KATHMANDU UNIVERSITY SCHOOL OF LAW

SECOND IN SEMESTER ANSWER PAPER

SUBMITTED BY: SUBMITTED TO:

PRAKRITI SITOULA PROF. RANJAN KRISHNA ARYAL
8TH SEMESTER SUBJECT: TAXATION LAW
ROLL NO : 41038
Q. No. 1. Discuss the measures instituted by/in the Nepal Insurance Authority and
Insurance Act, 2022 for ensuring good governance/solvency in the insurance sector and for
the protection of interests of insured. Also shine light on the various rules, circulars and
guidelines that the NIA has issued in this connection.

Answer: The Beema Samiti, initially established in 1968 (2025 BS) according to the Insurance
Act of the same year, served as Nepal's exclusive Insurance Regulatory Authority. It was
subsequently maintained by the Insurance Act of 1992 (2049 BS), with the Ministry of Finance
(MoF) overseeing insurance affairs. However, the Insurance Act of 2022 (2079 BS) brought
significant changes by replacing the Board with the Nepal Insurance Authority (NIA), granting it
more extensive powers, duties, and jurisdiction.
As a regulatory body, the NIA's primary focus is on fostering a professional, robust, and
advanced insurance market in Nepal. To achieve this goal, the Authority assumes several key
roles, including market development, supervision, guardianship, quasi-judicial functions, and
operates as an autonomous institution. The Nepal Insurance Authority (NIA) and the Insurance
Act of 2022 introduced various measures to achieve effective governance, financial stability, and
protection for insured individuals in the insurance sector.
The NIA was granted expanded regulatory authority to oversee insurance companies closely and
ensure accountability. Through a risk-based supervision approach, insurers with higher risk
exposure receive more focused regulatory attention. The Act also mandates stringent capital
adequacy requirements to enhance solvency and protect policyholders' interests. Consumer
protection measures, such as transparent disclosure of insurance product information, were
emphasized. Additionally, the Act may require the establishment of a policyholder's fund to
safeguard claims in case of insolvency. A grievance redressal mechanism allows policyholders to
address complaints, while prudential standards and regulations promote sound business practices.
Regular reporting and disclosures enhance transparency and build stakeholders' trust in the
insurance market's stability.
The measures instituted by/in the Nepal Insurance Authority and Insurance Act, 2022 for
ensuring good governance/solvency in the insurance sector and for the protection of interests of
insured are discussed below:
1) The insurer has to maintain a separate insurance fund for each category of insurance
business.This provision requires insurance companies to segregate funds based on
different types of insurance they offer. By maintaining separate funds for each category,
the insurer can ensure that the financial resources are dedicated solely to covering the
liabilities and claims arising from specific insurance lines, preventing cross-utilization of
funds between different types of insurance policies.
2) The fund maintained for one category of insurance business shall not be used to shoulder
the liabilities arising from other categories of insurance business.This measure
emphasizes the importance of keeping the funds for each insurance category independent
and distinct. It ensures that the assets reserved for a particular insurance line are not used
 to cover liabilities from other lines of business. This segregation guarantees that
policyholders' claims and obligations within each insurance category are adequately
protected without being impacted by the performance of other lines of business.
3) In the case of a life insurance business, the Reserve Fund should not be less than the total
liability as specified by the insurance policies. For life insurance, the Reserve Fund acts
as a financial buffer to meet policyholders' future claims and commitments. This
requirement ensures that the Reserve Fund must be sufficient to cover the total liability
arising from all existing life insurance policies, guaranteeing that the insurer can fulfill its
obligations to policyholders in the event of claims.
4) In the case of a non-life insurance business, the Reserve Fund should not be less than 50
percent of the net non-life insurance premiums.The Reserve Fund for non-life insurance
serves to cover potential claims and expenses related to non-life insurance policies.
Requiring the Reserve Fund to be at least 50 percent of the net non-life insurance
premiums ensures that the insurer maintains a financial cushion to handle claims
efficiently and fulfill its responsibilities to policyholders in this category.
5) The liabilities of an insurer should be less than its assets.This fundamental principle of
solvency regulation ensures that an insurance company's total liabilities, including
potential claims from policyholders, do not exceed the value of its assets. By maintaining
