Cover Feature

Insurance Business Potentials Untapped

The seemingly saturated insurance market in Nepal has a tremendous potential for growth, agree both the authorities and insurance companies. However, the potentials are largely untapped

Judging by gross premium collected, insurance business in Nepal is expected to reach Rs. 1500 million this year, as estimated by Beema Samiti (Insurance Board), that regulates the business in the country. Compared to the potentials in the business, the figure is too low, agree both the Board and the insurance companies, but accuse each other and the government of not doing enough to realize the potentials.

Though it is difficult to estimate the exact volume of business potential in insurance, one can have a rough idea by looking at the insurance depth. In 1997/98, the gross premium collection in Nepal as percentage of total non-agricultural GDP reached 0.77, and is expected to have reached 0.88% in 1998/99. The corresponding figure for developed countries is said to be between 4% and 6%. Similarly, premium collection per capita of population was Rs. 70.33 in Nepal in 1997/98, and it is expected to have reached around Rs. 71 (less than a dollar) in 1998/99. The corresponding figure for developed countries is said to be above US$ 2000.

Looked at that way, the country’s untapped potentials in this business are just enormous, but the realizable volume is far less than that. Compared to the Insurance Board's estimation of Rs. 1500 million for this year (Rs. 300 million in life and Rs. 1200 million in non-life), Rabi Bhakta Shrestha, Chairman of United Insurance, puts the volume to have crossed Rs. 1400 million in non-life itself. While Rajendra Khetan, Director of Everest Insurance thinks it is not difficult to collect a total of Rs. 2500 million as life and non-life premiums, Indra Prasad Karmacharya, Insurance Advisor of Neco Insurance Company, is more optimistic, and says, it is possible to collect Rs. 2500 million in non-life segment alone.

Rakesh Kumar, the Manager for Nepal of The Oriental Insurance Co. Ltd., an Indian company operating in Nepal for the last 43 years, says, "the potential volume of insurance business is very high as compared to the premium underwritten". Being a landlocked country the marine insurance potential is very high, he says. The projects constructed here are being insured outside the country. If they are made to be underwritten here, premium generation will be very high, he points out.

But, if the history is any guide, the target of Rs. 2500 million still seems to be a couple of years away at least. The highest annual increment in premium collection (30%) was achieved in 1990/91. The increment on year-to-year basis was as low as 11% in 1996/97, though it went up to 21% the next year.

That is however, in total of life and non-life insurance premium combined. The picture looks not much different when the two segments are looked at separately. For example, in non-life, the year-to-year increment in 1990/91 was around 24% only. Though it increased to 27% in 1994/95, it fell down to 12% in 1995/96 and to 11.52% in 1996/97, but went up to 22% in 1997/98. This shows that an annual increment of 25% is well above the normal rate and needs well-planned effort to realize. Some insurance professionals, such as Om Singh, the President of National Life and General Insurance Company Ltd., (NLGI) a 12 year old composite company, even go to the extent of declaring that Nepal has no growth potential in insurance sector. "The insurance business in Nepal in a way has reached saturation point", says Singh, who is also the President of recently formed Nepal Insurance Association.

Prasad Sharma, Chairman of Insurance Board, alleges them of taking short-cuts and snatching clients of their competitors through unethical means at times. Facts also seem to substantiate Sharma’s point. The largest player state-owned Rastriya Beema Sansthan (RBS), has been experiencing a steady reduction in its volume of premium collection in non-life segment. That is despite the fact that almost all the business from the government sector - including that of RNAC aircraft - goes to RBS. Some of the private sector companies too have experienced stagnation in their premium earning.

Rabi Bhahadur Shrestha

That may be a reflection of more efficient business strategy, including that of marketing, on the part of the successful private sector players. But what about the question of unethical practices? A few months back the Board withdrew the marine portfolio of an insurance company, though it was restored a month after the withdrawal. Marine was under non-tariff category, so companies were taking the liberty of underquoting the rates in the pretext of giving discounts. According to Sharma, risks that would normally carry a rate of Rs. 0.25 were being underwritten for as low as Rs. 0.02. There was a threat for Nepal of achieving the dubious distinction of a ‘claim dumping site’, he recalls. In 1997/98, marine had the highest loss ratio (66.31%) among all the categories of insurance. Though marine is still under non-tariff category, the Board has now fixed rates for various classes of marine insurance.

