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Function of Insurers Organization of Insurers The Merger Movement Reinsurance
Function of Insurers Organization of Insurers The Merger Movement Reinsurance
Organization of Insurers
Reinsurance
Types of Insurance in Nepal
According to Insurance Act there are three types of Insurance company in terms of nature of
business, life, non life and reinsurance.
Insurance Act states that companies should be public limited and should do only one type of
business. In terms of equity ownership, insurers are classified as : State owned enterprise,
Privately owned domestic, joint venture and foreign branch .
Stated Own Enterprise : Rastriya bema Sansthan, Nepal Reinsurance company are example
of state own enterprise.
Public private partnership means equity participation of government and private sector.
Again Nepal Reinsurance company is example of PPP model .
Contd….
Domestic Private Company : Domestic private company owned entire capital by the
national Investors. After 1980s, government granted permission to establish the
companies in private sector, as a result, large number of life and non life insurance
companies have been established by private sector investors.
Joint Venture Company : Joint venture company has equity participation of both domestic
and foreign investors. Joint venture company should follow the rule and regulation of the
host country. Life insurance corporation of Nepal ( LIC - Nepal) is an example of this model.
Foreign Branch : Foreign companies are allowed to establish their branch office in Nepal.
For example Met life .
Risk Management in Insurance Company
To maintain good financial health of insurance company, insurer adopts various risk
management techniques which are given below.
Reinsurance
Exclusion of Risk
Actuarial suggestions and advice are very much important to insurers in product designing
and pricing, valuation of assets and liabilities of insurers, and calculation of solvency margin.
Financial statement is not approved by regulators until it is approved by the actuary.
Insurer needs to follow the recommendation of the Actuary so that insurer gets stronger and
the risk will be mitigated .
Appoint the Risk Manager : Insurers are risk manager but they need to manage their risk
themselves.
Risk Management is a technical and complex task.
Only Risk Manager can manage the risk properly. Risk Manager scans the organization’s risk
exposure, classifies it in different categories, select appropriate techniques or risk
management and suggest appropriate technique to the top management .
Suggestion of Risk Manager is useful for insurer to manage overall risk of the company.
Insurer manage two types of risks : Insurance risk is managed by transferring to the
reinsurers while other risk is managed through the proper risk management technique .
Reinsurance
A reinsurance operation is a contractual arrangement between a reinsurer and a professional
insurer, who alone is fully responsible to the policyholder, under which, in return for
remuneration, the former bears all or part of the risks assume by the later and agrees to
reimburse according to specified conditions all or part of the sums due or paid by the later to
the insured in case of claims.
For this service, the reinsured company pays premium to the Re- insurer.
The fundamental difference between insurer and reinsurer is that the policyholder transfers
the entire risk to the insurer but insurer transfer partial risk ( loss ) to reinsurer .
Principles of Reinsurance
Principles of Indemnity : The moral of the principal of insurance is that insurers cannot earn
profit from the reinsurance contract. It is is proved that under the original policy, the ceding
company itself is not liable to pay a claim then the reinsurer is not liable to pay any claim
under reinsurance.
Principal of Utmost Good Faith : In insurance contract, trust and honesty are expected from
policyholders. In a reinsurance contract, same is expected by reinsurance from insurers.
Importance of Reinsurance
The function of reinsurance is to absorb the risks from direct insurance industry. In absence
of reinsurance, we cannot imagine the existence of insurance activities. Reinsurance is not
only a mechanism of transferring risk from an insurer to another insurer but it is a wider
approach to managing risk.
Reinsurance spreads the risk to a wider area, divide the risk among the many organizations,
as reinsurers are more experts and professional to manage the risk than insurers. In other
word, insurance and reinsurance are two sides of the coin.
The importance of reinsurance is not limited to sharing the risk. It provides various support to
insurer viz. enhancing the management capacity, increasing the risk retention capacity,
minimizing the fluctuations on claim payment and lapse exposure, managing the portfolios,
facilitating mergers, and helping on the expansion of the business.
It also provides expertise, share information, enhance the capacity of the insurers in
underwriting, claim settlement, and investment management also . For example, a reinsurer
has the capacity to review many more complex claims .
Contd…..