a positive asset-to-liability ratio, the insurer demonstrates financial strength and the
ability to meet its obligations, instilling confidence in policyholders and regulators.
6) The insurance companies are required to invest at least 75 percent of their total
investment in government securities, treasury bills, and fixed time bank deposits. The
remaining 25 percent may be invested in housing schemes, financial companies, and
debenture schemes of public limited companies apart from depositing in commercial
banks. This provision governs the investment practices of insurance companies, ensuring
that a significant portion of their investments is allocated to secure and low-risk assets
like government securities and treasury bills. This conservative approach minimizes
investment risk and protects policyholders' funds. The remaining 25 percent allows for
some diversification, permitting investments in other relatively secure areas while still
maintaining a conservative investment profile. This balance aims to safeguard
policyholders' interests while providing some potential for growth in the insurance
companies' investment portfolios.
7) The Insurer shall have the risk which would exceed the limit of risk to be borne by it,
reinsured in a manner as specified by the Board.This requires insurers to manage their
risk exposure by transferring a portion of their risks to other insurance companies through
a process called reinsurance. If the risk faced by the insurer exceeds a certain limit set by
the Board, the insurer must arrange for reinsurance coverage to mitigate its potential
losses. Reinsurance allows the insurer to spread its risks across multiple reinsurers,
reducing its overall exposure to catastrophic events and ensuring the financial stability of
the insurance company.
 8) Audited financial statements with detailed information should be submitted to the
Insurance Board within six months of the expiry of the preceding fiscal year. Insurance
companies are required to prepare and submit their audited financial statements to the
Insurance Board within six months after the end of the fiscal year. These financial
statements provide a comprehensive overview of the insurer's financial position,
performance, and compliance with regulatory requirements. The detailed information in
these statements allows the Insurance Board to assess the insurer's financial health,
solvency, and adherence to the provisions of the Insurance Act.
9) The Insurer may spend up to 25 percent in the case of marine insurance and up to 30
percent in the case of other insurance for management functions out of the total amount
of income generated from the premium while running the insurance business.This
allocation covers various operational expenses related to running the insurance business,
such as administrative costs, salaries, marketing, and other day-to-day expenditures.
10) The Actuary should confirm the financial soundness of the insurer. All material risks to
the solvency of the insurer should be identified and reported. The Actuary must identify
and report all significant risks that could potentially impact the insurer's solvency. By
doing so, the Actuary helps the insurer and the regulatory authorities understand the
company's financial risks better, ensuring appropriate measures are taken to maintain the
insurer's stability and protect policyholders.
Following are the Rules, circulars and guidelines issued by NIA for ensuring good governance
and protecting the insured:
1. Insurance Regulation, 2049 (1993)
2. Circular regarding merger and acquisition 2079
3. Circular regarding Income Tax Act 2058 to insurance companies 2079
4. Insurers' Corporate Governance (Fifth Amendment) Guidelines, 2080
5. Insurers Merger and Acquisition (Fourth Amendment) Guidelines, 2080
6. Insurer Registration and Conduct of Insurance Business (Second Amendment)
Guidelines, 2080
7. Own Risk Solvency Assessment Directives, 2023 (2079)
8. Insurer's Institutional Governance (Fourth Amendment) Guidelines, 2079

Above rules, circulars and guidelines are few laws issued by NIA for ensuring good
governance and protecting the insured. The provisions discussed above and many other
provisions are laid out by the NIA to ensure that Insurance companies in Nepal can
achieve good financial health so that the insurers are protected. Through measures like
strengthened regulatory authority, risk-based supervision, and capital adequacy
requirements, insurance companies are better equipped to manage risks and uphold their
financial commitments to policyholders. Consumer protection measures, policyholder's
funds, and grievance redressal mechanisms further reinforce the importance of treating
policyholders fairly and maintaining their trust.
Q. No. 2. Examine how the insurance sector is regulated in countries/regions like
India, UK, USA and the European Union. Also deliberate on how the World Trade
Organization (WTO) arrangements have included the insurance business under
their regime.

