Poor Corporate Governance in Some Insurance Companies

Kathmandu: Industry information has confirmed that some insurers are found to be involved in violation of corporate governance. The directors, CEOs are misusing the investable fund by funding their own projects.

It is learnt that the directors and chief executive officers of some insurers have invested millions of rupees in companies with their own family members as promoters or directors.

The poor monitoring of the regulatory authority Insurance Board is supposed to be favourable for such group.

‘Insurers Investment Directives 2075′ sets out the areas in which Insurers can invest and the limits of investment. Life and non-life insurance companies are allowed to invest within the prescribed limits.As insurers can invest within the approved limit, there is no obligation to take prior approval for investment.There is a provision to inform the Insurance Board in writing in case of failure to invest within the approved limit. Similarly, in case of investing more than the sanctioned limit, there is a provision of mandatory pre-approval from the Insurance Board.

Insurance companies can invest within the pre-approved limits without violating the provisions of Insurance Act 2049, Insurance Bylaws, Directive on Investment of Insurers 2075, Directives 2075 on Institutional Good Governance of Insurers, Prevention of Financial Investment in Asset Laundering and Terrorist Activities, 2075.

Insurance Board, the regulatory body for the insurance sector, has implemented investment guidelines for insurance companies, both life and non-life.  As per the Investment Directive 2075, there’s an arrangements for the fixed deposits of banks and financial institutions, savings certificates, debentures, ordinary shares of companies listed in the secondary market, mutual investment funds, agriculture, tourism and hydro power infrastructure.

Insurers investment has also been regulated by Insurer’s Corporate Good Governance Directives 2075. In particular, it is forbidden to invest in any company or project that is contrary to good corporate governance. Paragraph 9 of Insurer’s Corporate Good Governance Directive 2075 lists the tasks that insurers should not do.

Article 49 (1) (f) prohibits any kind of investment in any company, firm or organization in which its promoters shareholder, any member of the board of directors is a director or such member or member of his family has financial interests.

Insurers can invest up to 5 percent of the total technical reserve in real estate and up to 20 percent in tourism, hydropower and agriculture. Insurer is investing in these two provisions in a way that conflicts with financial interests.

It has been found that the autonomy given by the directives has been misused by some Insurers. Some insurers have invested in the company in which the promoter shareholder, director or promoters of subsidiary of the company is involved.  Institutional discipline has been observed to some extent in investing in fixed deposits, savings certificates, bonds and collective investment funds of banks and financial institutions.

However, a chartered accountant has complained that while investing in tourism, hydropower, agriculture or other sectors, the investment is being made in a way that conflicts with the financial interests of the insurers’ promoter or directly violates the institutional discipline

‘It is not easy to evaluate the investment one by one’, said a chartered accountant who is experienced in internal audit of insurance companies, ‘But some insurers have invested in conflicting financial interests.’

Specially with life insurance companies having a large amount of money to invest in life insurance funds, the implementation of corporate good governance within life insurance companies is in doubt.  According to the Insurance Board, the life insurance fund of life insurance companies currently stands at over Rs. 375 billion. It means Rs.75 billions is available for investment in tourism, hydropower or agriculture for life insurers. Similarly, non-life insurers can industry has a total Rs.3 billion to invest in such projects.

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