Insurance Its own Risks

What prevents the Nepali insurance business from growing to Rs. 3 billion a year from the present Rs. 1.5 billion level? "Lack of technical competencies", answers a latest study into the current situation of this sector.

As the head of the one-man task force set up by the government to assess the potential for the expansion of insurance sector, Krishna Bahadur Deuja submitted his second and final report to the Finance Minister just before the presentation of this year’s budget to the parliament. Since the minister and his deputies have not made the report public as yet, Deuja does not want to reveal the details himself. But from whatever little he reveals, it turns out that the major constraint for the growth of this sector in Nepal is the technical deficiency, not only among the insurance companies, but within the regulatory set up itself.

Compared to hardly eight insurance companies in India, a small market of Nepal has over a dozen (14 to be precise) and three of them are in life insurance. Two more life insurance companies are to be added very soon. Deuja views, only eight or nine companies are viable in Nepal’s non-life sector given the present conditions. "Still, that does not mean that the others can’t be made viable", he adds.

The solution lies in further professionalization in the business together with its expansion and insuring transparency. And all these issues are interrelated.

To take the example of transparency, Deuja explains that as there are too many companies chasing the small market, insurance in Nepal has been reduced to a business by tender, meaning, the companies offer the rates, facilities and like to the prospect, who select the company that quotes the best. "That is wrong way of doing this business", declares Deuja and warns that it may lead to a situation in which the companies may get overexposed to the risks. As a result, the policy holders may not get their claims settled and/or the shareholders of the insurance companies will lose their investment. On top of these, the reinsurers may lose confidence on Nepali companies. Hence, the need for transparency.

This leads to the need for professionalization, explains Deuja. The main objective of the insurance business is to profit by management of the fund, not by simply maximizing the surplus of premium collected over the compensation paid. The success of the company should be judged by the size of the reserve it has which comes from strengthening the portfolio, which in turn requires spreading the risk over a wide area. This needs expansion of the business. But the technical capabilities necessary for such expansion are found absent in the country, Deuja concludes.

Take, for example, the fact that insurance market includes not only insurance companies, but also other intermediaries, such as surveyors, brokers, reinsurers, loss adjusters and investigators. Deuja says none of these intermediaries, except some surveyors, are developed in Nepal so far. Even surveyors of special types (such as jute surveyors, and aviation surveyors) have to come from abroad when claims in these fields arise. As this results in most of the business going out, Deuja calls for an integrated development of insurance sector, meaning, there should be development of all the intermediaries. The government, together with the Insurance Board, should have done it. "But I didn’t see them trying to do it. Both lack the necessary know-how", says Deuja.

One quite viable area for expansion of Nepal’s insurance business is tourism. Trekkers and mountaineers coming here can be made to buy insurance here. Similarly, the big projects (hydroelectricity, irrigation) are not insured. If they are insured at all, the insurance is with a foreign company. "Though some companies in Nepal are fund to have issued policy for a few such projects, many of the projects are not insured at all. The authorities are simply not concerned to explore these areas of business expansion", says Deuja who has worked also the Executive Chairman of Rastriya Beema Sansthan (RBS), the state-owned insurance company, during 1978-81.

But that is not blaming them, cautions Deuja. "They simply lack the know how". The idea of insurance service fee of 1% to be raised by the Insurance Board was suggested by Deuja himself 10 years ago, as he claims. Now he complains that the fee is not properly utilized. The idea was to use it in carrying out studies, conducting trainings and the like. "But that is not being done", he says. "The authorities simply don’t know how to go about it."

Talking about the life insurance business, Deuja notes that the demand grew substantially after the salary increase last year for the government employees. It shows that if the middle class expands, the insurance business does the same. Larger the middle class, stronger the economy. "Thus, insurance business, is an indicator of the strength of the economy", he argues.

Therefore, Deuja has suggested to carry out an extensive feasibility study in all the urbanised areas. In this connection, he also notes that about Rs. 500 or Rs. 600 million of insurance business goes to India per annum from border areas reflecting on the lack of capabilities in the existing insurance companies.

Regarding the question about how many of the existing 14 companies would survive if there is viability for only eight or nine, Deuja says, nothing can be predicted. "I did not find any Insurance Audit carried out. There was no Inspection Report from Insurance Board. In the absence of such reports, nothing can be said for sure." However, he also adds that if any insurance company fails, it is not going to fail because of the market constraints, but probably because of its own internal management weaknesses. When insurance sector was opened for the private sector in early 1990’s the private sector companies benefited by drawing the technical and managerial manpower from RBS. But that source has almost dried up now, Deuja views. Even the joint-venture companies are facing difficulties, in his opinion. Though they may have the technical competencies, they do not know the local market.

The surprise is that none of the insurance company is feeling to be in danger at present despite the economy not growing at a healthy rate. And this in itself is the indication that the sector supposed to protect others from possible risks is itself in danger and seemingly unaware of it.

Deuja has also assessed that as much as Rs. 300 million goes out from Nepal as duty insurance premium because of lacking points in the Nepal-India transit treaty. So he has recommended for revision in the treaty. In this connection, he has also suggested for tariff strengthening by necessary legislation to increase the transporter’s liability.

About the Nepali tariff structure, Deuja comments that it is still a copy of the Indian tariff structure, not reflecting the actual conditions of the country. He suggests to incorporate the unique Nepali situations in the tariff structure so that the possible risks get incorporated in a judicious way.

Looking at the growing lack of required manpower in Nepali insurance business and at the possibilities for the expansion of the business, Deuja has suggested to set up an Insurance College and training center. If this can be done, the technical capabilities in both private and government sectors can be improved, it is hoped. This in turn will lead to expansion in the business will beyond Rs. 3 billion. "Strengthen insurance, banking and transport, and then you have the complete infrastructure for a strong economy. The present situation is unbalanced one", says Deuja drawing examples from countries like Britain, USA, Japan and others.

Regarding the requirement of Rs. 250 million as minimum paid up capital to open a life insurance company, Deuja calls for revision in the provision to allow some relaxation at least to companies promoted by Nepalis. "In our context, the present requirement is very high. The fund will remain idle for long", he says.

On a question whether he is really confident of his recommendations being implemented, Deuja shows optimism quoting what the finance minister told him while receiving the report. Apart from that, it is up to the insurance companies themselves to press the government for the services that they deserve in return for the fee they pay, he says.

His first report was mainly about the Rastriya Beema Sansthan which is to be separated into two units for life and non-life insurance businesses.

By New Business Age Reporter

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