Answer: Insurance regulation refers to the government overseeing the insurance market
to ensure fairness and professionalism among those working for the insurance industry, to
prevent the market from collapsing, and to democratize insurance. Laws are created for
the industry and an agency is put up to make sure these laws are observed. Insurance
regulation mechanisma on one point or the other around the world. Regulation of the
insurance sector in different countries id described below:

India
Insurance Regulatory and Development Authority of India (IRDAI), is a statutory body
formed under an Act of Parliament, i.e., Insurance Regulatory and Development
Authority Act, 1999 (IRDAI Act 1999) for overall supervision and development of the
Insurance sector in India.The powers and functions of the Authority are laid down in the
IRDAI Act, 1999 and Insurance Act, 1938. The key objectives of the IRDAI include
promotion of competition so as to enhance customer satisfaction through increased
consumer choice and fair premiums, while ensuring the financial security of the
Insurance market.
The Insurance Act, 1938 is the principal Act governing the Insurance sector in India. It
provides the powers to IRDAI to frame regulations which lay down the regulatory
framework for supervision of the entities operating in the sector. Further, there are certain
other Acts which govern specific lines of Insurance business and functions such as
Marine Insurance Act, 1963 and Public Liability Insurance Act, 1991.
IRDAI adopted a Mission for itself which is as follows:

● To protect the interest of and secure fair treatment to policyholders;

● To bring about speedy and orderly growth of the Insurance industry (including
annuity and superannuation payments), for the benefit of the common man, and to
provide long term funds for accelerating growth of the economy;
● To set, promote, monitor and enforce high standards of integrity, financial
soundness, fair dealing and competence of those it regulates;
● To ensure speedy settlement of genuine claims, to prevent Insurance frauds and
other malpractices and put in place effective grievance redressal machinery;
● To promote fairness, transparency and orderly conduct in financial markets
dealing with Insurance and build a reliable management information system to
enforce high standards of financial soundness amongst market players etc.
 The IRDAI sets capital requirements, premium rates, policy terms, and
conditions, ensuring a level playing field for insurance providers. Additionally, it
monitors the conduct of insurers, preventing mis-selling, and promoting
transparent practices. Foreign insurers must comply with specific guidelines to
operate in India, promoting fair competition and market stability.

United Kingdom

The body which regulated the UK financial services industry, the Financial Services Authority
(FSA), was replaced by two new regulatory bodies. This is known as the ‘twin peaks’ system of
regulation: 1)The Prudential Regulatory Authority (PRA), which is part of the Bank of England,
promotes the safety and soundness of insurers, and the protection of policyholders
2) The Financial Conduct Authority (FCA) regulates how these firms behave, as well as more
broadly the integrity of the UK’s financial markets
The ABI is not a regulator, but we do seek to engage closely with both the PRA and FCA to
ensure the UK has a regulatory framework that provides safety, stability and fairness for
customers whilst also ensuring insurers are able to offer affordable products, to innovate, and to
invest in the UK economy to help Britain thrive.
The ABI Prudential Regulation team focuses on a range of prudential and financial reporting
issues of importance to our members, including Solvency II, international prudential regulatory
developments, financial reporting standards and the regulatory environment for institutional
investors. The ABI Conduct Regulation team focuses on a range of conduct policy issues of
importance to our members. These include European initiatives such as the Insurance
Distribution Directive (IDD) and General Data Protection Regulation (GDPR) and UK based
FCA initiatives in the General Insurance and Long Term Savings sectors, as well as its broader
work across subjects such as consumer vulnerability, access to financial services and the UK
financial advice regime.

