Fundamentals of Insurance

Non-life insurance services offered by the National Insurance Company Limited (NICL), Nepal:

The National Insurance Company Limited is a general (non-life) insurance company of Nepal. Its major non-life insurance services include:

1. Fire Insurance — Covers loss or damage to buildings, factories, godowns, stocks and other property caused by fire, lightning and allied perils.
2. Marine Insurance — Covers goods in transit by sea, air, road and rail (marine cargo) and vessels (marine hull) against loss or damage during shipment.
3. Motor Vehicle Insurance — Covers private and commercial vehicles against accident, theft, fire and third-party liability as required under the Motor Vehicles Act.
4. Engineering Insurance — Includes Contractors' All Risks (CAR), Erection All Risks (ER), machinery breakdown and boiler explosion insurance.
5. Aviation Insurance — Covers aircraft hull and aviation liability risks.
6. Property and Miscellaneous Insurance — Covers burglary, housebreaking, cash-in-transit, fidelity guarantee, public liability, personal accident, crop and livestock insurance, etc.
7. Micro-Insurance — Provides low-premium protection to low-income and rural households against crop, livestock, business and accident risks.
8. Reinsurance Services — Provides reinsurance support to other insurers operating in Nepal.

In short, NICL offers a wide range of non-life insurance services covering fire, marine, motor, engineering, aviation, property, micro-insurance and reinsurance needs of individuals and institutions in Nepal.

Principles of Insurance

Insurance works on certain basic principles which guide the insurer and the insured in making a valid and fair contract. The main principles are:

1. Principle of Utmost Good Faith (Uberrima Fides): Both the insurer and the insured must disclose all material facts truthfully. Concealment or misrepresentation of facts makes the contract voidable. For example, the insured must disclose pre-existing diseases while buying health insurance.

2. Principle of Insurable Interest: The insured must have a legal and financial interest in the subject matter of insurance. Without insurable interest, the contract is invalid. For example, a person can insure his own house but not his neighbour's house.

3. Principle of Indemnity: The insured is compensated only to the extent of the actual loss suffered, neither more nor less. This prevents the insured from making profit from insurance. It applies to fire, marine and general insurance, but not to life insurance.

4. Principle of Subrogation: After paying compensation, the insurer acquires all the rights of the insured over the damaged property. The insured cannot claim the same loss from both the insurer and a third party.

5. Principle of Contribution: When the same property is insured with more than one insurer, all insurers share the loss in proportion to their sum insured. The insured cannot claim the full amount from each insurer separately.

6. Principle of Proximate Cause: Compensation is payable only when the immediate and effective cause of loss is a risk covered by the policy. If the nearest cause is an excluded risk, no claim is payable.

7. Principle of Mitigation of Loss: The insured must take reasonable steps to minimise the loss and act as a prudent person would, even after the risk has occurred.

These principles together ensure that insurance remains a contract of protection rather than a source of profit.

Re-insurance is the insurance of insurers. It is the process by which an insurance company (the ceding company) transfers a part of the risk it has assumed to another insurance company (the re-insurer) in return for a share of the premium. It is done to:

• spread and diversify large risks beyond the capacity of a single insurer,
• protect the insurer against catastrophic losses (e.g. earthquake, flood),
• increase the underwriting capacity of the insurer,
• stabilise profits and maintain solvency, and
• obtain technical and financial support from experienced international re-insurers.

Status of the re-insurance market in Nepal:

1. Legal and regulatory framework: Re-insurance in Nepal is governed by the Insurance Act, 2049 (1992) and the directives of the Nepal Insurance Authority (formerly Beema Samiti). Insurers must cede a compulsory percentage of their risk to the national re-insurer before going to foreign markets.

2. National Re-insurer: Nepal Reinsurance Company Limited (Nepal Re) was established in 2071 BS (2014 AD) as the sole domestic re-insurer, with the Government of Nepal, the Rastriya Beema Sansthan and private insurers as shareholders. It began operations in 2072 BS. It provides both proportional (quota share, surplus) and non-proportional (excess of loss) cover, mainly in fire, motor, marine and engineering lines.

3. Compulsory cession: As per the law, general insurers must cede at least 20% (and life insurers a prescribed portion) of their risk to Nepal Re. This has helped retain a part of the premium within the country instead of losing it all abroad.

4. Dependence on foreign re-insurers: Even after ceding to Nepal Re, a large share of high-value and catastrophic risks is re-insured abroad — mainly in India (GIC Re), London, Munich, Zurich and other international markets — because Nepal Re's capital base and retention capacity are limited. Thus Nepal remains a net importer of re-insurance services.

