January 8: Nepal Insurance Authority has paved the way for life insurance companies, non-life insurance companies and reinsurance companies to invest outside the provisions included in the investment guidelines.

By revising the investment guidelines, the regulatory body has made arrangements for insurance companies to invest beyond what is mentioned in the investment guidelines by taking prior approval from the authority. The insurance companies are also allowed to  invest more than the specified percentage.

Although the Investment Guidelines 2079 clearly mentions the areas and limits of investment, the revised guidelines of 2080 has a provision that allows insurance companies to invest in areas other than those mentioned in the guidelines and more than the specified percentage with the prior approval of the authority.

This has opened the way for the officials of the NIA to approve the investment as per the proposal of the insurance companies.

Experts point to the risk that the funds accumulated in the insurance company may be misused by the new arrangement. "It is good if the provision to increase the limit is used in cases where investment cannot be made as specified in the guidelines," insurance expert Dr Rabindra Ghimire said, adding, "If the investment sinks by giving arbitrary approval, the insurance company itself may be at risk."

Even though the authority has designated the area of investment, he suggested that the insurance companies should have their own risk management strategy and should invest accordingly.

However, Rajuraman Paudel, the executive director of the NIA, says that the provision was put in place to approve investment in potential areas.

"Investments made by insurance companies should be safe," he said, "To ensure that the investment is safe, the authority gives permission to invest in areas other than the specified areas and beyond the limits only after careful observation."

The authority has opened the way for insurance companies to invest in private equity funds and venture capital funds through the amendment of the guidelines and has also increased the limit for investing in shares.

In the guidelines, it is stipulated that prior approval of the authority is also required to invest in private equity and venture capital funds in infrastructure and productive sectors such as real estate business and water resources, agriculture, tourism, etc.

According to the new guidelines, life insurance companies, non-life insurance companies and reinsurance companies will now be allowed to invest in private equity funds and venture capital funds approved to do business by the Securities Board of Nepal in accordance with the Specialized Investment Fund Regulations.

Companies can invest up to 1.5 percent of the total investment in such funds. Similarly, arrangements has been made so that only up to 1 percent can be invested in one particular fund. The authority has not allowed micro insurance companies to invest in such funds.

The Securities Board of Nepal has been giving approval for the operation of private equity and venture capital funds according to the 'Specialized Investment Fund Regulations, 2075'. So far, 13 companies have received permission to operate such funds.

Prior to this, Nepal Rastra Bank has also opened the way for banks and financial institutions to invest in private equity and venture capital funds.

Similarly, the NIA has increased the limit of the amount that small insurance companies can invest in shares of life insurance companies, non-life insurance companies and reinsurance companies. According to the revised guidelines, the micro insurance companies will now be allowed to invest up to 15 percent of the total investment in shares of insurance companies. Previously, there was a provision that such companies could only invest up to 10 percent in shares.

So far, insurance companies are allowed to invest in 11 areas specified by the guidelines. However, the investment of companies is focused on term deposits of banks and financial institutions.

According to the authority's data, as of mid-October of the current fiscal year, life insurance companies have invested a total of Rs 600 billion and non-life insurance companies have invested Rs 60  billion in various sectors, mostly term deposits of BFIs. Out of that, life insurance companies have invested 77 percent of their accumulated funds and non-life insurance have invested 79 percent in fixed deposits of banks and financial institutions. Among fixed deposits, the largest investment is in commercial banks.

After the insurance companies complained that they were not able to diversify their investments, the then Insurance Board of Nepal amended the investment guidelines five years ago, opening the way for companies to invest in infrastructure and productive sectors such as real estate business and water resources, agriculture, tourism, in addition to fixed deposits and shares. However, even after five years of changes in the guidelines, the investment of insurance companies in the new sectors is negligible.