Experts flag provision of new insurance bill

Kathmandu, August 22

The Bill to Amend and Integrate Insurance Laws, which has been registered in the Parliament, has given least priority to liability settlement of insurers in case an insurance company fails and needs to be liquidated, which could dampen the sentiments of the insuree, according to experts.

The bill has listed priority of the payment based on the company's liability if the liquidation is carried out. Section 123 of the bill has listed giving top priority of the payment to the liquidator and the cost while carrying out liquidation; tax dues and fees to the government; and the regulatory fees to the Insurance Authority. After settling these three liabilities, the liability to insuree will be settled.

However, experts have opined that the liability to the insuree should be placed in second priority after making payment to liquidator.

Rabindra Ghimire, an insurance sector expert and director of Pokhara University, said that if the bill is passed without any changes, it will discourage people from purchasing insurance policies.

He said that the Banks and Financial Institutions Act has given due priority to return depositors' money if any bank or financial institution fails and has to undergo the liquidation process. “The same should be applied in insurance sector as that would raise the confidence of insurees,” he said.

In the context of low insurance penetration, the law should be introduced to gain the trust of people. “If the bill is endorsed without any change, it will not only hit the expansion of insurance outreach but also increase the lapse rate.”

Including the insurance policies purchased from migrant workers, insurance outreach has expanded to around 14 per cent of the total population, according to Insurance Board - the insurance sector regulator. The outreach is calculated based on the number of population divided by the number of insurance policies sold.

However, the lapse ratio in the insurance sector is high at 28 per cent, which could rise if the lawmakers overlook this provision, as per insurance sector experts. The lapse ratio measures the amount of insurance policy renewals with respect to the total number of insurance policies at the beginning of a specified period.

There are multiple reasons for discontinuation of polices, like the insurance agent not properly explaining the terms and conditions of the policy, lack of understanding, insurance policy bought without regular income source and shocks in income source, and lack of proper follow-up, among others. As per experts, the provision of the new bill will be the prime reason for increase in lapse ratio, if it is not amended.