Security of Social Security
While the custodians of
the country’s financial
sector are saying that
they are trying to insulate the country from the adverse effects of ongoing global economic problems, banking and insurance sectors of the country are rocked by local turmoil.
In a country like Nepal where social security is not provided by the government, people have to explore and invent their own venues to generate such security. One such method is parking their savings in the banks and the other method is to buy life insurance policies. Yes, the saving capacity of the people is low, but they still make savings by cutting down expenses on some essentials. Therefore, the savings made by such people are actually their blood and sweat.
But recently, some of the bank depositors received a rude shock of their life when the central bank announced to liquidate one of the development banks. They are helplessly watching their hard earned savings disappearing without any fault of theirs as their savings were lodged with a bank that was duly recognized, approved and monitored by the Central Bank of the country. It is natural that the general public cares less about the financial, economic and social background of the establishment. However, their trust is based on the fact that such establishment is licensed, registered and monitored by a competent authority of the government.
Another shock for the general people who are holding life insurance policies came through two of the life insurance companies. The regulatory authority took some actions in case of one company where there was conflcit among the promoters of the company.
The life insurance policies are not just instruments of savings. They are rather instruments of financial planning to meet their expected financial obligations at different stages of life. For example, the policy helps in meeting the educational and marriage expenses for their children. These are even pension savings - an economic security for old age. Even a minor ripple in such sensitive sector can result into an enormous shock to the life of insurance policy holders.
The worry was further augmented when a news report disclosed that another leading life insurance company had proposed to reduce the bonus rate on life insurance policies. This was a real shock to the policy holders as they had invested in life insurance policies hoping for an assured return. To convince the prospective life insurance clients, the company’s representatives\agents use all sorts of reasons; companies themselves mention the bonus rate clearly in their leaflets, brochures and proposal forms. The buyers of these policies believe on those documents feeling them approved by the regulatory authorities. Here again the registration, licensing and regulatory authorities of the government play a big role in motivating the prospective insurance clients.
Now the question arises: Is the turmoil in those sectors result of non-professional handling of the institutions, negligence of the registration authorities/regulatory authorities or the lack of good governance on part of the management or due to the greed of promoters?
The regulatory authorities of the banking sector should see to it that proper means are devised to protect the interest of all the depositors. There must not be any discrimination between small and big depositors as any loss of deposit would be a national loss and not only a loss of the individual depositors.
Following suggestions can be made in this regard:
a. Depositors’ insurance should be in place to ward off such eventualities.
b. Efforts should be made to see if “Annual Balance Sheet Insurance”(or Profit Insurance) could be arranged wherever needed.
However, these should not be allowed to be used as the pretext for the management or the supervisory authorities to be lax in their duties.
As for the proposal by a life insurance company to reduce its bonus rate, it can be said that its move is in no way justified because the company had been in profit since its inception and all the people associated with the management are enjoying huge benefits. Why only the policy holders, who pay premiums that feed the insurance companies should suffer? Before coming to any conclusion, the regulatory authorities should ensure that:
i) A realistic valuation of the assets of the company is made,
ii) In case the local office of the company is found operating without adequate funds, the parent company should be called upon to put in matching funds for the business under-written by the company,
iii) In case the company has repatriated funds in such a manner as management supervision charges, the same should be brought back to make up for the gap between the bonus rate offered in the past and now proposed,
iv) The management of funds and expenses should properly be monitored and checked. In case the management team was ever awarded any monetary benefits over and above the normal salary and allowances, the same should be called back.
v) Re-insurance premiums remitted should be checked; the rates of re-insurance commissions, profit, commissions etc. should be ascertained and called back wherever possible.
Regulatory authorities should religiously ascertain that the interest of the policy holders is fully protected. The regulatory authorities should also enusre that the bonus rates already committed are maintained by devising means like restricting management expenses and the rates of commissions allowed to the agents. Evaluating long-term investment plans of the company is also needed.
As we know that the insurance sector in Nepal is still in its infancy, in case the confidence of a single client withers from a single company, it will lead to the downfall of the entire insurance sector.
(Singh is an insurance professional)
