“Beema Samiti can take decision for the forced merger for the insurance companies if required”

Prof Dr Fatta Bahadur KC is chairman of Beema Samiti—the insurance market regulator of the country. In recent times, the insurance business has observed a massive growth with the number of people buying the insurance policies. With the development of the insurance service, there are also troubles reported in the insurance companies, eliciting regulator’s intervention some time. Similarly, most of the insurance companies are also offering handsome dividend to their shareholders. Lately, many of them have also prioritized stock dividends over the cash dividend in a bid to raise their capital. The attraction of the investors toward the insurance scrips is so vivid that that the sub-index of the insurance group has shot up sharply in recent months. There were news reports that the Beema Samiti was also pushing the insurance companies to soar up their capital. ShareSansar caught up with Prof Dr KC to talk on wide range of issues pertaining to the insurance sector. Excerpts:

How do you assess the current and prospective market of the insurance industry?

Most of the current demands and products mechanism are conventional products. Toward non-life insurance sector, motor insurance accounts for the biggest portfolio closely followed by other like engineering, marine and fire insurance. The demands of the insurance products increase with the growth of the economic activities. While we look life insurance sector, their focus is also on the conventional products like term insurance. Similarly, the insurance policy for the foreign bound migrant workers is compulsory which is sold by the life insurance companies whereas third party motor insurance is mandatory toward non-life insurance. Except those compulsory insurance related products, there are also other products that the companies have been dealing with. There are 26 insurance companies in the country that are offering their various products to the people. Out of the total insurance companies, 9 are life insurance companies while other 17 are non-life. As far as the prospectus of the industry is concerned, Nepal is agricultural country where the roles of the agro insurance from the non-life insurance companies remain significant. If these companies are able to offer surety at a massive level, it would benefit farmers as well as the overall economy of the country. Though we have introduced agricultural insurance couple of years ago, the program has not been able to take an expected pace of progress. Likewise, Nepal is considered to be earthquake-prone zone. If we will be able to introduce programs of insurance at least in the municipalities, it will help to expand the market of the insurance industry.  Apart from these, health insurance, which is provided by both life and non life insurance companies, is largely limited to a certain section or region now. If we can take health insurance at the doorsteps of all people, the insurance service, which is currently satisfied with a certain product or people, will see a massive expansion.

A vast majority of the people are still left out by the insurance companies which are concentrated highly in the urban areas. Have the government and the insurance market regulator Beema Samiti is spearheading any campaigns to ensure that insurance service is reaching at the doorstep of peoples?

Every agency or body has its own responsibility. Beema Samiti is the insurance market regulator which has also the responsibility of promotional role. Creating awareness about the insurance and the development of this sector are also its important roles. The government has its own responsibility. The government should take the insurance industry as an integral part of the economic development. The government can also take ahead the insurance as a social security to peoples who are under a poverty line. Since BS has its office only in the capital city, 26 insurance companies have or are having their structure, i.e. branches and sub-branches, across the country which can also help on raising awareness about the importance of the insurance.

As a regulatory body, how do you evaluate the overall health of the insurance companies?

The capacity of the regulatory body followed by the activeness to ensure transparency, corporate governance and protect interest of the insured peoples is must. Beema Samiti is doing its best to check the activities of 26 insurance companies, to maintain disciplines and to enforce corporate governance norms there. However, it’s not like that our effort is more than sufficient.  We are not even content with the level of our own efforts. However, to fulfill our dreams to take the insurance service in each nook and corner of our country, we should enhance our capacity and become more active in the days to come. For this, Beema Samiti should be transformed into independent and capable institution.

Beema Samiti introduced Corporate Governance Regulation in 2069. However, there are voices that you did not become strict while enforcing it.

While you say we are lenient, the companies are saying that we are becoming too strict to them. What we say is that it should be balanced according to the time. At least the regulation came after a long time. Reform is an ongoing process. A single regulation alone cannot cure all malaises. The attempts which are made should be taken ahead continuously. The voices reflect more expectation which deserves appreciation. Yet, the regulation came when there was nothing. If we move ahead with a gradual process, we do not meet a fate of accident. We have to take all people along with us by convincing them. From the time when there was nothing in place which was giving a leeway for arbitrariness. It’s an achievement for us that at least we are able to instill some notions among companies, like they have to convince the regulators, become clients oriented, remain under the regulation and discipline and meet requirements.

As the insurance companies hold long-term liabilities as well as the size of business and transactions is increasing, don’t you think that the current capital requirements for these companies is low?

It’s not only low, I would rather say that Rs 25 crore or Rs 50 crore is not capital at all. Some life companies’ liabilities have surpassed Rs 16 arba while it is going to increase every day. Insurance companies having capital base of Rs 25 crore or Rs 50 crore or even Rs 1 arba cannot withstand such high liabilities. Though the life fund is secure and the insured peoples are safe, the insurance companies should also win the confidence of clients. The companies should make capable themselves for that. All of the money belongs to people; the life fund that we talk is of people; the fund is the companies’ liabilities. While talking about the strength of the companies, their capital is not adequate. So the companies should have or make plans to raise their capital gradually.