United States of America

Insurance in the United States refers to the market for risk in the United States, the world's
largest insurance market by premium volume. According to Swiss Re, of the $6.861 trillion of
global direct premiums written worldwide in 2021, $2.719 trillion (39.6%) were written in the
United States.Insurance, generally, is a contract in which the insurer agrees to compensate or
indemnify another party (the insured, the policyholder or a beneficiary) for specified loss or
damage to a specified thing (e.g., an item, property or life) from certain perils or risks in
exchange for a fee (the insurance premium). For example, a property insurance company may
agree to bear the risk that a particular piece of property (e.g., a car or a house) may suffer a
specific type or types of damage or loss during a certain period of time in exchange for a fee
from the policyholder who would otherwise be responsible for that damage or loss. That
agreement takes the form of an insurance policy.
In the USA, insurance regulation is primarily conducted at the state level. Each state has its own
insurance department or commission responsible for regulating insurance companies operating
within its jurisdiction. State insurance regulators oversee market conduct, solvency, policy forms,
and rates. The National Association of Insurance Commissioners (NAIC) plays a significant role
in promoting uniformity and cooperation among state regulators. Federal agencies like the
Federal Insurance Office (FIO) monitor insurance markets from a broader perspective and
represent the USA in international insurance matters.

European Union

The regulation of the insurance sector in the European Union (EU) is guided by a comprehensive
framework of harmonized regulations designed to create a single insurance market across
member states. The primary regulation governing insurance in the EU is the Solvency II
Directive, which sets out prudential rules and standards for insurance and reinsurance companies
operating within the EU. The objective of Solvency II is to promote financial stability, enhance
risk management practices, and provide a consistent and robust regulatory environment for
insurers.

Key Aspects of Regulation under Solvency II:

● Risk-Based Supervision: Solvency II adopts a risk-based approach to supervision, taking

into account the specific risk profiles of insurance companies. This means that insurers
are required to assess and manage their risks effectively, with regulatory focus placed on
areas of higher risk.

● Capital Adequacy Requirements: Insurers must hold sufficient capital to cover their risks
and ensure they can meet their obligations to policyholders. The Solvency Capital
Requirement (SCR) represents the minimum amount of capital an insurer must hold to
withstand significant financial shocks. The Minimum Capital Requirement (MCR) is a
lower threshold set for insurers to continue their operations.

● Valuation of Assets and Liabilities: Under Solvency II, insurers are required to value their
assets and liabilities at market-consistent values. This ensures that insurers' balance
sheets reflect the most accurate and current valuations, promoting transparency and
consistency in financial reporting.

● Risk Management and Internal Controls: Insurance companies are obligated to establish
robust risk management frameworks and internal controls to identify, assess, and mitigate
risks effectively. Regular reporting and governance requirements further enhance the
focus on risk management practices.
 ● Reporting and Disclosure: Insurers are required to submit regular reports to their national
supervisory authorities, detailing their financial condition, risk exposure, and compliance
with regulatory requirements. Additionally, insurers are mandated to provide public
disclosures to increase transparency and facilitate market discipline.

● Group Supervision: Solvency II includes provisions for group supervision, which is

relevant for insurance groups operating in multiple EU member states. The regulations
ensure that groups are effectively supervised, and any potential risks arising from group
structures are appropriately addressed.

● Insurance Distribution Directive (IDD): The IDD is another important regulation within
the EU insurance framework. It governs insurance distribution, including the sale and
marketing of insurance products. The IDD aims to ensure that insurance products are sold
responsibly and that consumers receive appropriate advice and information.

Role of National Supervisory Authorities:

Each EU member state designates a national supervisory authority responsible for overseeing
insurance companies within its jurisdiction. These authorities are tasked with implementing and
enforcing Solvency II requirements, conducting regular assessments of insurers' financial
positions, and overseeing their risk management practices. They also play a critical role in
approving new insurance companies, regulating insurance intermediaries, and ensuring
compliance with EU and national laws.