While the marine experience is still fresh, Sharma informs that there are reports of similar cases in fire insurance, which is a tariff category. "We’re looking into the problem and considering downward revision in the tariff", he says. The companies too agree that there are unethical practices going on, and charge their competitors for the same, claiming themselves to be clean.

Another complain against the companies, according to Sharma, is their growing tendency to appeal against the decisions of the Board, which also has some quasi-judicial functions, like arbitrating in insurance disputes between the companies and their clients. The companies complain that the Board is too much biased in favour of the consumer, but Sharma defends his office with the argument that as a regulating body it has to be sympathetic towards the consumers. "Moreover, as all of our decisions have been upheld by the courts, appealing against our decision is basically a strategy on the part of companies to delay the payment of claim money", he says.

Rajendra Khetan

Though he hastens to add that it is the right of the companies to go for an appeal, his displeasure is at its growing tendency. Ant this tendency is said to be higher in the state owned RBS, more so in life insurance. The authorities of RBS refused to comment on the issue altogether. Private sector players claim that there is a very low number of complaints against them in the Board. "Not a single complaint has been lodged in the Board against our company so far," says Mahendra Shrestha, Managing Director of Himalayan General Insurance (HGI), a six-year-old company engaged in general insurance.

Sharma’s allegation that companies are not doing their job of promoting the business is not digested by the companies. Rajendra Khetan of Everest Insurance asks to refer to the premium collection data over the years and see the difference in growth before and after the entry of the private sector in the business, especially after his company started business. Sharma argues that if the companies are doing the business, it is their duty, not of the Board, to promote their business. The Board is to regulate, he says. But Khatan counters the argument saying that as the companies are paying 1% of their premium to the Board, it is natural that the companies expect the Board to carry out the promotional activities. "Nepal Rastra Bank is promoting banking even though the banks do not pay such fee", says Khetan. Insurance, according to him, needs grassroot marketing to create and expand awareness among the general people, which is very low at present. And as it is not possible for an insurance company to do it on its own, it is the duty of the Board to expand the size of the cake, thinks Khetan.

Companies do not go to the grassroot level is because of their lack of capabilities, points out Sharma. He gives the example of manpower. Most of the manpower in the companies are from RBS, and that source is now exhausting rapidly, he says, thus showing the need for companies to train manpower. Unfortunately, they are not developing their manpower, he says. Only a few of the domestic companies, such as NLGI and HGI, mention that their staff are pursuing long-term course on insurance.

Sharma gives several potential areas of business that companies have not paid attention to, due to their lack of manpower. One such area is shop insurance and the other house insurance. If only a fraction of so many shops existing around the towns is insured, that would make up a really big volume, he says. In case of house insurance, Sharma informs that the policy is not expensive - with Rs. 2000 premium for a year, a house worth Rs. 2 million is insured, and the services included in it are the insurance of household ornaments (which otherwise would cost Rs. 12 or 13 per thousand), breakage of appliances like TV and VCR, and Rs. 10,000 compensation if the head of the household meets with an accident. Looking into the fact that Nepal falls in a zone identified as the second most risky in terms of possible earthquake, nobody would resist buying the policy, provided the companies do intensive marketing, says Sharma. An advertisement issued by Everest Insurance says it is insuring houses for premium amount not less than Rs. 4000.

One constraint in the growth of insurance market is the tendency to underinsure the property. One major source of business for the companies is the bank loan, as banks make it compulsory for their clients to insure the property that is mortgaged to the bank against the loan. But to save the premium, the borrowers insure the property only to cover the value of the loan. "This is not insurance at all", says Sharma and points out that the companies need to explain the situation to the clients as well as to the banks. With the practice of under insurance going on, and the claim settlement not being as speedy and as sufficient as expected, the willingness on the part of the clients to insure their property will not rise. The tendency of the companies to appeal against the decisions of the Board is another cause for waning willingness toward insurance among the prospects.

Sharma’s complaints are not limited to the companies. He also calls upon the judicial authorities to change their traditional way of thinking. When asked to comment on the complaints of the general people that the loss they sustain as a result of vehicle accident are not compensated because the loss valuation is limited to an amount of Rs. 300,000 at the maximum, Sharma says the provision about this in the law has been crippled as the judicial authorities have been following a traditional style in looking into such cases (see interview).

