Nepal Insurance Authority Rolls Out Risk-Based Capital Directive to Modernize Insurance Sector
Kathmandu — The Nepal Insurance Authority (NIA) has introduced a new directive aimed at overhauling the financial health framework of the country’s insurance sector. Titled the Risk-Based Capital and Solvency Directive 2025 (2082), the regulation is designed to refine risk evaluation, capital management, and governance systems in line with international standards.
The new directive consolidates earlier guidelines issued in 2078 and 2081, while bringing forward more robust mechanisms to ensure that insurance companies maintain capital levels proportionate to the risks they carry. The NIA has emphasized that insurers are now required to operate under a risk-based capital regime, shifting from traditional fixed capital requirements to a more dynamic, risk-sensitive approach.
In a move toward greater financial transparency, the directive mandates that the valuation of insurers’ assets must now be based on market value. This evaluation will be conducted by the Insurance Act 2022 (2079), Nepal Financial Reporting Standards, actuarial principles, and relevant directives related to fair value reporting. The objective is to establish more accurate assessments of a company’s financial position, thereby enhancing public trust in the insurance industry.
The directive also outlines how technical reserves and capital adequacy must be backed by sufficient and appropriate assets, depending on their nature and quality. The Authority reserves the right to apply prudential filters and make necessary adjustments to ensure the quality and reliability of capital resources.
To assess risk comprehensively, the directive introduces two key methodologies: the stress approach and the factor-based approach. Under the stress approach, insurance companies will examine how their current financial statements would be impacted by hypothetical adverse events. Meanwhile, the factor-based approach will require insurers to calculate their capital needs using percentages defined by the NIA for specific categories of risk.
The guideline broadens the scope of risk categories that must be considered. Counterparty default risks, for instance, refer to possible financial losses from clients or partners who fail to meet obligations. Market risks encompass fluctuations in interest rates, inflation, currency exchange rates, and asset prices. The directive further breaks down insurance risks into life and non-life segments — with the former addressing issues like mortality and long-term illness, and the latter focusing on unpredictable claims in areas such as motor, fire, health, and agriculture. Catastrophic risks, including natural disasters such as earthquakes and floods, have also been accounted for, as have operational risks stemming from system failures, employee errors, or technological disruptions.
Beyond financial resilience, the directive brings greater clarity to the distribution of bonus profits to policyholders, a longstanding concern in the industry. This provision ensures that insurers handle policyholder benefits more transparently and equitably.
To support the implementation of the new framework, the Authority has planned the formation of a technical committee. This committee will assist insurers in transitioning to the risk-based capital regime and oversee compliance with the revised standards. All insurance companies falling under the Risk and Capital Framework are now required to fully adhere to the directive.