Surya Prasad Silwal is the Chairman of Nepal Insurance Authority - the regulatory body of insurance sector in Nepal. In an interview with New Business Age, Silwal talked on a wide range of issues related to the Nepal insurance sector. Excerpts:
How do you see your tenure so far as the head of insurance sector regulator?
We implemented changes in insurance regulations to curb malpractices in the industry. While we were not fully successful, there were some positive outcomes. One issue we addressed was the delay in the payment of claims.We also discovered that some companies had insufficient paid-up capital for the level of risk they were taking and were selling policies without proper risk analysis. To combat unhealthy competition, stricter rules were put in place. The regulator is now working to ensure that companies do not have unpaid claims for more than a year.
We found that companies were engaging in unhealthy competition due to a lack of new business opportunities. To address this, we compelled them to expand their business. When I took office, only 27% of the population was insured. It has now risen to 41%. To further improve the industry, we also encouraged companies to pursue mergers and acquisitions. This strategy has been successful, as six companies have already merged to become three, and we expect to see more M&A activity in the near future.
We attempted to promote microinsurance. However, we did not achieve the desired results despite our efforts. As a result, we had to licence microinsurance companies. New microinsurance companies will be starting soon. Additionally, a lot of money was going out of the country for reinsurance, so we established two reinsurance companies to prevent this outflow. Despite some negative reactions, this has been beneficial. We also have plans to establish insurance risk pools, such as aviation pools and hydropower pools, so that we can better manage risks within the country. This will also create new business opportunities for companies.
We discovered that companies were reinsuring their risks with unrated companies, which could put them at significant risk. To address this, we now prohibit companies from reinsuring with companies without credit ratings. We have also implemented new laws and are drafting new regulations to reflect the current context. However, there is still a need to raise awareness about the importance of insurance. The government at all levels should understand the importance of insurance and implement necessary policies.
You are encouraging mergers despite licensing new companies only recently. Rumours of licensing new companies often do rounds. Don’t you think it is contradictory?
The law allows us to issue licences to new companies only if there are sufficient grounds. Even though the number of companies have decreased due to M&A activities, we will not licence new companies immediately. However, this does not apply to microinsurance companies, which have different regulations. The law specifically states that these companies cannot operate in Kathmandu and have specific guidelines for their operations. They will have to work with local governments to raise awareness about the need for insurance in rural areas, bring backward people and their businesses into insurance coverage, and create business opportunities for themselves. If they are successful in achieving these objectives, our decision to licence microinsurance companies will be justified.
Existing companies were also providing microinsurance services, weren't they?
Despite our encouragement and efforts, the existing companies failed to perform as expected in the microinsurance business. We asked them to focus on microinsurance about eight years ago, but they were unable to make a significant impact. Their contribution to the total microinsurance business is only around 1%.
You mean that existing companies didn’t adhere to the regulator’s instructions?
We cannot fully blame the insurance companies for lack of progress in microinsurance. When we licensed them to do insurance business, we did not specifically require them to focus on microinsurance. While we can request them to do so, we cannot force them to do so. The cost of doing business in microinsurance is higher than traditional insurance. We cannot impose stricter regulations without first creating an enabling environment. The insurance companies were unable to create successful microinsurance businesses even in the districts assigned to them, leaving us with no option but to seek alternatives.
We conducted necessary studies and gathered input from all stakeholders before taking the decision to licence new microinsurance companies. Based on the suggestions provided, we felt that one microinsurance company in each province would be sufficient. Once these companies begin operations, we expect to see results. We also expect that insurance companies will now begin embracing information technology, as it is no longer possible to conduct business in traditional ways. By studying the success of IT adoption, this can be replicated throughout the country.
NIA acknowledges that there may have been mistakes in the past, but we are now working to ensure that such issues do not occur in the future.
You have been promoting M&A activities. Is there any study or research on its impact? There are concerns that mergers, mostly carried out forcefully, could lead to complications in the financial markets?