In the background of all these the insurance companies say that they have been finding it very difficult to expand their business to the potential level. Of the 13 players in the field, Credit Guarantee Corporation is limited to livestock insurance alone. That leaves 12 players vying for their respective share of the pie of insurance business. In the life insurance sector, a lot of business is going out to India, not only from Terai, but from other areas as well. The primary reason identified is the bonus differential between the Nepali and Indian companies. According to Sharma, while the bonus per thousand paid by an Indian company to the holder of life insurance policy is around 80, the corresponding rate in Nepal is 65 in case of private sector National Life and General Insurance Co. Ltd. that raised the rate to the present level since July 15, 1994. But that of the state-owned RBS has reached only 62.2 per thousand. "As long as this wide difference in the bonus rates continues between Nepali and Indian companies, the business will continue going out", says Sharma.

In non-life insurance, however, the law has banned properties from being insured abroad. But, two Indian companies operating through their branches here occupy an enviable 20% share in non-life insurance business, estimates Sharma. That leaves 10 Nepali companies sharing the remaining 80% of the market.

Copying others is a practice that seems to be prevalent among the insurance companies. One company comes up with a medical plan and all the others follow suit. The product recently introduced by some and being copied by others is trekkers insurance. Commenting on the tendency, Khetan says, as the market is small (only around Rs. 1 billion rich) because of low purchasing power of the people, only a limited number of packages are available and every company has to play around these packages improving the product to make it more attractive than that of the other. In this context, the opening of aviation sector has been providing the companies some opportunities. However, only four or five of the 12 companies are licensed to handle the portfolio. RBS is the leader in this segment, followed by Neco Insurance of which 60% of the portfolio is composed of aviation. Everest, HGI and United are among those licensed to underwrite aviation insurance. Fifty-one year old Nepal Insurance too is preparing to begin this business. But, NLGI has stopped underwriting aviation insurance since 1996/97 for the growing claims and lower profit margins in this category.

Life insurance has been a segment that has raised some controversies recently, particularly with the letter of intent granted to a foreign company while a number of applications from local companies are still pending with the Insurance Board. Khetan and his team have already christened their proposed company as Kathmandu Beema Company (KBC). People involved in HGI and United Insurance also have applied for license to take up life insurance. Life Insurance Company of India too had made some gestures last year to enter Nepal in this field. But nothing has come out about the other proposals, while American Life Insurance Company (ALICO) has managed to get the letter of intent after over two years of efforts.

Sharma says that though his office is not so dissatisfied with the functioning of private sector domestic companies, he doubts whether they would be able to match the existing bonus rates of Nepali companies, forget about the rate of LIC. If the companies plan to provide the bonus at the existing rate from the very beginning, the minimum capital requirement as per the existing law will not be sufficient to sustain the business. So the Board has revised the criteria and incased the capital requirement for a new life insurance company to Rs. 250 million from existing Rs. 50 million. But it has asked ALICO to bring Rs. 50 million only, not Rs. 250 million. The controversy on life insurance licence was further heated up recently by Finance Minister Dr. Ram Sharan Mahat who, in his keynote address at the just concluded 12th Insurance Congress of Developing Countries (ICDC) in Kathmandu, said that the life insurance market was opened for private and foreign investors. Khetan promptly issued a press release the next day complaining that his application was pending with the Insurance Board for over a year, while an international company is at the stage of starting its operation.

Domestic applicants seem to be justified in their worry at the delay in granting them license. As Mahendra Shrestha of HGI says, since life insurance policies are long-term policies, whoever enters the field earlier will always be in an advantage. It is not so in non life insurance where the policy is for only one year duration. Therefore Shrestha says, the domestic applicants must get the license together with the foreign applicant. Otherwise it would be discrimination against the domestic applicants, he adds.

As the experience shared by participants of 12th ICDC showed, several trends with far-reaching implications on insurance business are spreading across the world. With the market saturated in their countries, insurance companies from developed industrialized countries are entering the developing countries in search of markets, a case example being ALICO coming to Nepal. The expansion of Internet communication has made it possible to sell insurance policies online, making the agents redundant for at least the traditional policies. At the present level of communication facilities and insurance awareness in Nepal, the insurance companies still may not need to worry about this trend overcoming them right now. But it may be worthwhile for them to start thinking on those lines.

