Guidelines for Risk Based Capital of Insurers in the Offing

Kathmandu: The Insurance Board(IB), in collaboration with the World Bank(WB) has held an interaction with the CEOs of the insurance companies to get feedback on risk-based capital.

The interaction program has been held as a part of the ongoing joint study of the IB and the WB. The IB is in preparation to implement RBC with the technical assistance of the WB.

The CEOs requested the organizers to make necessary arrangements for technical assistance to develop expertise among insurers and implement Risk Based Capital.
The participants of the program made their commitment for the RBC gradually once the modalities gets finalized by the IB. The IB is making necessary preparations to develop and implement guidelines for risk based capital for insurance companies.

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 IB 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.

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 right shares with the intention of influencing the secondary marketr rather strengthening their risk bearing capacity.
In this context, it has a plan not to allow any insurance companies to issue shares during the current fiscal year.

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