Nepali market needs strong insurance companies

Surya Prasad Silwal assumed the role of Chairperson of the Nepal Insurance Authority (NIA) in February 2021, and his tenure has been marked by transformative policy changes in the insurance sector. Under his leadership, NIA’s strategic approach has been focused on sectoral consolidation for creating bigger and better entities. The regulator has increased paid-up capital for both life and non-life insurance companies and has been asking the companies to go for mergers as many of them are unable to meet the new capital requirement.

As the insurance sector undergoes this transformation, the HRM caught up with Silwal at his office in Kupondole, Lalitpur. In the interview, he shared insights on the policy changes, consolidation drive in the insurance sector, and NIA’s plans, among other topics. Excerpts: 

It has been over two years since you took the leadership of NIA. What major achievements for NIA would you highlight in this period?
In an effort to add momentum to the stagnant insurance sector, we brought several changes. The corporate governance in the sector was weak which resulted in unhealthy competition among the companies. NIA issued circulars and directives, conducted inspections, and took necessary actions to improve the governance of the insurers. As a result, the governance in the insurance sector has improved significantly, I feel with 85 percent effectiveness.

Previously, even the government showed little interest in insurance. In the past two years, the government has started to understand the importance of insurance. This has been reflected in budget speeches as providing insurance coverage to citizens has been prioritized. Also, the policies and programs of the government now include five to six points addressing insurance. As a result, people have become more aware of the significance of insurance.

When the government lacks understanding about insurance, it becomes challenging for the public to comprehend its importance as well. Hence, it is crucial for the government to grasp the concept of insurance and incorporate it into policies.

We have put efforts to raise awareness, reaching out to 225 local units and engaging in discussions about insurance. I have personally spoken with seven chief ministers last year to emphasize the significance of insurance. We have expanded our reach to all six provinces except Bagmati, and our goal is to ensure that access to insurance expands to every nook and corner of the country. Insurance is particularly crucial for marginalized and vulnerable communities. By working directly with local units, we are striving to provide insurance coverage to those in need.

Currently, the size of the Nepali insurance sector is valued at Rs 700 billion. Given Nepal’s geographical location in a high-risk zone, getting insurance coverage becomes even more important for the people. Therefore, I urge the government to prioritize insurance and distribute the risk rather than bearing it entirely. The government should not overlook the potential liabilities associated with assuming excessive risk.

It is important to note that the role of banks extends beyond developing and strengthening the economy. The insurance sector plays a vital role as well, as even banks themselves are insured.

NIA started the consolidation drive in the insurance sector after you came to the helm of NIA. What factors led NIA to start the drive for mergers and acquisitions (M&As) in the sector?
Given the size and geography of Nepal, the number of insurance companies was excessive, leading to unhealthy competition and difficulties in settling claims. To address this issue, consolidation became a crucial step. As a result, the paid-up capital requirement for life insurance companies was raised to Rs 5 billion and Rs 2.5 billion for non-life insurance companies.

By increasing the capital requirements, our intention was not to force mergers but to enhance the risk-bearing capacity of insurance companies. When companies have adequate capital and follow good practices, they can effectively settle claims in a timely manner. Moreover, this measure has reduced unhealthy competition and encouraged companies to invest in research and development (R&D) to focus on bringing innovative insurance products and solutions. The positive outcomes of these efforts are already apparent, with 17 companies having merged so far. This process will continue until the objectives of the consolidation are met.

To determine the optimal number of insurance companies required for the Nepali market, we are actively collaborating with Tribhuvan University for an in-depth study. If you ask me, the Nepali market needs strong insurance companies, five each in life and non-life segments, given the size and demographics of the country.

NIA had warned to take action against those insurance companies failing to meet the new paid-up capital requirement by Chaitra. But why was the deadline extended lately?
Regarding the companies that are already in the process of merging, we will carefully consider their situation. Currently, there are two companies, Nepal Insurance and Prabhu Insurance, that initially expressed their intention to go for a merger but later decided to backtrack. One company has proposed selling its property to increase capital, while the other plans to bring in a foreign investor to meet the new capital requirement. We have set a deadline for Asadh (mid-June to mid-July) for these companies. If they fail to fulfill their commitments to increase capital, we will reassess their situation accordingly.

To facilitate the insurers to raise their paid-up capital, we are also considering allowing companies to issue the right shares. This approach will be implemented in a manner that does not significantly impact the market. We will examine the unaudited balance sheets of these companies as of Asadh and consider their profits to determine the amount of capital they will require. However, we will limit the issuance of right shares to a maximum of 33 percent.

You have been expressing publicly that the M&As will bring new synergy to the insurance sector. What sort of synergy do you think the consolidation will bring?
The merger of insurance companies has several positive effects and creates synergy within the sector. First, the increase in paid-up capital strengthens the financial foundation of the merged entity. This enhanced capital base allows the company to have a greater risk-bearing capacity and ensures the availability of resources to invest in new products and services.

Likewise, the merger brings together the organizational cultures of the merging companies. This alignment of cultures promotes better coordination and collaboration among employees, resulting in increased efficiency and effectiveness in delivering services. With a larger workforce, the merged entity can leverage its skills and expertise.

Mergers also enable companies to expand their market reach. By accessing new markets and reaching customers that were previously untapped, the merged entity can seize new business opportunities. This expansion is often accompanied by research, innovation, and the adoption of new technologies, allowing the company to offer a wider variety of services to its customers.

