bank and the UK’s Department for International Development (DFID) have been supporting us in this regard. Under the DFID project, a diagnostic study about the risks in the Nepali insurance sector is currently being conducted by the multinational British firm PricewaterhouseCoopers (PWC). It is similar to the study conducted in 1988/89 to diagnose risks in the Nepal’s banking field. The firm will submit the final report of the study in April. We have already received the preliminary report which has prescribed us with 20 ratios of measurement for the Nepali insurance sector which will be finalised soon. We will identify and calculate the risks of each insurance company according to the ratios.
Similarly, the World Bank’s project is aimed at strengthening our offsite inspection. It will submit the offsite inspection manual in April. The implementation of the recommendations of PWC and World Bank will be a step forward in terms of strengthening our supervision and monitoring capabilities. We will start using specific software for the purpose after six months. This would not only open the door for international level inspection and supervision processes, but also make the Nepali insurance sector competitive.
Although, the overall feedback for our initiatives was positive, there were criticisms from some quarters. Some have said that we messed up the insurance market by issuing too many licenses. We have not issued new licenses but just sorted out the pending applications. Our steps will be justified within a year through strong outcomes with some visible already. For instance, the new capital requirements for insurance companies has brought a total of Rs 20 billion to the formal sector generating jobs for more than 1,000 people in the last year alone.
IB is yet to issue operating licenses to three general insurance companies. When will the process be completed?
They have been given a period of three months to meet the requirements. We will issue licenses only when they fulfill the paid-up capital requirement by the deadline. We have made this clear to them.
The case filed by Mahalaxmi Life Insurance against the board is pending in the Supreme Court. What went wrong in the license issuance process?
We decided to cancel the application of the company on August 23. Earlier on August 21, the company submitted an application asking us to extend the deadline mentioning its inability to meet the minimum paid-up capital requirement. We replied that the issue related to the license was already decided and the process would be cancelled if they failed to meet the statutory requirement in due time. Then they went to the Ministry of Finance (MoF) seeking help. Now, they are in the Supreme Court and the court sent us a 15-day clarification notice. IB has already forwarded the clarification to the court. The hearing for the case is scheduled for February 19 and we will follow whatever the court decides.
Section 4 of the Insurance Act, 2049, has given IB all rights related to the issuance of licenses and setting the terms and conditions for the licensing process. The companies are required to agree and sign the terms and conditions before they receive our approval. The company which has filed the court case against us is now arguing that the terms and conditions are wrong.
Insurance companies are reeling under the acute shortage of trained and qualified human resources to carry out their operations. What will the role of IB be to help produce the required workforce for the insurance sector?
A very competitive human resource equipped with masters’ degrees in a range of business management subjects is available in Nepal. But our companies are very traditional. Instead of giving job responsibilities to the fresh graduates and training them, the companies poach employees from their competitors at higher salary levels. This has created a conflict between the companies and jobholders as many insurers have not issued release letters to their employees who have resigned from their posts to join other institutions. This has resulted in employees filing cases in the Patan High Court against their employers.
We have also received carbon copies of the cases filed at court. IB will not be interfering in such disputes. Nevertheless, we have been closely monitoring this problem since October. I have even consulted with CEOs of insurance companies suggesting them to hire and train new staff by putting them in pigeonholes for over a month instead of poaching employees from competitors.
This particular trend used to prevail in the Nepali banking sector about two decades ago. It declined as banks focused on hiring and train fresh graduates. The trend, though, has been reducing in the insurance sector in recent days.
What is IB doing to start the Insurance Academy?
First, an insurance training institute will be started which will be later transformed into an academy. A committee to establish the institute has already been formed under my coordination. A CEO each from life and non-life insurance companies will join the committee soon. The institute will soon start training courses.
What are the reasons behind the delay in the amendment of the Insurance Act, 2049? Where has the process reached?
Some factors are behind the delay in the amendment process,the stability of the government being one of them. With the changes in government, ministers have changed and the draft has gone through different hands notably slowing down progress.
