Insurers may have to empty reserves‚ but won't go bust: IB  

KATHMANDU:

Non-life insurance companies will have to exhaust their reserves and may even have to spend a portion of paid-up capital, as the process of settling claims related to devastating earthquake of April 25 starts gathering pace in the coming days.

Preliminary estimates of the Insurance Board (IB), the insurance sector regulator, suggest non-life insurers will have to fork out around Rs 20 billion to settle all quake-related claims.

“Of this amount, losses of Rs five billion to Rs six billion will have to be borne by domestic insurance companies. The rest will have to be paid by reinsurance companies located abroad,” IB Director Raju Raman Poudel told The Himalayan Times.

Insurance companies here retain only a small portion of risk with them and transfer most of the risk to reinsurers located in India, Malaysia and countries in Africa, among others.

Although it is common for insurance companies around the globe to transfer risks to reinsurance companies, Nepali firms rely heavily on this practice, with many shifting almost all of the risks to reinsurers. This is because of low capital base, which prevents insurers from absorbing bigger shocks.

The regulator here has allowed non-life insurance companies to operate their businesses with a paid-up capital of as low as Rs 250 million. The size of reserves of many insurers is not that big as well.

A total of 16 operational non-life insurers — excluding NB Insurance, which was barred from conducting business over a year ago — hold around Rs 4.76 billion in reserves, show the second quarter unaudited balance sheets of insurance companies and data provided by the IB.

“This amount may sound like nothing compared to the devastation caused by the quake. But this is enough to cover a big portion of losses because the number of claims appears manageable so far,” a senior IB official told THT on condition of anonymity.

The earthquake has fully destroyed 488,789 private houses and damaged another 267,477 houses so far. Yet, the number of claims received by non-life insurance companies, as of Sunday, stood at 9,443.

There is discrepancy in number of claims and houses damaged or destroyed because of very low penetration of insurance products in the country. Moreover, many insured properties have used fire insurance policy to insulate them, which entitles insurers to deduct 2.5 per cent of the sum insured or Rs one million, whichever is lower, while settling claims.

Because of this provision on deductibles, almost 30 to 40 per cent of the claims received by insurers may not have to be settled at all, the IB official said.

“But even if companies fall short of funds, even after exhausting reserves, they can use a portion of paid-up capital,” the official said, adding, “Up to 20 per cent erosion in paid-up capital can be tolerated in the event of catastrophe like this.” Also, non-life insurance companies have investments, the official further said.

Insurers invest a big portion of funds held in reserves and premiums collected from sales of insurance policies in securities issued by the government, preference and general shares and mutual funds or park them in fixed deposit accounts in banks and financial institutions.

Investments of non-life insurers hover around Rs 14.14 billion, show the second quarter unaudited balance sheets of insurance companies and data provided by the IB.

Of this amount, only around 20 per cent has been allocated for long-term investment. This implies most of the investments of insurance companies are short-term in nature — meaning most of the money is either deposited in banking institutions or has been used to purchase government securities with maturity of one year or less.

“If some of the insurance firms start facing cash problems, we will have to request Nepal Rastra Bank to allow such firms to withdraw term deposits or government securities before their maturity period,” the senior IB officials said, adding, “Many insurance companies may have to empty their reserves but they won’t go bust.”

Source:THT