Insurance & Regulatory environment

Kiran Thapa
 Why is risk important for insurance ?

• Risk is what makes you decide whether or

not you need insurance.
• Risk is what insurance companies measure
when determining whether to offer you
insurance and how much it will cost.
 How to handle risk?
1.  Avoidance: Choosing not to participate in an
activity because of the risk involved, e.g. not
getting a driver’s license;

2.  Retention: Saving money in case of future

losses, e.g. putting Rs100,000 in a savings
account in case of a car accident;

3. Transfer: Passing the risk on to an insurance

company, e.g. paying a monthly fee for an
insurance policy and expecting the insurance
company to protect your assets.
 What is insurance?
• Insurance is a contract between two parties in which one
party, the insurer, agrees to pay the other party, the
insured, a fixed amount of money after a certain incident
occurs in return for a fixed sum of money called a
premium.
• Insurance is a legal contract that transfers risk from a
policyholder to an insurance provider.
• Insurance company sells the insurance policy and collect
the insurance premium and invest in the various sectors
like real assets and financial assets.
• Insurance company is the financial intermediaries because
they collect and invest large amount of premiums.
• They provide means for accumulating savings and
channelize these funds to various sectors.
 Contd.
 They provide loans to policyholders.
 They are non banking financial institutions
because they are not directly involved in
banking activities like deposits and other
services.
 They are considered as the contractual
saving institution due to their nature.
 They execute various financial functions that
influence financial market of the country.
 The regulatory authority always regulates
their funds.
 Terms used in insurance contract
 Insurer
 Insured
 Insurance policy
 Insurance premium
 Insurance period
 Insurance policy loan
 Insured amount
 Functions of insurance
 Primary functions:
(1) Insurance provides certainty
Insurance provides certainty of payment at
uncertainty of loss. The uncertainty of loss
can be reduced by better planning and
administration.

(2) Insurance provides protection

The main function of the insurance is to
provide protection against probable chances
of loss.
 Contd.
 Risk sharing
The risk is sharing in ancient time was done
only at the time of damage or death but
today on the basis of probability of risk, the
share obtained from each and every insured
in the shape of premium without which
protection is not guaranteed by the insurer.
 Secondary functions
 Prevention of loss: The insurance joins hands
with those institutions which are engaged in
preventing the losses of the society.
 Improves efficiency: The insurance eliminates
worries and miseries of losses at death and
destruction of property.
 It helps economic progress: By protecting the
society from huge losses of damage,
destruction and death, provides an
opportunity to develop to those larger
industries which have more risk in their
setting up.
 Bancassurance
 The partnership or relationship between a
bank and an insurance company whereby
the insurance company uses the bank
sales channel in order to sell insurance
products.
 Also known as cross selling, is defined as
the presentation and sale to bank
customers by an insurance company of its
insurance products within the premises of
the banks and its branches.
 Benefits of insurance
 Providing security
 Shifting of risk
 Provide investment
 Encouraging savings
 Capital formation
 Generating employment opportunities
 Promoting social welfare
 Helps controlling inflation
 Improving credit standard
Types of Insurance