There have been weaknesses also from our side. The leadership of IB needs to work aggressively in this regard. Within the first two months of my appointment, I requested the former finance minister Krishna Bahadur Mahara to expedite the amendment process. He forwarded the draft to the Ministry of Law, Justice and Parliamentary Affairs (MoLJPA). There was some progress in the amendment process, but the election process slowed it down. I have recently heard that the draft has been returned to MoF from MoLJPA with legal suggestions.
Similarly, a committee has been formed according to a recent secretary level decision at MoF. The committee is mandated to provide suggestions on what should be incorporated in the Insurance Act as per the constitutional provision of the policy arrangement and operation of insurance in provincial and central levels. We will submit the report to MoF as soon as possible. After the formation of the new government, suggestions will be forwarded to the cabinet and then to the parliament.
Concerns have been raised regarding the utilisation of money IB has been collecting as one percent of the premium income of insurance companies. How much money has been collected till date? How is it being utilised?
Till date, over Rs 2 billion has been deposited in IB’s bank account as insurance premiums. IB has devised an investment policy to utilise the money. We have been maintaining a high level of transparency and I am leading a committee for the utilisation of the money. IB has been investing the amount in banks as fixed deposits that the banks receive through a bidding process. We have prepared indicators according to the categories such as capital adequacy and non-performing asset (NPA) levels set by the Nepal Rastra Bank. The committee evaluates the proposals of the banks as per the indicators to see if they meet the eligibility criteria or not. Meanwhile, the board has also set a limit for investment.
Furthermore, some part of the money will be spent in constructing a new office building. We have 10 ropanis of unused land here where a modern complex will be built. Likewise, we want to make it clear that Rs 20 million has been allocated this year for staff training in our budget, of which only Rs 5.5 million might has been spent till date. Abroad trainings and exposure to international insurance practices are important in order to achieve our aim of institutional capacity enhancement. The staff are being sent abroad according to the need and the money has not been misused. After my appointment, I have participated only in two international programmes.
Currently, there are Rs 50 billion and Rs 20 billion respectively in the life and non-life insurance funds that can generate us Rs 700 million a year. The one percent levy of insurance premium might have been provisioned in the Insurance Act, 1992 due to the small size of the insurance sector and lack of financial sources for IB to operate when the law was formulated. However, with the substantial increment in paid-up capital levels of the companies and rapidly expanding insurance market, we have proposed to reduce the insurance premium to 0.5 percent from the existing one percent in the new Insurance Act. I think the insurance premiums need to be set at 0.25 percent for life insurance and 0.5 percent for non-life insurance companies. This will benefit the general policyholders as the bonus rate of the insurance policy will increase.
Where has the process of formulating the Insurance Broker License Directive reached?
The preparation of the directive is currently in the preliminary phase. Presently, our focus is on amending the Insurance Act. Nonetheless,we have felt a need to formulate and implement the Insurance Broker License Directive in order to bring the activities of all insurance brokers into a legal framework. Foreign insurance brokers have been working in Nepal without paying taxes to the government. If we are able to produce Nepali insurance brokers, they can work in other countries and also bring foreign business to our re-insurance company.
The ongoing health insurance scheme implemented by the government is not under the purview of IB. In this situation, how can such a programme be called “insurance”? What is the board doing to incorporate it under its purview?
The programme is moving ahead according to the government’s decision. And IB, as the insurance sector regulator, is also a part of the government. Nevertheless, we had earlier suggested that the programme would bring confusion and difficulties if it is not brought under our purview. During a discussion with the former finance secretary, we emphasised that the programme has to be brought within the ambit of IB and the scheme has to be run through insurance companies in due course to avoid confusions and difficulties that are likely to come in the future. We have advised for our representation in the governing body of the Social Health Security Program which has been implementing the government’s health insurance initiative. IB has suggested that it can certify the health insurance policies issued by the Program according to which the policies will be re-insured by Nepal Reinsurance Company to make them insurance policies in a true sense. Otherwise, the policies will only be health schemes rather than the insurance policies.
