Reinsurance Requirements Tightened, Insurers Required to Reinsure Based on Risk
Kathmandu — The Nepal Insurance Authority has introduced stricter requirements for insurers’ reinsurance arrangements, requiring them to structure reinsurance based on the nature of risks and their financial capacity.
According to the Reinsurance Directive, 2023/24 issued by the Authority, insurers must retain risks within their capacity and reinsure the portion of risks that remains beyond their retention capacity or cannot be retained by them. When arranging reinsurance, insurers are required to ensure adequate risk diversification and assess the technical and financial capacity of reinsurers.
The directive provides for three types of reinsurance arrangements: treaty reinsurance, facultative reinsurance and insurance pools.
It also requires insurers operating in Nepal to reinsure at least 20 percent of the sum insured they underwrite directly with Nepal Reinsurance Company. However, the directive specifies that this requirement does not apply to certain types of insurance business.
Insurers dealing with foreign reinsurers must also meet the standards prescribed by the Authority. The directive requires foreign reinsurers and reinsurance brokers to be registered with the Authority.
Limits on Risk Diversification
The directive requires insurers to maintain adequate diversification of risks when arranging reinsurance. In the case of non-life insurers, no more than 60 percent of the entire portfolio or any individual portfolio may be reinsured with a single reinsurer.
Similarly, a lead reinsurer may be allocated a maximum of 40 percent of the total reinsurance, while each following reinsurer may be allocated a maximum of 20 percent.
The directive also requires insurers to maintain adequate reinsurance arrangements for catastrophic risks. Non-life insurers must structure catastrophe reinsurance so that their net retention does not exceed 10 percent of their net worth.
Reinsurer Ratings Mandatory
For treaty reinsurance, insurers are required to transact only with reinsurers that meet specified minimum credit ratings. Lead reinsurers must have a minimum rating of A- from AM Best, A- from S&P, A3 from Moody’s and A- from Fitch. For following reinsurers, the required minimum ratings are BBB, Baa1 and BBB from the respective rating agencies.
Overall, the directive places emphasis on risk diversification, the financial strength of reinsurers, catastrophe risk management and the utilization of domestic reinsurance capacity.