Laws, Rules and Procedure Governing Reinsurance in Nepal

Reinsurance is a financial arrangement between insurance companies whereby an insurance company, called the ceding company, transfers its risky portfolio to another insurance company, called the reinsurer. The insurer receives a fixed percentage of the premium and covers the same percentage of claims. The reinsurer is only required to pay if the losses exceed a certain threshold.

1.1. Laws Governing Re-Insurance in Nepal

The Insurance Act, 2079, has laid down that insurance companies operating in Nepal must re-insure with established reinsuring companies at a rate specified by the relevant insurance authority, typically the Nepal Insurance Authority.

The Insurance Board had also set up a directive known as the Reinsurance Directive for Life Insurance and Non-Life Insurance, 2065, stating that the insurer had to make an appropriate reinsurance policy while considering its programs, net worth, and the involved risk.

1.2. General Requirement for Reinsurance

Every insurer must undertake reinsurance, and the insurer is required to assume the risk of liability and obtain reinsurance to cover any remaining liability.

1.3. Procedures for Operating and Conducting Reinsurance Business

An insurer engaged in the reinsurance business may conduct such business either independently or through an insurance broker. The following regulations are applicable to insurers engaged in the reinsurance business:

  1. An insurer involved in reinsurance may accept reinsurance for both life and non-life insurance businesses.
  2. An insurer involved in reinsurance may accept reinsurance from, or provide reinsurance to, a foreign insurance company or reinsurance company.
  3. Insurers operating domestically are mandated to reinsure with domestic reinsurers at a rate not less than the percentage specified by the authority.

1.4. Risk Retention by the Insurer

The reinsurer cannot reinsure 100% of the risk without having the ceding company retain some portion of the risk covered by the policies of the insurer.

1.5. Provisions Governing Reinsurance Contracts

When engaging in the reinsurance business, the insurer must obtain approval for the format of the reinsurance contract from the authority. If the reinsurance contract between the insurer and the reinsurer fails to protect the rights and interests of the insured, or if it appears that the liability risk is not adequately covered, the authority may instruct a review of the terms of such a reinsurance contract at any time.

1.6. Reinsurance Protocol, Guidelines, and Necessity for Life Insurance Companies

The insurer is obligated to reinsure the remaining portion of the risk after retaining its own share. Policies cannot be issued unless adequate reinsurance arrangements are made for the portion that exceeds the insurer’s retention capacity. The reinsurance arrangement must ensure that no risk covered by the insurer’s policy is overlooked.

Risk cannot be covered without confirmation from the reinsurer in cases where facultative reinsurance is required. The selection of such reinsurers should consider criteria including capital, reputation, capacity, and experience. Insurers without their head office in Nepal are prohibited from engaging in transactions with their head office as reinsurers.

1.7. Eligibility and Criteria for Life Reinsurers

Reinsurance must be conducted with either a local insurer registered with the Board, a reinsurance company registered in Nepal, or a reinsurance company registered overseas.

In cases of reinsurance with overseas reinsurers, the reinsurer must be chosen based on criteria including capital, reputation, capacity, and experience. Additionally, reinsurance for the leading risk cannot be placed with a reinsurer with a credit rating lower than BBB, according to an internationally recognized credit rating agency for insurers and reinsurers.

1.8. Reinsurance Protocol, Guidelines, and Necessity for Non-Life Insurance Companies

An insurer must reinsure the portion of risk that exceeds its own retention capacity. No policy shall be issued without adequate reinsurance arrangements for the portion of the risk that cannot be retained. An insurer that does not have its head office in Nepal is prohibited from engaging in reinsurance transactions with its own head office.

Risk cannot be covered without the confirmation of the reinsurer when facultative reinsurance is required. The reinsurer must be selected considering its capital, reputation, capacity, and experience.

1.9. Eligibility and Criteria for Non-Life Reinsurers

Overseas reinsurers can also provide reinsurance facilities to insurance companies in Nepal. Reinsurance must be conducted with the following reinsurers:

  • A local insurer registered with the Board,
  • A reinsurance company registered in Nepal, or
  • A reinsurance company registered overseas.

When reinsurance is conducted with an overseas reinsurance company, the reinsurer must be selected based on its capital, reputation, capacity, and experience. Additionally, reinsurance for the leading risk cannot be placed with a reinsurer that has a credit rating lower than BBB, according to an internationally recognized credit rating agency for insurers and reinsurers.

Conclusion

Reinsurance is a financial mechanism wherein an insurance company, known as the ceding company, transfers its risky portfolio to another insurer, referred to as the reinsurer. The reinsurer receives a fixed percentage of the premium and covers the same percentage of claims, being liable only if losses exceed a specified threshold. Nepal’s Insurance Act, 2079, mandates insurance companies operating in the country to reinsure with established reinsurers at rates specified by the relevant insurance authority.

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