Insurance Board to fix solvency margin for insurers

KATHMANDU, Dec 6: 

The Insurance Board will soon make it mandatory for insurance companies to maintain a solvency margin stipulated by the regulator to ensure the country´s insurers have enough funds to settle huge claims emanating from unforeseen events like natural disasters.

The board has already started drafting a guideline in this regard, which, once complete, will chart out methods to calculate the margin that basically gives the ratio of assets held by a company to its liabilities, like insurance claims that can be made by policyholders. 

“Considering the size of insurance sector, we believe companies with asset size double that of their liabilities would be able to absorb big shocks. But we are still working on the details and will soon derive a formula,” Santosh Prasai, a chartered accountant at the board, told Republica. 

Although the domestic insurance market was opened to the private sector around two decades ago, the regulator so far did not feel the urgency to fix solvency margin for insurers due to the small size of the market and the practice of reinsuring almost all of the risks with companies abroad.

As of now, Nepali companies´ reliance on foreign reinsurance companies has not come down significantly. But the insurance business volume is increasing day by day as anything that has been bank financed has to be insured.

“We believe this is the right time to introduce the solvency margin so that we can be aware of the financial health of insurance companies and their ability to absorb shocks,” Prasai said.

Solvency margin generally shows how solvent a company is. For example, if a company´s solvency margin is 90 percent it means it has resources to meet only 90 percent of its liabilities. 

Since 90-percent solvency margin gives an indication of deteriorating financial health of a company, caution should be taken while dealing with such insurer unless it has capital injection plan. So the introduction of provision on margin compliance is also expected to aid the regulator as it can immediately know which companies need special attention.

This, however, should not mean insurance companies that are currently in operation without any regulatory framework on solvency margin do not have any mechanism to deal with unexpected situations. 

All insurance companies set aside a certain portion of the amount, collected from policyholders in the form of premiums, in what is known as mathematical reserve. Insurers dig into this reserve whenever they have to settle claims. 

“As of now all the companies are maintaining that reserve properly,” Prasai said.

Source: Republica