The insurance industry is classified into two

major groups:
(1) Life: Life insurance provides protection in
the event of untimely death, illnesses,
and retirement.
(2) Non life or Property – casualty. Property
insurance protects against personal injury
and liability due to accidents, theft, fire,
and other catastrophes.
Fundamentals of insurance
• The fundamentals of insurance is law of large
numbers.
• Insurance companies are financial
intermediaries because:
• they collect and invest large amount of
premiums;
• they provide means for accumulating savings
and channalize these funds to various sectors;
• they even provide loans to the policyholders;
• they are non-banking financial institutions,
because they are not directly involved in banking
activities like deposits or other financial services.
 Types of insurance product
• Term life insurance
• Whole life insurance
• Endowment
 Term life insurance
 Pure life insurance
 Issued for a short period (3 month to 7 years)
 If insured dies, the policy is intact and
beneficiary receives the death benefits.
 If the insured does not die within the period, the
policy is invalid and has no value.
 There is no cash or investment value for a term
insurance policy.
 Policyholder can not borrow against the policy.
 Only protection element present in the policy
 Contd.
 The objective is the family to get a lump sum
assured amount in the event of untimely death of
the family head/bread winner.
 If the insured survives till the end of the selected
period, nothing is payable.
 Term insurance policy can be issued for 5, 10, 15
or 20 years.
 It is a policy with low cost (premium).
 These are required when the coverage is required
for a stipulated period like tenure of a home loan.
 The cost (premium) varies with the age of the
insured and the proposed tenure of policy
coverage.
 Contd.
 It is similar to property or liability
insurance.
 This provides risk coverage only for the
term selected.
 If there is no provision for automatic
renewal, the insured can take a fresh
policy at a fresh cost (applicable at that
age level) subject to this being permitted
based on status of his/her health.
 There are two types of term policies;
renewable and convertible.
 Contd.
 Renewable term policy meets a valid need
of insured as it protects his/her
insurability.
 Convertible term policy offers an option to
the policyholder to convert a term policy
into a whole life or endowment policy
without producing evidence of continued
insurability.
 Whole life
 Also known as cash value or permanent or
straight or ordinary or investment life
insurance
 Oldest and most traditional form of insurance
 Issued for the whole life of person
 Premiums are payable only once or
throughout the life of assured or for certain
period of time.
 Assured amount becomes payable only on
the death of policyholders to his/her
nominee
 Endowment
 Combines a term insurance element and
savings
 It guarantees a payout to the beneficiaries
of the policy if death occurs during some
endowment period.
Problem and issues
1. Limited market
2. Poor economic condition
3. Lack of insurance knowledge
4. Lack of compulsory insurance
5. Low rate of return to the investors
6. Complicated procedure
7. Lack of reinsurance
8. Instability of political situation
9. Lack of insurance experts
10. Unhealthy competition
11. Unemployment
12. Lack of sufficient rules and regulation
 Structure of insurance co.
Insurance companies are a composite of three
companies.
•First there is the “home office” or actual insurance
company.
• Second, there is the investment component, which
invests the premium collected in the investment
portfolio. This is the investment company.
• The third is the distribution component of the
sales force. There are different type of distribution
forces. Agent of company, Agent associated with
any company, and commercial banks.
 Current status of Nepalese Insurance Market;

Adequate regulation and supervision enhance policyholder protection.

That is the ultimate objective of insurance supervision and regulation
according to the International Association of Insurance Supervisors
(IAIS). Two features of insurance are important to understand.
Insurance Act, 1990 made a provision of Beema Samiti (Insurance
Board), as a sole authority to regulate the insurance activities within
Nepal. During 1990s, Nepalese government adopted economic
liberalization policy. The policy results in the rapid expansion of the
Nepalese Insurance business in terms of number of companies
working in the field and also, total premium income. In the mean time
existing Insurance Act, 1968 and Insurance Rules 1969 was repealed
by Insurance Act, 1992 and Insurance Regulation 1993 respectively.
The main aim of the Insurance Act, 1992 is to establish Insurance
Board to systematize, regularize, develop and regulate the Insurance
Business in Nepal. At present, policy holders’ protection has become
main focal point. However, the independence of regulatory body is still
handicapped by existing law. This is among reasons why the Insurance
Act of Nepal should be amended in an appropriate manner.
 Various insurance products in Nepal

Insurance companies in Nepal have various

types of insurance products for Nepali
policyholders. Life insurers have been
selling a range of policies such as whole life
policy, term life insurance, endowment
plans, money back plans, accident and
health related policies, children insurance
plans, group insurance/employee benefit.
 Beema Samittee
Introduction, Evolution,