Benefits of EU Insurance Regulation:

The harmonized regulation of the insurance sector within the EU provides several benefits:

Single Insurance Market: The unified regulatory framework allows insurers to operate across EU
member states under the "passporting" system, reducing barriers to cross-border business and
fostering competition.

Financial Stability: Solvency II's stringent capital requirements and risk management practices
enhance the financial stability of insurance companies, protecting policyholders and other
stakeholders.

Consumer Protection: The IDD ensures that insurance products are sold fairly, with clear
information provided to consumers, ensuring their interests are safeguarded.
Transparency and Accountability: The reporting and disclosure requirements promote
transparency and accountability, enabling stakeholders to make informed decisions.

Role of World Trade Organization (WTO) Arrangements

The World Trade Organization (WTO) includes the insurance business under its regime through
the General Agreement on Trade in Services (GATS). GATS is a multilateral agreement that
governs international trade in services, including insurance services. Its primary objective is to
promote trade liberalization, remove barriers to services trade, and ensure fair and equitable
treatment for service providers in foreign markets.

Key Features of GATS and its Application to the Insurance Business:

Scope of GATS:
GATS covers four modes of services supply: cross-border supply (Mode 1), consumption abroad
(Mode 2), commercial presence (Mode 3), and the movement of natural persons (Mode 4).
Insurance services predominantly fall under Modes 1, 3, and 4.
Mode 1: Cross-border supply of insurance services refers to the provision of insurance services
from one country to another through electronic means, such as online insurance offerings or
digitally transmitted insurance services.

Mode 3: Commercial presence involves foreign insurance companies establishing subsidiaries,

branches, or representative offices in another country to provide insurance services locally.

Mode 4: Movement of natural persons pertains to insurance professionals, such as agents and
underwriters, temporarily entering a foreign market to provide insurance services.

Market Access and National Treatment:

Under GATS, member countries commit to liberalizing access to their insurance markets for
foreign insurers and insurance professionals. This includes reducing or eliminating barriers such
as restrictions on foreign ownership, discriminatory regulations, and licensing requirements.
The principle of national treatment ensures that foreign insurers and their services are treated no
less favorably than domestic insurers and their services in the host country. In other words, once
a foreign insurer is licensed to operate in a WTO member country, it should receive treatment on
par with domestic insurers regarding licensing, regulatory requirements, and market access.

Specific Commitments and Schedules:

WTO member countries make specific commitments in their schedules of commitments under
GATS. These schedules outline the level of market access they are willing to grant to foreign
insurers and insurance professionals in each mode of supply. Countries can specify limitations
and exceptions to their commitments, subject to negotiations and mutual agreement.
Regulatory Autonomy:
While GATS encourages liberalization of insurance services, it recognizes that countries have the
right to regulate their insurance markets to achieve legitimate policy objectives. This allows
member countries to maintain prudential regulations, consumer protection measures, and other
regulations essential for the stability and integrity of their insurance sectors.

Dispute Settlement Mechanism:

GATS provides a dispute settlement mechanism to resolve disputes between member countries
concerning their commitments and compliance with GATS provisions. If a WTO member
believes that another member is not fulfilling its obligations under GATS, they can raise a
dispute, which may be adjudicated through WTO dispute settlement procedures.

Insurance regulation is of utmost importance as it serves to protect the interests of consumers,

maintain the stability of the insurance industry, and safeguard the broader financial system. By
setting clear guidelines and standards, insurance regulation ensures that insurance products are
fair, transparent, and suitable for consumers' needs, promoting trust and confidence in the
market. It also establishes capital adequacy requirements and risk management standards for
insurers, mitigating the potential for insolvencies and protecting policyholders from financial
losses. Moreover, insurance regulation fosters healthy competition among insurers while
preventing anti-competitive practices, leading to better product choices and competitive pricing
for consumers. Ultimately, the importance of insurance regulation lies in its role as a crucial
safeguard, maintaining market integrity, and enhancing consumer trust in the insurance industry.