5. Limited domestic capacity: Nepal Re's paid-up capital and reserve base are small compared with the huge sums insured in big industrial, hydropower and infrastructure projects. Hence it too must retrocede a major part of its risk to foreign re-insurers.

6. Growth and challenges: The re-insurance market is growing along with the expansion of the insurance industry (dozens of life and non-life insurers), but it faces challenges such as low retention capacity, shortage of actuarial and technical manpower, weak data base for risk pricing, heavy outflow of foreign exchange as re-insurance premium, and heavy dependence on foreign markets.

Conclusion: Nepal's re-insurance market is at a developing stage. Nepal Re has created a domestic base for re-insurance, but due to inadequate capital and technical capacity, the country still depends heavily on foreign re-insurers. Strengthening Nepal Re's capital, developing actuarial expertise and building a reliable risk database are necessary to make the market self-reliant.

Claim Settlement Process under the Insurance Act, 2049 and Insurance Regulations, 2049

Claim settlement is the process by which an insurer pays the insured, nominee, or legal heir the amount due when a valid claim arises under an insurance policy. The Insurance Act, 2049 and the Insurance Regulations, 2049 prescribe the following process:

1. Notice/Intimation of Claim: The insured (or nominee/legal heir in case of death) must inform the insurer of the loss or insured event as soon as possible, within the period and in the manner stated in the policy and Regulations. Failure to give timely notice may prejudice the claim.

2. Submission of Claim Documents: The claimant submits the prescribed claim form with supporting evidence — e.g., survey report, police report/FIR (motor/fire), medical and hospital records (health/life), death certificate and proof of relationship (life), and proof of loss.

3. Appointment of Licensed Surveyor/Assessor: For general insurance claims, the insurer appoints a surveyor licensed by the Insurance Board (Beema Samiti) to inspect the loss, determine its cause, and assess the amount. The surveyor submits a report to the insurer. (Under the Regulations, surveyors must hold a valid license from the Board.)

4. Investigation and Verification: The insurer verifies documents, checks whether the loss falls within the policy cover, confirms premium payment, examines any breach of policy conditions (non-disclosure, exclusions, warranties), and determines whether the claim is genuine and not fraudulent.

5. Decision on the Claim: The insurer may:

• Admit the claim and settle it;
• Repudiate (reject) the claim, giving reasons in writing; or
• Partially settle the claim where only part of the loss is covered.

6. Payment of Claim: Once admitted, the insurer must pay the claim within the time limit fixed by the Act, Regulations and Board directives (generally 30 days from receipt of the surveyor's report and complete documents). If payment is delayed beyond this period, the insurer is liable to pay interest at the prescribed rate. In life insurance, the sum assured (or surrender value, as applicable) is paid to the nominee/legal heir on maturity or death. Deductions such as excess, deductible, or unpaid premium may apply.

7. Limitation Period: A claim must be filed within the time limit prescribed by the Act/Regulations (as specified in the policy); claims filed beyond this period may be time-barred.

8. Grievance Redressal: If the claimant is dissatisfied with the settlement or rejection, he/she may first approach the insurer's grievance mechanism, and if unresolved, complain to the Insurance Board (Beema Samiti). Further appeal/revision lies as provided under the Act.

Key points: The claim must fall within the policy period and cover; the insured must provide true information and cooperate; the insurer must act promptly, fairly, and within the statutory time limit; and settlement must conform to the Insurance Act, Regulations, and policy terms.

Capital Structure of Rastriya Beema Company Limited (RBCL)

Rastriya Beema Company Limited is a government-owned insurer of Nepal, established in 2023 BS (1966 AD). Its capital structure, as commonly cited, is:

(These figures change when the company raises capital to meet the Nepal Insurance Authority's minimum capital requirement, so the latest annual report should be checked.)

Share Distribution of RBCL

The government holds a majority (51%) and so controls the company, while institutional holders and the general public hold the rest.

Functions, Duties and Responsibilities of the Audit Committee under the Insurance Act, 2079

Constitution: Every insurer and reinsurer must constitute an Audit Committee comprising three members from among the directors, with at least one member having experience in accounting or financial management. The board designates one member as the coordinator. The Chief Executive Officer and the head of the internal audit department serve as non-voting members (member-secretary).

Functions, Duties and Responsibilities:

1. Review of financial statements — To review the annual and quarterly financial statements, balance sheets, profit and loss accounts and cash flow statements before submission to the board and the Nepal Insurance Authority.

2. Internal audit oversight — To approve the internal audit plan and scope, review internal audit reports, and issue necessary directives to the internal audit department for risk-based auditing.

3. External audit coordination — To recommend the appointment and remuneration of the external auditor to the board, review the audit report and management letter, and ensure follow-up on the auditor's observations.

