Kathmandu: The Insurance Board, in collaboration with the World Bank, has started a study of risk-based capital. The board is conducting the study with the technical assistance of its own actuary and the World Bank.
The formula for risk-based capital has been developed as an additional tool to assist regulators in the financial analysis of insurance companies. It looks at companies’ credit risk, operational risk, market risk and more. Its main purpose is to have capital according to risk. By calculating the risk weighted capital of the companies, it will help the Insurance Board to determine the capital size of Insurers.
Risk based capital has many modalities. The IB will decide which of these modalities to adopt. Nepal follows the Canadian model to a large extent when formulating insurance policy. After that, some modalities of India have been copied. Apart from this, there are examples where the IB has always followed the working culture of Nepal Rastra Bank.
An official of the IB informed that it will take another 6-7 months for the report of the current study to come. Even after the report is made, the board has to do the next step of homework to implement it.
Nepal Rastra Bank has set separate criteria for ‘Capital Adequacy’ of banks and financial institutions. For this, credit risk, operational risk and market risk of banks have been looked at. Similarly, insurance companies have their own inherent risks. These risks need to be identified and minimum standards set. To some extent, the IB also follows the same criteria, say the employees.
The IB has alleged that the insurance companies have recently proposed to issue shares with the intention of influencing the secondary market. In this context, it has a plan not to allow any insurance companies to issue shares during the current fiscal year.