Life insurance policy holders will not have to wait for three years for the insurance companies to declare bonuses as the insurance regulator has made annual valuation of life funds compulsory.
The Insurance Board (IB) has made annual valuation of the life funds of life insurance companies mandatory in the recently released Solvency Margin Directive 2013. "Earlier, life insurance companies held valuation of life funds by an actuary every three years. Now to calculate the solvency also these companies are required to get it done each year," pointed out IB's chartered accountant Santosh Prasai.
Annual valuation means life insurance companies will be able to declare the bonus for profit-sharing insurance schemes every year. A life fund refers to a pool of assets held by an insurance company into which premiums of life insurance policyholders are paid and from which claims are made.
Insurance companies announce bonus for the profit-sharing schemes based on the surplus in life fund — that is the difference between asset and liabilities which is calculated by actuaries. The declared bonuses are paid along with the sum assured at the time of policy maturation.
The Solvency Margin Directive meant for life insurance firms has asked the insurance companies to maintain minimum solvency ratio of 1.5 times. It means, insurance companies are required to have 1.5 times more total assets than its liabilities. Though worldwide, insurance companies are required to maintain a certain level of solvency ratio, this is the first time the Nepali insurance regulator has introduced such a provision.
"Solvency margin makes sure that an insurance company remains solvent even in case of a large scale catastrophe, as capital adequacy of the financial institution ensures its solvency," pointed out Prasai.
If the solvency ratio of insurance companies dips below 1.5 but is above one, then the regulator will maintain higher supervision and conduct on-site inspection. However, in case of solvency ratio below one, the regulator will take enforcement action or ask for capital injection to ensure solvency of the company.
"IB will introduce solvency directive for non-life insurance companies within the end of the current fiscal year," added Prasai.
There are nine life insurance companies operating in Nepal right now. Life insurance companies have issued almost one million life insurance policies and collected premiums worth Rs 13.3 billion in fiscal year 2011-12.