Kathmandu. The Insurance Authority of Nepal (BEE) has recently introduced a directive on Risk Based Capital (RBC). In order to make the general public and stakeholders clear about this new system, the Authority has released a book with answers to frequently asked questions.
Traditionally, insurance companies had to keep a certain amount of capital according to the size of their business. However, in a risk-based system, the capital should be kept on the basis of how much risk the company bears. Companies that take a lot of risk and take less risk have to reserve capital accordingly. So that the insurance company is financially strong in case the claim has to be paid tomorrow.
Report and TAG_CLOSE_span_32 Time Limits: Insurance companies are required to submit the RBC report to the Authority within 90 days of the end of each fiscal year (120 days from the current transitional period or by mid-November).
Capital Adequa TAG_CLOSE_span_31 cy: The solvency margin of a company should be at least 130 percent. This has been decided based on the international practice and the situation of the Nepali market.
Risk Assessment: Capital weights are calculated by taking into account the fluctuations in the company’s investments, real estate, and other assets. If an asset cannot be immediately sold and converted into cash, such assets are not recognized in the capital calculation.
Future Profits and Bonuses: Potential future profits cannot be shown as capital right now because they are uncertain. However, the announcement has to be made only after checking whether the bonus given to the insured is sustainable or not. The appointed actuary must verify the technical aspects of the company and the risk calculation.
Simple definitions of other technical terms included in the FAQ book are as follows:
1. Solvency: is the ability of a company to pay claims to its customers.
2. Technical Provision: is the money set aside for the claim amount that the company will have to pay to the customer in the future.
3. Market Consistency: is a way of valuing assets and liabilities according to the actual value of the market.
4. Tier 1 Capital: is the company’s highest quality capital, which is available to cover losses at any time.
5. Mark-to-Model: is a method of calculating the potential value of an asset using a mathematical formula if its market value is not immediately known.
