March 29: Although the Insurance Board of Nepal had issued a circular last Thursday directing insurance companies to increase their paid-up capital, the companies say that they are not in a position to do so under current circumstances. 

Directors and investors of insurance companies argue that capital expansion is challenging during the Covid-19 pandemic and liquidity crisis continues unabated. 

At present, the minimum paid-up capital of a life insurance company is Rs 2 billion and that of a non-life insurance company is Rs 1 billion. The latest circular of the Insurance Board states that life insurance companies should have a paid-up capital of Rs 5 billion and non-life insurance companies Rs 2.5 billion. The board has directed the insurance companies to increase the minimum paid-up capital by mid-April 2023. 

However, the operators of the insurance companies say that it is not possible to meet the demand of the board in such a short period. They say that the issue of raising capital immediately could be detrimental to the insurance sector. 

Chairman of the Non-Life Insurance Practitioners Association Rajendra Malla said that it would be difficult to increase the capital as per the directive of the board. "It is necessary to revise the paid-up capital of the insurance companies with time. But, increasing it suddenly is challenging," he said, adding, "It would have been easier if the board had given at least 3-4 years. It is difficult to increase the paid-up capital by 150 percent in one year." 

He said that the liquidity crisis and the economic instability caused by the pandemic have made it difficult to increase investment. "There is a liquidity crunch in the banking sector right now. As a result, there is a shortage of capital in all sectors," he said, "On top of that, inflation has also increased. It's difficult to invest more in this situation." 

Furthermore, he said that the new limit on paid-up capital set by the board was more than required in the case of non-life insurance companies. 

"At present, the average annual transaction of a non-life insurance company is around Rs 1.5 billion. In this case, I don't think it would be better to make the size of paid-up capital more than Rs 2.5 billion or more than the business transactions. It seems that such a policy has been taken to forcefully merge the companies rather than increase their capital." 

Investors of life insurance companies also say that the immediate capital increase is challenging. Stating that it would be difficult to raise the capital immediately, an investor said, "Increasing their paid-up capital in such a short span of time is challenging to life insurance companies as well. The board needs to reconsider its decision." 

Chief executive officers (CEOs) of insurance companies say this could lead to a merger. "The best way to raise capital is through rights shares. But shareholders say there is not enough capital," said a CEO of an insurance company. "In that case, the companies would be forced to merge." 

Earlier, on January 27, 2018, the board had directed to increase the minimum paid-up capital to Rs 2 billion for life insurance companies and Rs 1 billion for non-life insurance companies. For that, the board gave a deadline till mid-July 2018. However, the companies reached the prescribed paid-up capital only towards mid-April 2020. This time too, there is a challenge for the insurance companies to increase their capital on time. 

Investors point out that an increase in capital will reduce the dividend potential of companies. "Now the insurance company will have a lot of paid-up capital. However, the growth of the business will not be immediate," said one investor, "In this case, their dividend potential decreases. Because, we don't make money by investing like a bank. As we do risky business, investment should be done in a safe place. We do not get a huge return. Therefore, the dividend potential seems to be declining." 

This argument is also confirmed by the banking sector as well. With a paid-up capital of Rs 2 billion, commercial banks have an average dividend potential of 30-35 percent. The dividend capacity of commercial banks has been declining after raising their paid-up capital to Rs 8 billion. Last year, the average dividend capacity of commercial banks was only 12-13 percent. Investors say that this could happen in the insurance sector as well. 

"Increasing the company's paid-up capital is a good thing in itself. But, the market and the business also need to happen accordingly. When the paid-up capital is more than the business, there will be a problem," said one investor. 

Investors engaging in discussions 

Directors of insurance companies are preparing for discussion after the board decided to increase the paid-up capital. According to Malla, a memorandum will be submitted to the Insurance Board on the basis of the decision taken during that discussion. "Investors are meeting to discuss the board's decision to increase the paid-up capital. We plan to submit a memorandum to the board with necessary suggestions after the discussion," he said.