•Beema Samiti is the official government

organization of Nepal to manage, regulate,
develop and control of insurance business in
Nepal. 
•Insurance board of Nepal is called Beema
Samiti, Nepal.
• Insurance Board is the independent institution
established by the government of Nepal under
the insurance act 2049.
• It has been established to manage, regulate,
develop and control of insurance business in
Nepal.
 Functions of the board
The Functions, Duties and Powers of the Board is as
follows:
▪ To provide necessary suggestions to the Government
of Nepal to frame the Policy regarding to systematize,
regularize, develop and regulate the Insurance
Business.
▪ To frame a policy for the investment of the amount
received from the insurance and to prescribe the
priority sectors.
▪ To register and renew the Insurer, Insurance Agent,
Surveyor and Broker and to cancel or cause to cancel
such registration.
▪ To arbitrate in the dispute arises between the
Insurer and the Insured.
 Contd.
▪ To make decision on the complaints filed by
the Insured against the Insurer regarding to
the settlement of liability of the Insurance.
▪ To issue necessary directives to the Insurer
from time to time regarding to the
Insurance Business.
▪ To formulate necessary basis for the
protection of interests of the Insured, and
▪ To do or cause to do other necessary
functions regarding to the Insurance
business.
 Main Features of Insurance Act.
Chapter 1:
(b) "Chairperson" means the Chairperson of the Board.
(c) "Member" means the Member of the Board and the word
includes the Chairperson.
(d) "Insurer" means a corporate body registered in Beema
Samitee and the word includes the re-insurer.
(e) "Insurance Business" means Life Insurance Business or
Non- Life Insurance Business and the word includes the
reinsurance.
(f) "Life Insurance Business" means the business relating to
a contract regarding to the life of any person under which
he/she or his/her heir in the event of his/her death, will
be paid a particular amount in case a specified amount is
paid in installment on the basis of his/her age.
(g) "Non-Life Insurance Business" means other Insurance Business
other than the Life Insurance Business.
(h) "Re-Insurance Business" means re-insuring the portion of the risk
which is excess of the risk to be hold by the Insurer.
(i) "Insurance Policy" means a document mentioning the rights and
liabilities relating to the contract of the Insurance.
(j) "Actuary" means a person having the qualification as prescribed
and is appointed by the Insurer for assessing and
calculating the liabilities of the Insurance Business.
(k) "Insured" a person or organization holding a Life Insurance and
Non-Life Insurance Policy.
(l) "Insurance Agent" means a person other than a salaried employee
of an Insurer.
(m) "Surveyor" means a person who has obtained a license pursuant to
*Section 30A, to make a financial valuation of the destroyed property
and the word includes an adjuster and a person who makes a
valuation of losses.
 Contd.
Chapter 2: Formation of the Board:
1.Chairman
2. Member from ministry of law
3. Member from ministry of finance
4. Person nominated by govt of Nepal
knowledge in insurance
5. Person nominated by insured
 Contd.
The Board to be an Autonomous Body
Meeting and Decision of the Board
Provisions Relating to the Service Conditions
and Facilities of the Chairperson
Employees of the Board

Chapter 3: Functions, Duties and Powers of

the Board
 Contd.
Chapter 4:
Registration of Insurer, Cancellation of
Registration and Liability

Chapter 5:
Provisions Relating to Insurance Agent,
Surveyor and Broker
 Contd.
Chapter —6
Fund of the board and Audit
Chapter -7
Miscellaneous
 CLASSIFICATION OF BANK AND FINANCIAL INSTITUTIONS IN NEPAL

 The Rastra Bank shall classify the licensed institutions into

Class A, Class B, Class C” and Class D” on the basis of the
minimum paid-up capital required for the license to be
issued.
 Banks and financial institutions are classified into A, B, C
and D classes on the basis of minimum capital up capital
required for the licensing. According to this classification,
class A = Commercial banks, class B = Development banks,
Class C = Finance companies, and Class D = Micro finance
financial institutions.
 Contd.
COMMERCIAL BANK
 Banks and financial institutions are classified commercial
banks as Class A financial institutions.
 Commercial banks should have minimum paid capital of
Rs 8 billion at the end of Mid-July 2017
DEVELOPMENT BANK
 Nepal Rastra Bank has classified the development banks
into three categories, national level development bank,
district level banks covering 4-10 districts and banks
covering 1-3 districts.
 Presently, the capital requirement of National level bank is
2.5 billion paid up capital, for covering 4-10 districts is Rs
1.2 billion and covering 1-3 districts is Rs 500 million.
 Contd.

FINANCE COMPANY
 Nepal Rastra Bank has classified financial companies into two
classes on the basis of the number of districts they covered.
 The finance company covering National Level 4-10 districts
required Rs 800 million of paid-up capital and covering 1-3
districts need Rs 400 million paid up capital.
MICRO FINANCE COMPANY
 Nepal Rastra Bank has classified financial companies into three
classes on the basis of the number of districts they covered.
 The national level micro finance needs capital of Rs 100 million.
 The micro finance company covering 4-10 districts required Rs
60 million of paid-up capital and covering 1-3 districts need Rs
20 million paid up capital.
 Contd.
NEPAL INFRASTRUCTURE BANK LIMITED
- Infrastructure development bank (NIFRA) is the first bank and only one
bank in Nepal.
- It is established under the BAFIA 2073.
- The objective of this bank is accelerating the development of
infrastructure of the nation.
- This bank obtained the operating license from Nepal Rastra Bank on
11th February 2019 and formally started its operations from 6th March
2019.
- NIFRA aims to bridge the infrastructure financing gap by raising
resources from domestic and international market in the form of equity,
debt, structured funds and bonds.
- The funds collected from these sources is then invested in infrastructure
projects by adopting proven models of infrastructure financing.
Contd.