A matter of more immediate concern may be the wave of decontrol in this business brought about by the broader wave of economic liberalization. While the government in Nepal has already decided to privatize RBS, the decision has not been implemented as the auditing of RBS accounts has been pending for several years. The RBS auditing has also been blocking the implementation of another decision - that of separating insurance companies into life and non-life segments. India too has decided to open up insurance business for the private sector. The decontrol element of

Rakesh Kumar

liberalization in insurance is removal of tariff system. Egypt has already abolished Accident and Marine tariffs, whereas Fire and Motor tariffs will be abolished by mid-2000, according to Samia Mohamed Heed, Chief Executive (Marine, Oil & Aviation) of the Egyptian Reinsurance Company, who was in Kathmandu to participate in the 12th ICDC. What will be the situation like if Nepal has to do the same? That may be one of the questions relevant in the background of unethical practices prevailing in this business here and the country's preparation to acquire WTO membership

"Insurance is now becoming more varied - VT Ayllon & Isagani De Castro
"Companies aren’t doing as expected"- Lava Prasad Sharma
"In life insurance, the companies should get license together" - Mahendra Krishna Shrestha
"There’s no unhealthy competition" - Sunil Gupta

"Insurance is now becoming more varied"

VT Ayllon & Isagani De Castro

Vicente Ayllon and Isagani De Castro, both from Philippines, were in Kathmandu recently, to attend the 12th ICDC, a jamboree of insurance professionals from developing countries, held here. Ayllon and De Castro are the outgoing President and Secretary General of AIRDC respectively. While Ayllon is the Chairman of the Board of Insular Group of Companies involved in life and general insurance and investment fund management, De Castro is the President of Present Value Managers Inc. ( actuaries and financial consultants). Editor Madan Lamsal interviewed them together on the sidelines of ICDC. Excerpts:

VT Ayllon

The trend of the business world-wide is liberalization, opening up of markets, allowing foreign companies to come into the market.

How is the trend in terms of growth?

Well, in developed countries there is not much growth anymore, that is why they are looking at the developing countries, where they see prospects for more growth. That is why globalization is taking place. They are going global into the developing countries. Now we know that there is a crisis in Asia. So the growth of insurance is not that much. But there is still a growth.

What challenges do you see in the insurance business in developing countries?

For us poor and developing countries where our market is small, we cannot grow as fast as the developed countries. So what we are hopeful of is that perhaps insurance can help in generating investible funds, so that the capital market of the country is developed. With more capital, you have more investments for economic growth and the market increases. So more people will buy insurance.

Till now, it has only started life-insurance competition from the international markets. But there are also other types of benefits that the finance and banking industry offers in terms of pensions. Insurance is now becoming more varied. There are now other types of benefits that are not only offered by insurance companies but by other financial and banking companies as well.

What steps would you suggest for expansion of the insurance business in a country like Nepal?

In the case of Nepal, the focus should be on developing the economy so that there is more money in the hands of the people. When the people have money, they will then buy insurance. This could also work the other way round. Because you are able to generate savings from the people, the money is invested and therefore the market also grows. You were talking about technology earlier, that is another problem. While we are in the age of the Internet, very few people in Nepal have computers. Communication is also not very efficient. And therefore dependence on Internet selling etc, is not going to be very progressive.

What is lacking?

The awareness is lacking. But not only that. Resources also are lacking. And what is very important is education. If people get to know what the advantages and benefits of insurance are, then more people will buy insurance.

There are arguments that life-insurance should be kept with the government. What is your opinion?

Well, the government should take care of it. Insurance in reality is also a social security. You protect upto a certain level of income of the people. And you open the upper market to private insurance. That is the main role of the government. The poor people will not be able to afford for insurance and therefore they will be unprotected. But the people who have the money can buy insurance from the private sector. Of course, that also depends on individual countries. The more developed countries sometimes offer too much to the people, all sorts of security, pensions, even medical aid. But in developing countries, we should try to take care of the basic necessities first.

What is the experience of crop insurance in Philippines?

Crop insurance has been limited to rice and corn, the basic food necessity of the people. And it is highly subsidized. The premium is very high and the insurance is normally given only to those who borrow money to plant the crops. So far, the experience is okay, and we are also re-insured in case of catastrophic losses. It is not really as extensive as in some other countries, like South American countries.

How difficult is it to monitor crop insurance?

It is very difficult. Because there are a lots of moral hazards. This is where the subsidy by the government is very important. On a private basis, it is difficult to insure crops. The government has to be a part of it.

"Companies aren’t doing as expected"

Lava Prasad Sharma
Chairman, Insurance Board

How do you evaluate the insurance business in Nepal?

