Insurers told assets must be 1.5 times their liabilities

LIFE insurance companies have been ordered that their assets must be 1.5 times their liabilities. Issuing the Solvency Margin Directive 2013, the Insurance Board (IB) told insurers to be able to pay their liabilities when needed. “We have been quite conservative while determining the scale of assets required,” said Santos Prasai, chartered accountant at the IB who prepared the directive. “In many countries, the ratio is 1.25 times the liabilities.” The directive went into effect on July 16. The board has also directed insurance companies to conduct a valuation of the “life fund” they have to maintain annually. The life fund is the cash reserve which needs to be maintained against the liabilities of the insurance companies. Earlier, life insurance companies were required to conduct a valuation every three years. “The provision of annual valuation was inserted to maintain transparency in the transactions of insurance companies,” said Prasai. “Annual updates will help to examine the performance of individual companies each year.” Following the valuation, any surplus funds can be shown in the profit and loss account. “However, 90 percent of that surplus should be returned to the life fund while the rest will be paid to the shareholders as per the existing provision,” said Prasai. The 90 percent put into the life fund is paid to the policyholders when the policy matures or upon their death. Meanwhile, the IB has also increased the amount of individual policies that life insurance companies can accept without buying reinsurance coverage. Revising the Reinsurance Directive on Life Insurance 2008, the industry regulator has allowed life insurance companies to accept individual policies worth up to 0.3 percent of their net worth. Earlier, the limit was 0.1 percent. “As insurance companies have increased their paid-up capital and their reserves have also gone up, we have become flexible in this regard,” said Sriman Karki, director of the IB. Likewise, foreign life insurance companies such as MetLife can accept individual policies worth up to Rs 1.3 million without reinsurance coverage. Earlier, they could accept policies worth up to Rs 300,000. Karki said that insurers could accept policies worth more than the limit if they reinsure them.