There were also news reports that the Beema Samiti was preparing to make it legal requirement for the companies to soar up capital to a certain level.

We had prescribed the capital for the companies in the law related to insurance. Even few companies have felt to meet such requirement. We have enforced some restrictions to such companies who have failed to meet the capital requirement. These restrictions of branch opening, selling policies and distributing dividend, among other barriers, will compelled to them to meet the capital requirement as soon as possible. Similarly, we are asking them to present the capital increment plan to those companies who have already made the capital requirement as the current prescribed capital is not sufficient. We have been telling them to make plan not at the end of the fiscal year, but time-bound plan which they can implement in a gradual way. Taking decision about the capital requirement is Beema Samiti’s discretion which it will take on right time.

Have you planned the amendment of the law to compel the companies to raise their capital?

Law is not an obstacle for the companies to raise their capital. It is rather flexible. The law has stipulated the minimum capital whereas company can increase their paid-up capital on their own. The company should have their capital at least which can sustain their activities. Earlier five/six years ago, we had proposed the minimum paid up capital of Rs 1 billion for non-life, Rs 2 billion for life and Rs 5 billion for the reinsurance companies in the draft of the new law. The propose draft, however, could not be approved. We are again in the process to revive that proposed draft. The banks have already raised their paid-up capital to Rs 2 billion and are in the process to make it Rs 5 billion while the non-life insurance companies which were established in the similar time are still sitting against the capital of mere amount Rs 25 crore. It doesn’t suit these companies to accept high risk and increase activities by having such a meager capital.  Insurance is by nature a different sector than banking industry. For banks, they have to pay the liabilities that they have taken. But the insurance companies may have millions of liabilities for some thousand rupees premiums. More the insurance companies become stronger, the more trust they win from the peoples. The insurance companies should be able to win the trust of the people at a maximum level. Sound financial health with sufficient capital is must for the insurance companies to win the trust of the people. The management and the board of directors should be highly responsible to maintain sufficient capital while the regulators should create conducive environment.

While talking about forging conducive environment for the insurance companies to raise the capital, there are instances in banking sector where Nepal Rastra Bank is encouraging or prodding banks and financial institutions for the merger. Do you think the possibility of merger and acquisition in the insurance industry?

The insurance companies have to either increase their capital themselves to increase their business or they can be content with the limited business. However, if the companies cannot inject capital but want to increase the business than they could search a right partner and go for the merger. We have been encouraging companies for the merger. The attempt alone does not work until there are tangible results. We have brought the directive on merger and acquisition together. Though two companies were close to the merger deal last year with a target to begin joint operation by Magh last year, the process did not succeed. Either the companies have to raise their capital themselves or they should look a merger option to increase the capital. NRB is in the process to ask the BFIs to raise their capital to Rs 5 billion and the BFIs are also now mentally prepared and planning to maintain the paid-up capital of Rs 5 billion. Many BFIs are haunting partners for the merger to raise their capital. Insurance companies can choose any of the options available for them to raise capital. Now we are telling the insurance companies to make ‘merger’ optional. However, if required, we can take decision for the forced merger for the insurance companies as there is a provision in the M&A directive whereby regulator can instruct companies to adopt the amalgamation.

You told that the insured are secured despite low capital base of the insurance companies. However, serious problems were seen in couple of insurance companies in recent months. How can you say that such problems have not plagued other companies?

I have told you that the insured are secured in regard to the life insurance companies. In terms of non-life insurance companies, few problems were seen. At some points, we have also adopted the policy of ‘one step forward and two steps back’. This means that every insured should be secured and that they should get compensation if they buy policy. Having said that, I don’t claim that every company are on the equal footing.  Some companies are very good; some are good, while some are mediocre. The regulator’s responsibility is to protect the interest of the policy holders and we are doing our best toward that end. At the same time, we should not forget that it’s not like that a company will remain here always. In a liberal economy or open market economy, the companies have choice for the exit also. The regulator’s duty is to show the ways while the companies have their own choice where they want to go. I do not deny that there are no problems at all. However, the regulator would be here to protect the interest of the policy holders.

You talked about the open market policy. But isn’t completely shutting the door for the license against open market?

Open market is not like you doing whatever you want. It has its own norms. Why the financial crisis shook the world? It came mainly due to the ineffectiveness of the regulatory body. We should also see from this angle. What is the demand and the capacity of the economy? How much the economy can sustain? We should take care about these aspects also. Similarly, the capacity of vigilance and inspection of of the regulatory bodies is also an important factor. If the regulatory body is capable and the economy is demanding more, we should grant the new licenses. There are talks of M&A. We are encouraging it with a conclusion that the number of institutions is high. Earlier we opened the door saying that we are in the liberal economic system, but we were bound to control them when there were problems in the institutions. Where there is liberal system, there should also be a control. In planned economy, the government is ‘all-in-all’.  Who will be responsible from the chaos resulting from the haphazard issuance of licenses? Regulation is not only reining on what you have, it is also about monitoring and deciding how much there is demand, supply or need.