Looking at the present situation it is not going rapidly forward but there is gradual growth. We are now expecting better growth as compared to five years back. As long as the country is not industrialized and big projects do not come in, the non-life insurance segment will not see a rapid development. In the meantime, we are trying to create awareness among the public.

Despite applications from Nepali companies why did you choose a foreign company - ALICO - to grant license for life insurance?

Yes we have received applications from Nepali companies. Some of them look genuine but the others seem to be driven by the assumption that there is big money in life insurance. Looking at the functioning of the existing companies we are satisfied but, as per the norms of the sector today in Nepal, a new life insurance company must be able to match the bonus rate of existing companies. How will a new company be able to provide that? That is the difficulty. The existing law says that the paid up capital of an insurance company has to be Rs. 50 million. How can we expect a company with that much capital to match the bonus rate of RBS? How many customers will go to this new insurance company? It will naturally take time. Three or four years down the road the capital will be exhausted.

What is Beema Samiti going to do to improve the capabilities of insurance companies?

We have proposed to amend the law and have developed some standards. The paid up capital should be increased to Rs. 250 million. Thus the fund will not exhaust in a short time span and the retention capacity of the company will increase. Also we are making it essential to have at least three individual manpower well versed in insurance underwriting, reinsurance and insurance accounts. The logic that Nepali company should get priority over foreign companies is also not right. To issue licence to companies that are lacking in capital and in manpower would be putting the insurance sector into trouble. Our policy is not to avoid giving license. But it is not right to endanger the money of any individual who has taken out a life insurance policy.

Right now, we have been pressurizing insurance companies to train their manpower, to bring about awareness among the common people, and to introduce new products. As a regulatory body, Beema Samiti is not required to work on these, but we have felt the need for doing these things ourselves. So we also have been organizing seminars and workshops at various places of the country to educate the people about insurance. We have even placed advertisements in newspapers.

What problems do you see in this sector?

The problem with Nepali companies is that they are not keen on bringing in new products. Now you have foreign companies making entry into the market. The cake is small and you have everyone fighting for his own shares.

How about the idea of granting permission for joint venture insurance companies?

There are two joint-venture companies in the non-life sector. But again things have not gone according to out expectations. Beema Samiti has wanted companies to come up as joint venture. But there is no market. We also know that two or three of the companies are doing very poorly. In that state, how can we grant another company license in the non-life sector? As far as life insurance is concerned, there is market for one medium sized and two big companies at the most.

As there have already been too many companies, isn’t it time now that the government got out of the insurance sector?

In due course of time, the government will privatize the non-life part of the Rastriya Beema Sansthan, though it is also being considered that the government should run the life insurance sector, but under a competitive environment. It may also go on a joint-venture with a big and reputed company.

You said that companies have not performed as per your expectations. What are your expectations?

Insurance is also a service sector. Had the companies been doing a service, we would have nothing to say. If they are doing business, it is their duty to promote their business. Our duty is only to regulate. But the companies have not been promoting business. They are not placing their development officers at various places, they are not training their manpower. A tendency to harass the clients is going up, as can be seen from the growing tendency to appeal against the decision of the Beema Samiti. As a regulatory body we naturally look positively at the case of a consumer, and the court has upheld all our decisions so far. Such tendency to appeal is to delay the payment of the claim money. This discourages people from going for insurance.

In vehicle insurance there are complains that the compensation is not enough to cover the loss.

The provision of vehicle insurance has in fact been crippled because parties concerned have not appreciated its spirit. As the premium in commercial vehicle insurance is high, there is a tendency to insure for a value of Rs. 300,000 only. With this sort of policy the insurance company is liable for only upto Rs. 300,000. The law specifically has made it compulsory for vehicle owners to buy third party liability insurance, but it has also stated that in case this risk is not covered, the owner of the vehicle will be liable for the third party losses. But the owners are showing their Rs. 300000 policy and getting away without paying the additional losses incurred by the third parties in case of accidents. The courts have to look into it properly. If the vehicle owners are made strictly liable for third party losses, they will be forced to buy third party liability insurance on their vehicles, and those third parties who incur losses due to vehicle accidents will be duly compensated.

How do you view the provision that if a person is overrun by a vehicle and dies, his family gets only Rs. 17,000?