4. Compliance monitoring — To monitor compliance with the Insurance Act, 2079, rules, directives of the Nepal Insurance Authority, and other prevailing laws relating to the insurance business.

5. Internal control and risk management — To evaluate the effectiveness of the internal control system, risk management framework and accounting policies, and recommend improvements to the board.

6. Review of irregularities — To examine cases of financial irregularities, misuse of funds, fraud or embezzlement reported by auditors or employees, and recommend action to the board.

7. Reporting to the board — To submit its report, findings and recommendations to the board of directors at least once every quarter, and to report to the Nepal Insurance Authority on matters of serious concern when required.

8. Other functions — To perform any other functions prescribed by the Act, rules or the board relating to financial discipline, transparency and good governance of the company.

Conclusion: The Audit Committee thus functions as an independent internal watchdog ensuring financial discipline, transparency and accountability in insurance companies as envisaged by the Insurance Act, 2079.

Nepal Insurance Authority (NIA): Regulatory Roles and Compliance Challenges

Introduction

Nepal Insurance Authority (NIA) is the apex regulatory and supervisory body of the insurance sector of Nepal. It was originally established in 1968 AD (2025 BS) as the Insurance Board (Beema Samiti) under the Insurance Act, 1968. With the enactment of the Nepal Insurance Authority Act, 2079 (2022), it was restructured and renamed as the Nepal Insurance Authority with effect from 1 Shrawan 2079 (17 July 2022). Its head office is in Kathmandu. NIA regulates and supervises insurers, reinsurers, brokers, agents, surveyors and other insurance intermediaries, with the twin objectives of developing the insurance market and protecting the interests of policyholders.

Key Roles of NIA in Regulating Insurance Business

1. Licensing and registration. NIA grants, renews, suspends and cancels licences to life and non-life insurers, reinsurers, insurance brokers, corporate and individual agents, surveyors, loss assessors and third-party administrators. No person can carry on insurance business in Nepal without its licence.

2. Issuing directives and regulatory framework. It formulates and issues directives, circulars, guidelines and by-laws on capital adequacy, solvency margin, premium rates, commissions, reinsurance, investment, accounting and corporate governance. It also advises the Government of Nepal on insurance policy and law reform.

3. Supervision and inspection. NIA carries out off-site supervision (study of periodic returns, financial statements and actuarial reports) and on-site inspection of insurers' offices to verify compliance with the Insurance Act, NIA Act and its directives. It can direct insurers to rectify defects and can impose penalties.

4. Financial and solvency regulation. It prescribes minimum paid-up capital (raised substantially in recent years, with different minimums for life, non-life and reinsurance business), approves financial statements, actuarial valuations and reinsurance programmes, and monitors solvency to ensure that insurers can meet their liabilities towards policyholders.

5. Regulation of reinsurance. NIA regulates reinsurance arrangements and enforces compulsory cession of a prescribed percentage of reinsurance business to Nepal Reinsurance Company, thereby protecting foreign exchange and building domestic reinsurance capacity.

6. Consumer protection and grievance handling. It receives and disposes of complaints against insurers, monitors claim settlement and mis-selling, and runs insurance literacy programmes to make the public aware of their rights and duties.

7. Market development and financial inclusion. It promotes microinsurance, agriculture and livestock insurance, disaster and crop insurance schemes, and expands insurance access to rural and low-income groups.

8. Regulation of intermediaries and professionals. It conducts licensing examinations for insurance agents, prescribes qualifications for surveyors and actuaries, and regulates their conduct.

9. Winding up and liquidation. In case of insolvency, NIA supervises the liquidation process so that the interests of policyholders are safeguarded.

10. Anti-money laundering and market conduct. It enforces AML/CFT obligations and fair market conduct in the insurance sector.

Key Challenges before NIA in Improving Compliance

1. Weak compliance culture. Many insurers treat directives as formalities — delayed submission of returns, inaccurate data, non-compliance with premium tariffs, excessive commission and unhealthy premium undercutting are common.

2. Inadequate supervisory capacity. NIA suffers from a shortage of qualified actuaries, insurance experts, chartered accountants and IT professionals. The number of supervisors is small compared to the number of insurers, brokers and agents to be supervised.

3. Weak enforcement and low penalties. The fines and penalties prescribed are small relative to the size of business, and legal proceedings are lengthy. This reduces the deterrent effect of regulatory action.

4. Political interference and weak regulatory independence. Appointment of office-bearers, policy decisions and even enforcement are sometimes influenced by political and business interests, weakening NIA's authority.

5. Outdated and fragmented legal provisions. The Insurance Act, 1968 is old and has been amended many times; several provisions are inconsistent with the NIA Act, 2079. Coordination with other regulators such as Nepal Rastra Bank and SEBON is also weak.