Some of the benefit of reinsurance are as follows.
a) Risk Transfer : The main purpose of reinsurance is to allow the ceding insurance company to
write and assume large amount of risks that are more higher than the capital size of the
insurer.
b) Income Smoothing : Reinsurer protects to insurer from the possible large amount of loss and
ensures profit with the range between the upper and lower limit .
By taking all or part of the risk, reinsurance helps to smooth out the financial result of an
insurance company, making them more predictable by absorbing larger losses.
c) Expertise Services : Reinsurance are experts in risk management and in insurance sector .They
work globally with long years of experience and a high degree of expert human resources.
They have big data on pricing, underwriting and risk.
In many circumstances, insurers can get expert services from the reinsurers in designing and
pricing of new products, underwriting business, managing an optimum investment portfolio, and
investigation of fraud and settlement of claims .
Contd…..
d) Source of Profit : Reinsurers share the profit with an insurer based on the volume of the
business and profit on the particular portfolio.
The profit of the insurer increases as increase on the volume of business and protects the
loss of the insurer by transferring the loss to the reinsurer.
e) Relief from the Additional Capital Requirement : In the regime of the solvency margin,
insurers need to increase their capital as per the volume of the business. The relationship
between capital employed and profit is inverse.
Due to the reinsurance provision, the risk is transferred to the reinsurer, and additional
capital is not required as the increase in business.
Method of Reinsurance
There are two method of sharing risk under reinsurance contract which are :
a) Proportional
b) Non Proportional
Under Proportional reinsurance, one or more reinsurers take a stated percentage share of
each policy that an insurer issues.
Non proportionate method of loss sharing is that method where reinsurer shares the loss, if
the loss exceeds a certain limit.
Reinsurance Regulation
There is no distinct difference between the insurance and reinsurance business but some of
the provisions are unique to the reinsurance business.
Both should follow the land of law where they are working for. The same regulator regulates
insurance and reinsurance markets .
The insurance business is limited inside the country while the reinsurance business is not
limited to one country.
It is a cross- boarder activity so, the reinsurance business is regulated by the rules of the
home country as well as outside the home country where business is operated.
Reinsurers requires to follow international regulation, conventions and practices .
Approaches of Reinsurance Regulation
Reinsurance companies register their office in one country but operates their business in
more than one country. In the home country, they are regulated as per the law of land but
outside the country, regulation approaches are different.
Insurance board of Nepal is a regulator of the insurance and reinsurance industry. The
insurance industry is regulated based on the Insurance Act, Regulations and number of
directives.
Some specific directive have been issued by Board to regulate the reinsurance activities carried
out by insurers and reinsurance business by insurers, reinsurers and reinsurance brokers.
Insurer’s Reinsurance Directive ,2021
The objective behind the establishment of the reinsurance company is to stop the flight of the huge amount of
foreign currency every year in the name of reinsurance premium.
Again, to promote the insurance business of the country by increasing the risk bearing capacity of the
insurance companies too.
The company offers service to both life and non life insurers directly or via reinsurance brokers .
Till Dec 2021, the share structure has been changed as Nepal Government owned 44.04 %, 39.96 % by different
institutional investors ( life insurance/ Non Life Insurance ) and 16 % by General Public .
As IB has decided to raise the paid-up capital threshold of insurance companies. When the new
provision comes into effect, life insurers will have to increase their paid-up capital to five billion
rupees from the existing two billion rupees.
The decision was made because of the expanding insurance business across the country.
The Insurance Board has called on concerned stakeholders to increase the paid-up capital of nonlife
insurance companies to Rs 2.5 billion while the paid-up capital of life insurance to five billion rupees.
Contd….
So far, the Himalayan General Insurance (HGI) and Everest Insurance Company Limited from
the non-life sector while Gurans LIfe, Union Life including Prime Life insurance have seen
approval from the Insurance board for a merger and have already signed a memorandum of
understanding (MoU) for that.
.
The trends of insurance companies going for a merger is increasing as it is also a good means
of increasing their paid-up capital which is also the focus of the Insurance Board .
Many companies have chosen the merger as means to increase their paid up capital as it
decreases the administrative cost and strengthens the company.
By increasing the paid-up capital will increase the overall net worth, increase the risk-bearing
capacity of the company and create a conducive environment for the company to merge with
each other.
This will also help to t access to insurance by reducing the cost of services if there is large
capital, to create an environment of healthy competition among the companies by
maintaining large capital, and to maintain paid-up capital in line with risk-based capital.