The strange thing here is that if a buffalo is run over by a vehicle and killed, the driver or the vehicle owner is liable to pay Rs 25,000 to Rs, 30,000. In case a man is killed, the amount comes down to Rs. 17,500. Ten thousand rupees is for his funeral and even we do not know what the remaining Rs. 7,500 is for. Anyway, 17,500 for the life of a man is too trivial and amount. In India, if a man dies in accident no fault liability of Rs. 40,000 is paid instantaneously. We have been trying to have similar practices here. In body injury, we have decided at amounts as high as Rs. 125,000 and the payments have been made.

What developments are going on in introducing insurance to the agricultural sector?

Insurance companies have not gone to the agriculture sector. With the last budget, the Finance Minister introduced crop insurance. It was essential that a beginning was made. But we must not jump into the sector at once. Since we are already starting late, we might as well learn from the experience of other countries and make a good beginning so that a situation does not arise where the company has to shut down. The reason is that a farmer will not be able to afford this insurance. Crop insurance will mostly be on the loan. In other countries, the government bears 50% of the premium, while the lender and the farmer together bear the rest. This is gradually being changed and now the government bears 50 percent and the farmer the other 50 percent. How are we going to go about it? That has to be decided. That is on the premium side. When there is a claim and if no manpower can reach the place soon enough, the claim becomes inflated. Now what can ideally be done in this situation is to choose a particular area and take only one or two crops. That could work as an experiment and then we could gradually spread into other areas and take care of other crops as well. But if we go about in a haphazard manner, we will not be successful.

How is the experience in insurance of livestock that has been going on for some time?

It also cannot be said to have been done in a satisfactory manner. But yes, it has been started. It is loan-based insurance and there is lack of manpower and proper training facilities. So there is difficulty in that front too. We are discussing to find ways to improve this.

"In life insurance, the companies should get license together"

Mahendra Krishna Shrestha
Managing Director, Himalayan General Insurance Co. Ltd.

How has been your business?

Although the total market size has not seen much growth in the last two years, our company’s business has witnessed substantial growth. In 1997/98, our premium income was Rs. 54.3 million, that increased to Rs. 70 million in 1998/99, an over 30% growth. By February end this year we have collected over Rs. 80 million, and by the end of the year, we expect to touch around Rs. 110 million. One of our selling points is that there has not been a single complaint lodged against us in the Insurance Board. We have been able to satisfy our clients when settling claims.

What is the growth trend in the market?

There has been substantial growth-rate in the non-life segment because of the expansion of the aviation industry. A number of airlines have come up. Insurance premium for a small aircraft would cost around US$ 40 to 60 thousand a year. That would come to around Rs. 2.5 or 3 million. Whereas, in fire insurance, Rs. 3 million premium is not very common.

Is there any unhealthy competition in this sector?

Not much. From business point of view, there is tariff control in two categories - fire and vehicle. However, recently, rates have also been fixed on marine as the rates quoted had gone down significantly. Besides these, other segments are non-tariff. When we pursue the market, we try to go to new clients. We’ve been quite successful to gain an impressive 90% renewal rate. That is our strength.

What is hindering the growth of this sector?

The growth of the financial sector with a number of finance companies and banks coming up, has also helped this business to grow. People did hold negative attitude towards insurance companies previously. They thought that insurance companies were eager to collect premium but not too willing when settling claims. That was also a hindering factor. But the growth of the insurance sector and the effort to provide better service by insurance companies, has changed that attitude quite a bit. Still I think that the general concept and consciousness is lacking.

What is your field of specialization?

We’re taking every sector in non-life. Our prime focus is obviously on fire. We have reasonable portfolio in the aviation sector as well. We cannot pinpoint any sector as the field of specialization. We’ve also offered some two or three parties "loss-of-profit" coverage.

What is your reaction to the permission being granted to ALICO?

We also have applied for life insurance under a separate company. Maybe others also have applied. At the policy level, decisions need to be made as to the criteria that has to be met by companies to gain licence for life insurance opertion. It is fine that ALICO gets the licence. But other companies that meet the set criteria must also be given licence.

How will your proposed company face the competition from ALICO ?

Our life insurance company will be a joint venture with an international insurance company that is among the top five in the world. So we need not worry. But if ALICO gets lincence for life insurance operation now and Nepali companies obtaint the licence two years later, then they will find difficulty in competing with ALICO. In non-life it would not make much difference as the policy is only for one year. But in non-life, it is not so.

What new products are you bringing in?

Right now we’re receiving a lot of enquiries about professional indemnity policies from architects, engineers, doctors, accountants etc. But we’re not yet sure about the volume of business and what would be the rates of premium.

