Insurance regulator worried about possible cutback in power


The Insurance Board (IB) will not be able to regulate insurance companies if provisions in the draft constitution are implemented as they are.

Such a cutback in power of the central insurance regulatory authority, according to the IB and other experts, could trigger a disaster in the budding insurance sector, raising questions on interest protection of policyholders.

Schedule 4 of the draft constitution says the centre’s power will be limited to that of formulating insurance policies. Another schedule of the draft constitution further says provinces will be allowed to manage and operate the insurance sector.

If these provisions are implemented, the IB will not be allowed to frame laws to regulate the insurance sector, issue or renew insurers’ operating licence and promote insurance business. In other words, insurance companies will be entirely regulated by the provinces.

“Such a system is non-existent in South Asia ... even in India. So, it would be too early to adopt that practice in the country, where the insurance sector has just started to grow,” IB Chairman Fatta Bahadur KC told The Himalayan Times.

The new provisions must have been incorporated in the draft constitution by taking a leaf from the American insurance system.

In the US, individual states regulate insurance companies. These state regulators have to refer to model laws and regulations framed by a central body called the National Association of Insurance Commissioners — which comprises chief insurance regulators of all 50 states — while formulating their own laws. However, it is not mandatory for state regulators to follow the model laws and regulations framed by the central body.

“The US is a big country and territory of each of the states in the country is equivalent to or bigger than that of Nepal,” KC said. “So, it won’t be practical to follow American practices at the moment.”

A plausible reason for inclusion of new constitutional provisions on regulation of the insurance sector could be to increase rural population’s access to insurance products, as most of the insurance companies here are urban-centric. This school of thought appears to be in line with the federal system’s objective of ensuring economic equality, prosperity and social justice.

“It is true that insurance penetration in areas outside the urban centres is low. But delegating regulatory powers to provinces cannot assure rapid growth of the insurance sector. This is because many provinces may lack knowledge, experience, expertise and human resources to regulate insurance business. So, the new provisions will only induce disaster in the sector and put policyholders’ interest at stake,” KC said.

Moreover, there is shortage of qualified human resources in the insurance sector, and many do not fully understand the insurance business.

Because of these reasons, former Nepal Rastra Bank governor Yubaraj Khatiwada and former finance secretary Rameshwor Khanal have also expressed reservations on the new provisions that are likely to pave the way for provinces to regulate insurance companies.

“Insurance is a very sensitive sector. At a time when central regulatory authority has not been able to manage the insurance sector well, delegating power to provinces may create more problems,” Khatiwada told an interaction yesterday, adding, “Insurance firms must be regulated from the centre.”

Also, it is yet to be seen how the provincial governments would function, KC said.

“So until there is assurance that provinces could manage the insurance business, the centre should be allowed to frame rules and regulations for the insurance sector and regulate insurance business. Power could be gradually transferred to provinces once we gain more expertise. And in the meantime, the IB should open its branch offices in the new provinces to generate awareness about insurance.”