The NIA has not forced companies to undergo mergers. The companies have decided to do so on their own. We have only advised them that due to increasing risks in the market, they should increase their capital. We have set a capital floor five-seven years ago that now looks small given the size of the market and the risks companies have to bear. As the business expands, so do the risks. Therefore, companies have to increase their risk-bearing capacity by increasing their paid-up capital.
In the next two-three years, we are adopting a risk-based capital approach, which means that companies should have enough capital to cover the risks of all their transactions. At the moment, we are looking at the synergy between merging partners. While there are pros and cons to mergers in every sector, it can help reduce business costs. Companies can use this to create opportunities for new business and adopt information technology. I agree that there may be some drawbacks too.
NIA has restricted insurance companies from issuing rights shares to meet the capital requirement. But, it permitted one company for the rights issue. Isn't it discriminatory?
There are different types of companies, with varying limitations on what can be done. For example, when Life Insurance Corporation (LIC) was established, the government decided that promoters will have 55% stake, while local institutional investors and the general public were allotted 25% and 20% of shares, respectively. As an Indian company, we cannot force it to undergo a merger. Similarly, the Nepal Life Insurance Company (NLIC) and NLG Insurance Company (NLG) were once the same company and special decisions were made for them.
NIA is not against allowing companies to raise capital through rights issues. We only are making sure that it does not distort the market. We would consider a rights issue of 25-30% to be acceptable, but only after companies have submitted their capital plans. We advise companies to first explore options such as bringing in investors or converting unused assets into capital. If companies still fall short of capital after these measures, then rights issues can be considered as an option.
The Authority recently revised the investment guidelines for the insurance companies. The companies have stood against the point that requires to lower the portion of the deposits that they can park in the banks. What do you say?
I do not have knowledge of any company's dissent regarding the policy. The rules and policies are formulated based on the inputs and suggestions of all stakeholders, including insurance companies themselves. Our decision aims to achieve two objectives. Insurance companies have been keeping a lot of their money in banks in the name of safety of their money. But this is not the appropriate use of their funds. We haven't seen a significant direct contribution of the insurance sector in our GDP. Therefore, we have directed insurance companies to invest a certain percentage of their cash reserves in different sectors where they can get better returns than in banks. Companies can invest in the hospitality sector, which is performing well, or form a subsidiary company and invest in the real estate sector. These investments should be reflected in the balance sheets of the companies. They must ensure that investment is done after conducting necessary risk analysis. If their reserves alone are not sufficient, they can form a consortium of different companies to make the investment. This practice is followed worldwide.
Covid insurance settlement issue has not been addressed yet. Don’t you think this long delay on insurance claim settlement will erode the credibility of the insurance sector?
I understand that policyholders are suffering and the issue with the COVID-19 insurance policy is a complex one. The problem arose because it was something that was forced upon the companies by the government. Despite this, the companies have paid even more than their liability. The authorities, who promised to bear a certain percentage of the claims, should fulfil their commitment. NIA had to lobby very hard for the release of the amount from the authorities concerned. After lobbying for about a year, we received Rs 1 billion. We asked companies to chip in about 25% of the liability, and we also contributed Rs 140 million. However, the Nepal Reinsurance Company, which is supposed to bear about 12% of the risk, is not taking any action. We had around Rs 1.88 billion at our disposal, which could settle claims of about 18,000 people. Of that, we had already settled claims of about 14,000 people. We are still lobbying hard with the government to release the amount that it promised. This has been a learning experience for all of us involved. Nepal was one of the few countries that insured its people for a pandemic.
Do you think the claims will be settled?
It will definitely be settled. We all should realise that it is something related to people's trust. The COVID insurance policy was brought by the government, not the companies or the regulator. Therefore, the government should fulfil its commitment. I understand that the government cannot bear all the responsibilities because of the current economic situation. We have provided a solution to the government. If the government bears 55% of the insured amount, we will manage the remaining 45% from our side. We have already made the current government aware of this. Hopefully, the government will come up with a policy to address the issue.