How has the attitude of government authorities been?

Initially there were problems in remittance of premium to reinsures. But now the process has been smoothened though there is still room for improvement.

What do you think are the critical success factors?

Service is one of the critical factors. Any company that earns the reputation of being good in service will naturally get good business. Trained and techically sound manpower is also important. Initially that was a problem, but now it is not that serious. We are encouraging our staff to take the Indian Institute of Insurance examinations. For this fellowship has been arranged for one staff. At the end of the day, for the company to survive, you need not only experienced but technically competent and qualified manpower.

What is your comment on government still running an insurance company?

When there is a government run insurance company, most of the business from the government will automatically go to that company. It is only now that some of the other companies are getting business from the government. Talks of privatising Beema Sansthan has been going on for three or four years. But I don’t think there has been any progress on that front. I am not saying that the government should not run the company. There were also talks of opening a re-insurance company here. In that case, an option could be to convert Beema Sansthan into a re-insurance company leaving retail business to other companies.

"There’s no unhealthy competition"

Sunil Gupta
Asst. Manager for Nepal
National Insurance Company Ltd.

How is your business?

We are doing very well. At present, in terms of volume, we rank fourth among all the companies. Last year we made about Rs. 100 million in premium. This year our target is to reach Rs. 125 million. Competition in Nepal for general insurance has become very fierce because we now have 12 companies fighting each other. Our total market is about Rs. 1 billion rich, which is very small when you look at the market of other countries, even SAARC countries like India, Pakistan, Sri Lanka and Bangladesh. Among the SAARC nations, I think Sri Lanka is at the top in terms of per capita insurance premium.

Is the competition unhealthy here in Nepal?

No, I don’t think there is unhealthy competition. The trend today all over the world is for free market economy. We should be keen for competition. I think free competition should be allowed because then only you can give better services to customers.

Your marine portfolio was withdrawn recently?

It was suspended for a month. The main reason was that the guidelines that we had received from Beema Samiti regarding the marine insurance, were not exhaustive. The guidelines were very limited, without considering all the details of marine insurance. Marine insurance is a very vast class of insurance. What is practiced all over the world is that for big clients, over a large volume, discount is given on the premium charged. This is called a special declaration policy. So we had also allowed one or two clients those discounts. Later we came to know from Beema Samiti that that should not have been done. Then we tried to recover those discounts and cancel the polices. So it was just a case of misunderstanding in the interpretation of the guidelines.

What would be the potential volume of insurance business in Nepal?

Today it is around Rs. 1 billion and I think it should grow by at least 20 percent every year. This can be achieved by focusing on the non-traditional sectors. By non-traditional policies, I mean personal accident policy and medical policies.

The market size is very small. What can be done to expand it?

Insurance is a supportive sector. It is supporting the primary and secondary sectors. It is a service sector. In Nepal’s case, the economy is not strong and the progress is not very positive in terms of percentage growth. Economic growth has been negative in the last three or four years. We hope this year that the economy picks up and so does the growth of the insurance sector. If industry is doing well and infrastructure and agriculture is doing well, then insurance too will grow. Also insurance companies in Nepal, till date, are only focusing on the big sectors. If we focus on the middle and lower class of society then we will be able to grow.

Can you suggest any change policy-wise?

We have a seminar coming up which is being organized by Beema Sansthan regarding legislation of marine issues. There should be a provision to recover the loss from the carrier. Till date, there is no such law in Nepal. Once the goods are lost or stolen or destroyed due to the negligence of carriers, there should be some recovery.

What new services has your company introduced recently?

Last year we introduced a policy for tourists and foreigners for their stay in Nepal. It was for a dollar only and lots of benefits were given to the tourists. We also launched a hotel protection policy which is for the tourism industry and a comprehensive coverage for the hotels. From time to time we come up with new policies and submit them to Beema Samiti for approval after which they are introduced into the market.

How successful were those policies?

The policy for the tourists did not do very well because we did not have the sufficient marketing infrastructure. In case of other policies, we have been quite successful.

What difference in service do you provide from other insurance companies?

The main thing in the insurance business is how you are going to service the claims financially. In case of big disasters, the losses may be in billions. One single company may not have the capacity to bear the full loss. We, being a government of India company and a very big company, are also providing re-insurance support for the local Nepali market. We are accepting certain re-insurance offers from the local companies and giving them support to accept the risk in cases that are beyond their capacity.