Mergers contribute to a stable market environment. The consolidation of companies leads to a more balanced competitive landscape, reducing unhealthy competition and promoting long-term sustainability. A stable market environment provides greater confidence to customers and stakeholders, ultimately benefiting the entire insurance sector.

There can also be downsides to M&As such as dissatisfaction among staff in terms of adjustments in the merged entities. Also, M&As can also give leverage to a few individuals and business families to dominate the entire sector. How has NIA paid attention to avoiding such situations?
After the mergers, the companies have avoided adjustment of salaries and positions of their staff as per our instruction. The companies have decided to maintain existing salary structures to ensure stability and continuity throughout the merger process.

To align the workforce with the merged entity’s operational requirements, companies often conduct evaluations to determine the optimal number of employees needed. As part of this evaluation, voluntary retirement schemes were offered to employees, giving them the option to exit the organizations if they want. Fortunately, the mergers have not encountered significant problems.

It is not that a handful of business families will be controlling the entire insurance sector. If such is the case, the sector would’ve been in the grasp of a few businesspersons. There are diverse investors in different insurance companies.

Rules and regulations are there to limit an investor from holding more than a specified percentage of ownership which has been set at 15 percent. Also, regulations prohibit a single life insurance investor from investing in another life insurance company. These regulations aim to promote fairness and healthy competition and prevent potential conflicts of interest in the companies.

NIA already instructed insurers to move to risk-based capitalization by 2084 BS. Why was it necessary to introduce a policy to increase regulatory capital in that situation?
In the insurance sector, there has been an increase in risk, particularly due to the increased climatic risks. It is essential for insurance companies to issue policies that align with their available resources. This means conducting a thorough assessment of their resources before engaging in business activities.

We are actively raising awareness among insurance companies about the importance of aligning their business practices with their available resources. In addition, we are in the process of developing directives that will provide guidelines and instructions to companies regarding this matter. These directives will emphasize the need for companies to carefully research and analyze each portfolio to understand and address potential risks.

NIA drafted the National Insurance Policy after you came in as the Chairperson. What is the progress in bringing the policy?
The draft, which was initially taken to the cabinet by the former finance minister, was said to be endorsed by the government. We later knew that it was not endorsed. We have requested the finance minister and finance secretary to take the necessary steps to endorse it. Once endorsed, the policy will pave the way for the establishment of an inclusive ecosystem in the insurance sector.

The policy will provide direction, guiding the development and implementation of programs. It will create awareness and drive collaborative efforts among the government, provincial governments, and relevant stakeholders. Regular monitoring and evaluation will ensure progress and necessary adjustments. The policy will contribute to the development and improvement of the insurance sector.

Insurance companies have stopped selling agricultural insurance policies and claims settlements saying that the government has failed to provide the funds for the subsidy of agri insurance. As the regulatory body, how is the NIA working to resolve this issue?
Insurance companies have halted the sale of agricultural insurance policies and claims settlements, citing the government’s failure to provide funds for agricultural insurance subsidies. It is important that the Ministry of Agriculture and Livestock Development acknowledges and addresses this issue. In agricultural insurance, credit insurance practices should be reevaluated. Over the past two years, companies have been providing insurance but are not paid by the government, which poses a significant risk.

Actually, this matter is not related to NIA. It requires a comprehensive mechanism that ensures insurance providers receive timely claims. There is a separate board at the ministry to analyze the insurance, but I do not know how it is working.

At present, there is a pending claim settlement of Rs 3 billion, and it is the government’s duty to provide subsidies amount to the insurance companies. It is unacceptable that the government has not fulfilled its responsibility in settling these claims. This issue must be solved.

In countries like India, there are separate dedicated companies for health insurance. Do you see any possibility of such companies operating in Nepal?
The current situation calls for the implementation of insurance principles and the promotion of digitization for cashless systems. Let’s take an example of the hospital sector. To streamline the process of hospital treatments, a third-party aggregator should be established. When visiting a hospital, the staff can simply access and enter the patient’s details from their insurance card, allowing for seamless treatment. Discussions are underway to facilitate the involvement of a third-party aggregator.
Also, the cost of insurance products needs to be reduced to encourage people to purchase the policies. Unless the prices are competitive, there will be a lack of interest from potential buyers. The trend has shifted towards shorter-term policies rather than lifelong policies. Therefore, insurance companies should adapt and offer policies that cater to the needs of individuals, while also ensuring that the entire process is digitized.

For the first time in the country, microinsurance companies are gearing up to provide their services. How will the micro-insurance companies help in the expansion of insurance services?
The government had previously emphasized the need for 10 percent of total insurance activities to be allocated to microinsurance. However, recent studies indicate that only 2 percent of insurance activities are currently attributed to microinsurance. This shortfall has excluded the poor and rural populace from accessing insurance services, thereby limiting coverage for their properties and businesses in rural areas.

To address this issue, the government has granted licenses for microinsurance specifically targeting agriculture, livestock, small shops, cooperatives, and other rural areas. Presently, four companies have received licenses for the purpose, and another company is in the process to obtain a microinsurance license. These companies must design insurance products that cater to the needs of the rural populace, and the government should provide support to facilitate their market penetration.

In the policies and programs implemented, local units should play a role in mobilizing microinsurance. Also, policies should be formulated to enable local governments to utilize a portion of different funds for insurance purposes.

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