‘Squeeze in trade has badly affected premium collection’

Among the 17 non-life insurance firms in country, Nepal Insurance Company has performed comparatively better in terms of settlement of earthquake related claims. As compared to 50 per cent of the average case settlement of the insurance industry, Nepal Insurance has settled over 80 per cent claim amount of the earthquake related cases. The company has set a target to clear all the earthquake related cases by mid-February. Pushpa Raj Acharya of The Himalayan Times caught up with Chandra Singh Saud, CEO of Nepal Insurance and Executive Member of Nepal Insurers’ Association — umbrella association of Nepali insurers — to know more about quake related claim settlement status and other issues of insurance sector. 

The rate at which the earthquake related cases are being settled is very slow. What is the reason for the delay in claim settlement?

Altogether, 17 non-life insurance companies have settled around 50 per cent of the claims of the losses caused by the earthquakes of April and May. Recently, insurance firms also started releasing advance payment on some cases even though the documents submitted do not fully satisfy the requirements. As compared to average claim settlement, our company has performed much better. Nepal Insurance has settled claims worth Rs 530 million of the Rs 650 million worth of earthquake related claims that we received. The company has settled over 80 per cent of the claims, which is higher than the average of the industry.

Owners of various apartments have come together to form a struggle committee to create pressure on insurance firms. They allege that the insurance companies have failed to deliver the claim amount. What is your take on this?

There are some technical difficulties in claim settlement of apartments particularly. We have held discussions on these issues in the meetings of the Nepal Insurers’ Association. The technical difficulties which I mentioned earlier are that the ownership certificates of some of the apartments are registered in the name of the community and some in the name of the builders. This is the reason why insurance companies have not been able to settle the claim amount of such apartments. Not only apartments, claim settlement of mega hydro projects is also in limbo because the insurance firms are yet to get the reports from the surveyors. The surveyor’s report has been delayed because the owners have failed to provide the necessary documents to the surveyors. Similarly, in some cases related to warehouses, they have also failed to submit the stock position because they have not properly maintained the value added tax (VAT) bills. So, I want to stress that delay in settlement is not because of the insurance companies but because the concerned people have failed to submit the related document to the surveyors.

The problem of underinsurance was also witnessed after the earthquake because banks and financial institutions (BFIs) were issuing loans covering the risk of only the loan amount they disbursed. It is believed that the problem ofunderinsurance could be solved to a large extent if BFIs make sure that the entire property is insured before they issue a loan. What do you have to say on this?

Underinsurance is a major problem in the insurance sector. There is a huge tendency to insure only the loan amount. For example, if you have property worth Rs one billion but you obtain loan worth only Rs two million, then BFIs allow you to cover the risk of only Rs two million. So what happened was that during the earthquakes even if the entire property worth Rs one billion was destroyed the insurance company would only settle the claim of the insured amount, which is nominal compared to the total loss. If the customer had insured the entire property worth Rs one billion, then he/she would have been able to obtain the claim amount on a proportional basis as compared to the partial damage or the full amount if the entire property was damaged. If a customer has insured only 20 per cent of the value of the property then he/she will be eligible to receive claim for only that amount. Due to underinsurance, customers were not able to get the claimed amount and we have also faced some disputes in such cases. Likewise, there are other cases of a different nature. There have been some instances whereby a customer has actually purchased an insurance policy for a hardware shop but has later shifted to operating a grocery shop without informing the insurance company. Also, the change in the location of the firm in the claim does not match the location mentioned in the insurance policy which is also creating disputes in claim settlement.

The Insurance Board (IB) — the insurance sector regulator — has floated the idea of raising the paid-up capital of life insurance firms by 10 times and non-life insurance firms by 16 times within a certain timeframe. What do you have to say if IB does go ahead with this plan?

The idea to raise the paid-up capital of the insurance companies to strengthen their financial health is appreciated. However, the regulator should also consider the volume of business in the country while taking the decision. Currently, the paid-up capital requirement is just Rs 500 million for life insurance firms and Rs 250 million for non-life insurance companies. If I were to give my opinion then I would say that it would be viable to raise the capital by four times within a deadline of say five years. What we have to look at is that the total business volume for non-life insurance companies in Nepal is about Rs 10 to Rs 12 billion annually and there are 17 non-life insurance firms vying for that share. If IB takes the decision to raise the capital to Rs five billion for life insurance firms and Rs four billion for non-life insurance companies, it would not be viable to run companies here. There are 17 non-life insurance companies and if they need to raise their capital to Rs four billion each, then the total capital of the non-life insurance firms would be Rs 68 billion. I think this capital requirement makes the business highly unviable because as I mentioned earlier the total

business volume per annum for non-life insurers is about Rs 10 to Rs 12 billion. After the earthquake, we had thought that the insurance business would pick up because people would be more aware of the risks. However, business of the non-life insurance companies has been very low due to the border-blockade as it has highly affected the trade sector.

Insurance of fixed assets improved slightly, but squeeze in trade has badly affected the premium collection of

insurance companies.

IB has also introduced rules for merger of insurance firms, but none seem to be attracted to that idea unlike in the banking sector where we have witnessed a string of mergers. Do you believe higher capital requirement can push the insurance firms towards merger?

I do not think merger will be the only option for quality enhancement and outreach of insurance service. If IB decides to raise the paid-up capital by more than four times, it would be unviable to operate insurance companies because operation cost is going to rise. Along with the restructuring of the federal states, we will have to open a regional office in each province to tap the business there. Along with the regional offices we will also have to expand the number of branches accordingly and we will require manpower as well. I think capital is not a big issue. If we look at the insurance sector in India then the capital requirement for non-life insurance firms is just INR one billion. And the business volume of a branch of a company in India is quite higher than the total business of a company in Nepal.

Recently, the first reinsurance company started its operation in Nepal. Has it been able to tap business here?

I am not aware of the other companies but Nepal Insurance has reinsured five per cent of its total business with Nepal Reinsurance Company. Just because a reinsurance company has been opened in Nepal, it does not mean that Nepali companies need to reinsure with the domestic reinsurance company. Insurance companies are free to reinsure with any reliable reinsurance company and before the establishment of Nepal Reinsurance Company, we were entirely reliant on foreign reinsurance companies.