Insurance Regulation in Nepal

Insurance Regulation and Supervision

• The Nepal Insurance Authority (NIA) is the regulatory agency in Nepal for overseeing insurance businesses.
• NIA is an independent body established as per section 3 of the Insurance Act, 2079 BS.
• NIA is a legal entity ensuring perpetual succession.

Functions, Duties, and Powers of NIA

• Acts as an advisor to the Government of Nepal (GoN) on insurance matters.
• Drafts the National Policy on insurance and recommends it to GoN.
• Grants prior approval for establishing insurance companies and issuing/revoking licenses.
• Formulates bylaws, directives, guidelines, and orders for the insurance sector.
• Issues, renews, and revokes licenses for insurance intermediaries.
• Determines capital and capital fund requirements.
• Prepares and implements programs for a systematic, competitive, and credible insurance business.
• Conducts studies, research, training, and outreach for insurance business development.
• Decides on complaints by insured parties against insurers on insurance liability.
• Settles disputes among various parties involved in insurance.
• Takes actions to minimize risks in the insurance business.
• Develops and implements programs for human resources and insurance education promotion.
• Implements insurance promotion programs to increase access to insurance.
• Promotes micro-insurance to ensure access for low-income individuals.
• Cooperates and exchanges information with governmental and non-governmental organizations.
• Collaborates with foreign Insurance Regulatory Agencies and international organizations.
• Represents GoN in international insurance regulation organizations.
• Operates a fund to protect policyholders' interests.
• Coordinates with provinces regarding insurance.
• Executes other regulatory activities related to insurance.

Composition of Board of NIA

• Chairman: Nominated by the Nepal Government with a 4-year tenure, re-appointment possible.
• Member: Joint Secretary from the Ministry of Finance.
• Member: Joint Secretary from the Ministry of Law, Justice, and Parliamentary Affairs.
• Member: Nominated by GoN with special knowledge of Life Insurance Business.
• Member: Nominated by GoN with special knowledge of Non-Life Insurance Business.
• At least one member must be female, tenure is 4 years with possible reappointment.

Supervisory Function

• The Authority can regulate, inspect, and supervise insurers and related service providers.
• Assignments of an expert or employee to conduct on-site inspections are possible if any suspicion or complaint arises.
• The Authority can request relevant documents like accounts and insurance policies for examination.
• Supervision is based on established principles, norms, and international best practices.
• The Authority has the right to inspect, investigate, and request copies/documents.
• Insurers and intermediaries must provide requested information within the specified time and truthfully respond to inquiries.
• Responsible officers must provide statements if irregularities are found during inspection.
• Immediate directions can be issued by the inspecting expert or employee without prior approval.
• Compliance with instructions from the Authority is mandatory.
• Inspection findings must be submitted to the Authority within a specified timeframe.
• Cooperation from Government of Nepal, provincial/local authorities, regulatory bodies, or associated organizations can be sought.
• Entities are obligated to assist the Authority.
• Additional regulation, inspection, and supervision provisions of the insurance business are determined by the Authority.

Adjudicatory Function

• Section 123: Insurers must assess and settle claims within the policy's time frame.
• If insured/heirs fail to claim or if the claim is not paid, the amount is deposited into an unclaimed fund.
• Insurers must maintain evidence of search attempts for rightful claimants.
• Details of unsettled claims must be submitted to the Authority.
• Special procedures may be introduced for insurance claims in affected areas during major disasters.
• Additional provisions regarding claim settlement and unclaimed funds are determined as prescribed.
• Section 128: The insured can file a complaint with the Authority if an insurer fails to settle claims, assess liability, or assesses unfairly.
• The Authority will investigate and provide the insurer an opportunity to respond.
• If no response, the Authority may facilitate a settlement between the complainant and the insurer.
• Additional actions can include ordering compensation, directing reassessment of liability, mandating payment, or issuing other orders.
• Claimants receive compensation along with interest at 10% from the claim date if claims remain unpaid.
• Dissatisfied parties can appeal to the High Court within twenty-five days.
• Section 129: An insurer is liable for compensation if its director, officer, employee, or intermediary violates the rights of an insured causing damage.
• The insured can file a complaint with the insurance authority within a specified period.
• The Authority will investigate, provide the party an opportunity to submit a response or may order the responsible party to pay compensation.
• Those who are aggrieved have the right to appeal in the relevant High Court within that twenty-five days.
• Section 130: If a dispute arises between insurers, intermediaries, or related parties, the Authority may intervene which include licensees under this Act, insurers, intermediaries,
• Mediation may be initiated by the Authority or at the request of involved parties which should involve a structured and fair settlement of disputes .