What new services are you planning to launch?

In the coming years, we shall like to launch low premium personal accident policies for the middle and lower class people. We shall try to give more emphasis on house-hold policies. This is a comprehensive policy for ordinary house-hold persons to insure them from burglaries and thefts that are becoming common in Kathmandu.

ALICO Case Generating Controversies

By Amit Dhakal

The prospect of a foreign insurance company’s entry into Nepali market has now shrouded into cold water stumbling in a judicial scrutiny

Supreme Court recently issued a show cause notice to the Insurance Board, Ministry of Finance and Nepal Rastra Bank asking why the American Life Insurance Corporation (ALICO) has been "theoretically" granted permission to operate in Nepal while keeping the application of the interested Nepali players in freeze. And given the precedence of unusually protracted litigation process in the Supreme Court, ALICO’s entry into Nepali market is likely to hinge in legal wrangle for some time to come.

Insurance Board, after obtaining approval from the Ministry of Finance few months back asked the American Multinational, ALICO to bring in fifty million rupees equivalent foreign currency to obtain the operating license.

The Insurance Board in its letter to ALICO has also asked the Corporation to fulfill the legal requirements demanded by the Company Act. It is precisely here that the entry of the American Multinational is likely to hinge in the legal wrangle.

Company Act, on the one hand has some confusion regarding the entry of foreign multinationals in insurance sector, on the other hand, it is in conflict with the Insurance Act 1993, which has clearly provisioned the entry of a branch of a foreign body corporate in Nepali insurance market. It was as per this Act that Insurance Board forwarded the process to grant license to ALICIO. However, the Company Act is not clear as to whether ALICO should register in Company Registrar’s Office or not. ALICO has argued that its registration in the Company Registrar’s Office is not binding but an optional one.

The directors in the Insurance Board themselves were divided on this issue though majority were of the opinion that registration is optional. It was because of this difference of opinion, Insurance Board chose to transfer the burden to ALICO itself by it asking to fulfil the requirements of the Company Act. ALICO is trying to avoid the registration in Company Registrar’s Office because the Office registers only Body Corporate and not the branch.

This wrangle might be settled in the court but going by the unusually protracted litigation process of the Supreme Court, one thing is very clear, that it will give bad taste to the foreign investors. ALICO applied to obtain the operating license one and half-year back but has slipped into tangle since then. Ministry of Finance took over a year to decide whether it should endorse the recommendation of Insurance Board to grant operating license to ALICO. Communist Party of Nepal-Unified Marxist-Leninist, the main opposition party in the parliament, has already opposed the entry of foreign multinationals in the life insurance sector before the local aspirants.

Going by the Insurance Act 1993, it seems clear that the government wants to permit the foreign insurance company in the form of branch. But the current legal wrangling is also vindictive of the fact that the government has overlooked the necessary legal amendments after the formulation of Insurance Act, 1993.

Another side of this process to involve the foreign sector in the insurance market is neglect of the interest of local aspirants.

Two applications of the local investors are still pending in Insurance Board. The Board has argued that the Nepali investors lack managerial skill, adequate manpower and desired level of credibility. But the local aspirants have sorely rejected these arguments of the regulatory body.

The Board has further worsened the matter by setting new criteria, which has increased the present level of paid up capital to Rs 250 million for the new entrants. One new criterion also says that Nepali investors should come in joint venture to operate life insurance business. This criterion, which is yet to be approved by the parliament, is tantamount to discrimination against the domestic investors.

It would be a wrong postulation to ask the domestic investors to come in joint venture, while a foreign investor is permitted a hundred percent equity participation in insurance market. Hundred percent equity participation for local investors and joint venture participation to the foreigner would have looked more justified.

Lava Prasad Sharma, Chairman of the Insurance Board, however, argues that the provision of joint venture to the local investors will be scrapped after the amendment in the Insurance Act that will increase the paid up capital to 250 million rupees. Still there will be a room for the local investors to complain of discrimination against them. ALICIO is likely to obtain the license before the amendment of the Act by depositing rupees 50 million, which fulfills the present paid up capital requirement.

Insurance Board will do well to make a proactive assessment of the present situation and weigh the whole debate against the twin objectives of need and opportunity for vibrant insurance companies in the country. Judged against the backdrop of the present incompetent life insurance companies in the country, there is a dire need for new companies (obviously both foreign and locals) which will ensure good benefit packages to their clients.

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