Has Beema Samiti come to a conclusion that the available number of the institutions is now sufficient for our current size of the economy?

I have not made such conclusion also. Much of the services of the insurance companies are largely concentrated in the limited urban areas. If you look the business proposals of the interested companies, they again would be concentrated in the same urban areas. Even they do not have even innovative products. They should come first identifying their target group whom they want to serve as well as their target market. There is no point of wrestling for the same slice of cake by all existing and interested new companies. We are saying that insurance sector has not developed much and the coverage of the insurance or penetration is not more than 6 to 7 percent. Its contribution to the GDP is merely 1.5 percent. Insurance activities should have to increase to increase this contribution to 4/5 percent. For this, there should be the programs and products, areas, human resources policy accordingly. If there is situation where there is need of insurance policies to cover all the economic activities, the available number of the institutions would be very few. So you cannot say this is the appropriate number of the institutions that we need. However, we are concerned of unhealthy competition, possible problems, crisis or the risks of policy holders. We have dozen more institutions that have applied for the license of the insurance.

Does the current capacity of the Beema Samiti is enough and able to regulate the insurance market?

No. So we are saying that the regulatory body’s capacity enhancement in terms of human resource, technology and software, among others, is the first need. Similarly, the integrity of the regulators is also a must. The regulators should be capable as well as honest. If the regulator is honest but not capable, it is not going to sustain. Similarly, if the regulator is capable but dishonest, it is going to damage the credibility of the institution. The regulatory body should be independent, have sufficient resources and its capacity should be enhanced. In the similar way, there should be vigilance over the regulatory body to ascertain whether it is moving on the right track or not. If we have too much proximity with the market or fail to deliver, we will not be able to win the trust of the public and policy holders. Independence, capacity and integrity of the regulatory body is very much important.

Often there are complaints of lack of coordination between regulatory bodies like Beema Samiti, NRB and Sebon in the interrelated issues. What is your view?

There might be lack of coordination when the regulatory institutions are different. However, the motives of all these regulatory bodies are common: good governance, proper delivery of service to people and protect the interest of the concerned stakeholders. However, one regulatory agency should make consultation with another for any decision that somehow related with another agency. The coordination is not done by another agency. We have to coordinate ourselves. Since the coordination is done by ourselves, we have to consult with another agency sometime or sometime we may not need to coordinate. I cannot say that we have cent percent coordination among the regulatory bodies, but we meet, consult and discuss with each other if there is a need. Following the financial crisis, the western countries are also practicing the group-wise supervision, supervisory colleges and information sharing.

Recently, Beema Samiti has decided to widen the investment thresholds for the insurance companies amid concentration of their fund on banks’ deposit. Yet, don’t you think that this is not enough?

The fund belongs to people. Insurance companies should not understand it as their money. They are like a trustee. Becoming a trustee, they have to protect the people’s money. The insurance companies’ liabilities have increased in recent times. We have amended the investment policy to make it contextual. This is appropriate for now. Let’s see what will be the result after the implementation of this policy. If there is need, we will be more liberal on it or we may tighten the policy. Provided that we feel that there is high risk of misuse of public’s money or it is in stake, we may have to review the policy.

In recent months, shares of insurance companies are being traded like a hotcake. The sub-index of the Insurance group has also jumped in a astounding way. What do you think could be the reasons?

Many factors have contributed for the growth of this sub-index. The first and foremost reason might be the activeness of the insurance market regulator to ensure transparency and good governance in the insurance companies. We have been telling the companies to cut off their unnecessary expenses. There were companies here who had not been able to offer anything to its shareholders for 14/15 years. Why are they now capable to offer such lucrative returns now? This is because the insurance market regulator is standing now with carrot and stick. It has been making relentless efforts to make the companies responsible and maintain austerity. The second reason could be the sentiment of the investors that they are secured with their investment in this sector. The regulator’s supervision in the insurance companies is the major source of such sentiments of the investors. I don’t mean that the regulator’s effort is adequate, yet it’s all about perception and sentiment among the investors in the capital market. Third, it’s about the issue of the capital of the companies. Now, we are encouraging the companies for stock dividends over cash dividend. Though companies may not be required to soar up their capital instantly, they are bound to raise it in phase-wise manner.  This could also be a factor to lure the investors for the insurance scrip. Fourth, we haven’t made any plan to convert the 70 percent promoter shares to the public which could have led to the supply constraint, thereby leading to the demand and supply mismatch.

Don’t you think that the spin-off process of Beema Sansthan to make it life and non-life insurance companies has moved at a snail pace?

At a time when there was nothing happened, the development so far can be taken as an achievement. It’s not a full achievement. We made a lot of attempts since I joined the Beema Samiti. We dispatched many letters. At least, we have succeeded in splitting it. Two institutions can be seen now. Now they are bound to do it as the process has finally moved ahead formally. Doing business, being competitive and becoming more client-oriented, among others, is up to them now.