You have made it mandatory for insurance companies to provide certain reinsurance business to a recently established private reinsurance company? Is it good for a regulator to tell insurance companies which reinsurance company they should choose?
Let me clarify. We have not told insurance companies to give business to a certain reinsurance company. After two reinsurance companies were established in Nepal, we made changes to the policies. As per the existing laws, companies must reinsure 20% of their total business in Nepal. We only told companies to split that direct cession between two companies. This arrangement is for five years only and the direct cession gradually decreases and becomes zero after five years. Companies can then decide to give business to whichever reinsurance company they prefer. We have only told companies that certain business can be kept within Nepal. We haven't named any particular company. This is something that the ceding companies have to decide. Reinsurance companies should generate business on their own. We will ensure a level playing field in the sector. As a regulator, we do not recognize government-owned companies, all companies are treated equally.
Cases of policy surrender have been on a rise. It is a loss for both policy holders and insurance companies. What is the regulator doing to address this problem?
Yes, it has been a problem. But if you look at the data, you see the number is gradually declining after we introduced a provision that bars policy surrender within three years. As it has been about a year since we brought the provision, we will start seeing results soon. As one individual could become an agent of more than one company earlier, there was a conflict of interest. Some of them were found handing data from one company to the other. I think 90% of the problem can be addressed by making agents work for one company only.
It has been some months since the Beema Samiti was converted into Nepal Insurance Authority. What has changed?
The new Act recognizes NIA as the apex body that advises the government on matters related to insurance. It is the overall authority of the insurance sector. NIA has to ask the government only on issues related to creating postings and fixing remuneration and facilities of staffers. It can decide on its own on all other issues.
The new insurance law caps the terms of the CEO to a maximum of two terms. Some say the term cap will apply only after the law comes into force, while others say the terms CEO have served will be counted. What actually is the case?
There is no confusion over the term. The new Act takes ownership of provisions mentioned in Insurance Act, 1992. The term of CEOs, therefore, will be decided as provisioned in the Act.
The new Act has still maintained a high level of service fee that it collects from the insurance companies. The money thus collected is very huge and sitting idle with the Authority or used in unproductive expenses. What is the situation?
We have lowered unnecessary expenses. There have been no foreign junkets since I assumed office. We have lowered service fee to 0.75% from 1%. It may still look high, but the amount is distributed to different headings. For example, 33% of the service fee goes to the insurance development fund. Likewise, some funds also go to the treasury of the federal government.
This money was supposed to be used in promoting insurance among the people and to train human resources. Why only a small fraction of it is used for these purposes?
We have plans for this as well. NIA is working to expand the Insurance Institute of Nepal (IIN) out of Kathmandu as well. It would help to train more workforce required for the industry. The Insurance sector will prosper only if we have qualified agents. Very soon, we will start taking exams of insurance agents through a computer software so that there is no room for irregularities. We are also thinking of starting an Insurance Academy of Nepal to run academic courses related to insurance. We have applied to universities for affiliation. The process will expedite once we get the affiliation.
The Insurance Authority has put a cap on the general expenses of the insurance companies which have reduced their advertisement and promotional expenses. Won’t it affect insurance literacy?
We had to do something because we realised expenses in those heading were distorting the overall market. We have asked insurance companies to limit their expenses to a certain percentage of their earnings. The expenses of most of the companies are within the limit. Some companies are involved in activities that are distorting the market. We have told companies to set aside 1% of their earnings to CSR activities and 2% of the earnings to professional development of the employees. Some companies are not following this. It is true that we have not been able to look at all this because of other pressing issues. Now we will make sure that companies adhere to our instructions and guidelines. As instructions alone are not bringing results, I think it is high time we swung into action.