Is IB ready if the government asks it to bring the health insurance scheme under its purview?
The capacity of the board at present is largely insufficient in case the government asks us to take over the health insurance programme. If it is proposed, then we will ask the government to conclude the amendment process of the Act as soon as possible. The amendment draft has incorporated a provision about third-party administrators (TPA). We can issue licenses to TPAs after the Act comes into force. TPAs will function as bridges between insurers and insured creating their own proper software for the documentation process, issue insurance policies and provide the policyholders with digital cards that can be used in the hospitals for cashless payments. Thus, passing that act will open the door for us to bring in the health insurance programme in our ambit in the future after readying the required infrastructure.
How successful has the crop insurance scheme been? Are there any problems in settling claims?
The crop insurance scheme has been progressing in a good manner. We have received no complaints regarding the settlement of claims. However, insurers say that the government hasn’t been able to disburse the crop insurance subsidy on a timely basis. We have already notified the concerned ministry about this issue.
Where has the initiative of the policy arrangement of “bancassurance” with NRB reached?
At present, there is only one distribution channel for selling life insurance products which is through insurance agents who can be either individuals or institutions. We need to adopt other options such as digital channels or desks of banks to sell the insurance policies. If all three distribution channels are used, broad insurance coverage can be achieved. Currently, insurance companies are selling insurance products through the corporate agency of banks. Even if banks call it ‘bancassurance’, it isn’t actually so because they cannot operate separate insurance desks. Insurance companies will be able to cater widely by capitalising on the broad reach of banks.
For this to happen, NRB needs to formulate and implement a policy that allows banks to practice ‘bancasurrance’ in a real sense. Once the policy is in place, we will issue bancassurance licenses to the BFIs. We have already prepared a circular for introducing ‘bancassurance’. Earlier, I suggested the NRB governor to provision it in the Monetary Policy.
There is currently only one re-insurance company in Nepal. Won’t this create a monopoly in the market?
The Nepal Re-insurance Company (Nepal Re) is currently the sole reinsurer in Nepal. It will be a risky affair if it seeks to reinsure every risk all alone. For instance, the damage claims due to the 2015 earthquake amounted to Rs 16 billion. We don’t have the financial capacity to compensate such a large amount.
What we need to understand is risks should be spread out between the Nepali insurance companies, the domestic reinsurer and foreign reinsurers. It was due to spreading out the risks that we were able to recover insurance claims amounting to Rs 13 billion out of Rs 16 billion in claims settlement.
The need of the hour is to increase the financial capacity of Nepal Re. If it attempts to hoard all re-insurance by itself, the company will enter into a risk zone. Instead the entity should focus on seizing international re-insurance opportunities. Yet, I think the existing re-insurance company is enough for the time being.
What else is IB doing to increase the access of insurance in Nepal?
Our focus is on making the insurance sector a trustworthy area of business. It is why we have intensified the supervision of the companies. IB has been working for timely settlement of claims. We have mandated insurance companies to provision 115 percent of the claim once a claim is made. Our efforts are also on creating public awareness regarding the benefits of availing insurance services. A few months ago, we directed non-life insurers to spend 25 percent of their total administrative expenditure in advertising, business promotion and awareness campaigns. We are closely monitoring if the companies are working to this end or not. The coverage of insurance will also expand in Nepal when the government will actively start insuring its assets like buildings and facilities.
What is IB doing to reform the two government-owned insurance companies that aren’t performing well?
We are working towards financially reforming Rastriya Beema Sansthan and Rastriya Beema Company. Their present condition has been a major headache for the board. The financial report of the last five years of Rastriya Beema Sansthan is with the board and it doesn’t meet the statutory requirements. Also, their attitude is unacceptable. Whenever we take a tough stance, they try to create an impression that they are under MoF’s jurisdiction as their top officials are appointed by the ministry, and IB has nothing to do with them.