6. Poor data quality and reporting. Unreliable financial and actuarial data make risk-based supervision difficult and allow insurers to hide weak financial positions.

7. Low financial literacy and awareness. A large section of the population, especially in rural areas, does not understand insurance, so policyholders rarely complain or demand accountability.

8. Price competition and market distortion. Rate wars, especially in non-life business, reduce premium income and weaken the financial strength of insurers, making compliance enforcement harder.

9. Emerging risks. Digital insurance, insurtech, cyber risk and new products are growing faster than NIA's regulatory and technological capacity to supervise them.

10. Resource and technological constraints. Limited budget, weak IT infrastructure and dependence on manual processes slow down inspection, monitoring and timely action.

Conclusion

NIA is the guardian of Nepal's insurance market, performing licensing, supervision, solvency regulation, reinsurance control and consumer protection functions. However, weak compliance culture, inadequate skilled manpower, political interference, outdated laws and poor data quality remain serious obstacles. Strengthening NIA's institutional capacity, adopting risk-based and technology-driven supervision, ensuring regulatory independence, and raising public awareness are essential to improve compliance and to develop a sound, trustworthy insurance sector in Nepal.

Roles and responsibilities of insurance companies in the economic development of a country (5 marks)

Insurance companies are important financial institutions that collect small premiums from many people and pay compensation to the few who suffer loss. In this way they protect individuals and businesses and also contribute to national economic development. Their main roles and responsibilities are:

1. Risk transfer and protection of capital: Insurance transfers the risk of loss (fire, theft, accident, death, natural disaster) from individuals and firms to the insurer. This protects the capital invested in industry, trade and agriculture, so entrepreneurs feel secure in making new investments.

2. Mobilisation of savings and investment: Premiums collected from a large number of policyholders are invested in government securities, shares, debentures, and in industry and infrastructure. Thus scattered small savings are converted into productive capital, which accelerates capital formation and economic growth.

3. Support to trade and commerce: Marine, fire, motor and cargo insurance make domestic and foreign trade safe. Banks lend against insured goods and insured property, so credit flows more easily to traders and producers. Export credit and cargo insurance promote foreign trade and earn foreign currency.

4. Generation of employment and income: Insurance companies require agents, surveyors, underwriters, actuaries, clerks and managers. This creates direct and indirect employment and increases the income of many families. The government also earns revenue through taxes and fees.

5. Social security and stability: Life insurance, health insurance, crop and livestock insurance, and pension schemes provide security to workers, farmers and poor families. Compensation at the time of death, accident or disaster prevents families from falling into poverty and maintains social stability, which is essential for development.

6. Development of infrastructure and the capital market: Long-term funds of insurance companies are used in roads, hydropower, housing and industries. Their participation strengthens the share market and makes the financial system more stable and diversified.

Conclusion: Insurance companies are not only loss-compensating agencies but also important instruments of saving, investment, employment and social security. Therefore, a strong and well-regulated insurance sector is necessary for the balanced and sustainable economic development of a country like Nepal.

Revenue sources of insurance companies:

1. Premium income — the main source. Policyholders pay premiums (life, non-life, marine, fire, motor, etc.) periodically or in lump sum.
2. Investment income — premiums collected are invested in government securities, shares, debentures, fixed deposits and loans; interest and dividends earned form a large part of revenue.
3. Return on reserves and funds — accumulated technical reserves, life fund and solvency margin are invested and yield returns.
4. Reinsurance commission — commission received from reinsurers for ceding business.
5. Fees and charges — policy fees, endorsement fees, survey fees, renewal charges, etc.
6. Profit on sale of assets — capital gains from disposal of investments or property.
7. Other income — rent from owned property, salvage and subrogation recoveries, unclaimed deposits, etc.

Areas of expenses:

1. Claim settlement — payment of death claims, maturity claims, accident, fire, motor and other claims; the largest expense head.
2. Commission and agency expenses — commission to agents, brokers, surveyors and intermediaries.
3. Management and administrative expenses — salaries, allowances, office rent, stationery, electricity, communication, audit and legal fees.
4. Reinsurance premium ceded — premium paid to reinsurers for transferring risk.
5. Reserve and fund creation — transfer to life fund, claim reserve, catastrophe reserve and solvency margin.
6. Taxes and duties — income tax, premium tax, regulatory fees to the Insurance Board.
7. Marketing and publicity — advertisement, promotion and business development costs.
8. Miscellaneous — depreciation, bad debts, charity and other incidental losses.

In short, premium and investment income are the two pillars of revenue, while claim payment and operating costs are the major expense areas.