Kathmandu. KATHMANDU: The Insurance Authority of Nepal (IBA) has fully implemented risk-based capital (RBC) and solvency directives to strengthen the financial health and risk bearing capacity of insurance companies.
This system provides for the replacement of the traditional fixed capital structure and capital based on the actual risk that the company will carry. Some important points have been clarified in the guidance by the Authority for major queries and clarifications regarding RBC.
As per the guidelines, insurance companies will have to submit RBC reports within 90 days of the end of the financial year. It has been extended for 120 days (mid-November) for the transitional period.
Every investment made by companies will now have a capital burden on the basis of risk. Fixed deposits kept in the bank are also considered to be risk-sensitive due to fluctuations in interest rates. Nepal’s RBC system complies with the international standard of solvency 2, which is based on a confidence score of 99.5 percent. Valuation of immovable property: Certain intangible assets and properties held by affiliated parties have been given zero value for solvency purposes so that there is no impediment to the claim payment of the insured.
The RBC provisions make various provisions for the protection of the insured or the insured:
1. Ensuring claim payment: The RBC system ensures that companies have more capital than they have risked. This reduces the risk of bankruptcy in the event of a major calamity or high claims, and the insured can feel secure.
2. Financial Transparency and Accountability: The solvency position of a company is now mandatorily required to be certified by a Chartered Accountant and the Chief Executive Officer. This makes the real situation of the company clear to the insured and the regulator.
3. Sustainability of bonus: Life insurance companies should now look at the actual profit and sustainability of the company while announcing the bonus to the insured. This ensures that the bonus will be distributed only in the future without causing financial crisis to the company.
4. Prepare for the future: Companies now have to set aside a separate catastrophe reserve for major risks such as earthquakes and adequate funds for other future liabilities, which provides long-term protection to the insured.
NEA aims to make Nepal’s insurance market more professional, transparent and insurance-friendly with its risk-based asset guidance and framework.