Regulatory Function

• Section 134: The Authority can act against insurers, directors, chief executive officers, employees, intermediaries or insurance service providers who violate the Act.
• Possible actions include issuing warnings, ordering rectifications, taking control of assets, withholding payments, suspending individuals, halting business operations, or dissolution filings.
• Additional actions against founders, shareholders, or key personnel may include seizing shares, withholding remuneration, removing individuals, or recovering unlawfully received benefits as well as directing insurers to report misconduct to professional bodies.
• Removed individuals cannot claim compensation and are barred from insurance work for 5 years.
• The responsible party must personally pay for damages caused by the negligence or misconduct of a director, officer, or CEO within 25 days.
• Recovery will be made from the responsible partys' financial accounts or assets.
• Publication costs related to regulatory action taken by the Authority will be covered by the insurer.

Insurance Contract

• An insurance contract is a binding legal agreement where the insurer promises compensation for specific losses.
• This agreement provides financial protection against risks and uncertainties in exchange for premiums paid.
• Core components include agreement, consideration, legal purpose, and competent parties.
• In addition to the foundational elements of insurance contract like the policy outlines specific details that entail the parties.
• The other specifics are the cover period, subject matter insured, the insured value or sum, and insured risk.

Interpretation of Insurance Policies

• Necessary to resolve disputes and determine coverage due to the complexity of such contracts.
• Arises because insurance policies involves the various scenarios where clarity and understanding are crucial.
• Ambiguous language, vague terms, conflicting provisions, or complex legal jargon are the presence of the most common reasons that will have insurance policies interpreted.
• Coverage disputes over event or loss coverage often require interpretation, including exclusions or limitations of the insurance claim.
• Courts may interpret policies based on policyholder reasonable expectations should contracts be construed in a manner that reflects what a policyholder expect the coverage to include.
• Endorsements or riders are amendments to the standard policy modifying terms that can create complexities and potential conflicts.
• Interpretation is needed to understand how these modifications affect overall coverage and obligations.
• Interpretation is required to ensure that policy provisions align with legal requirements and to resolve conflicts between policy language and statutory mandates for Statutory and regulatory compliance.
• Claims handling practices: The way insurers handle claims can also necessitate policy interpretation e.g to determine if insurer acted under good faith and fulfilled obligations.
• Precedent and judicial decisions: Past judicial decisions and legal precedents play a significant role in interpreting insurance policies, helping maintain consistency and predictability in the law.
• Contractual obligations and duties: Interpretation is required to determine the specific duties and obligations of the insurer and the insured, which includes assessing conditions for coverage like cooperation with insurer's investigation and timely reporting claims ,
• Changes in circumstances like new legislation may necessitate reinterpretation of existing insurance policies.
• Interpretation of insurance policies ensures fair application, addresses ambiguities, resolves disputes, and clarifies rights and obligations.

Fundamental Principles of Insurance Contract Interpretation

• Contra Proferentem: Directs that is any ambiguous terms should be interpreted against interests of the party that drafted the contract, as they are lengthy, complex, leaving the insured party in a disadvantage.
• "courts aim to level the playing field, ensuring that ambiguities are resolved in favor of the insured, who is generally less knowledgeable and powerful in the contractual relationship."
• Rationale: Insurer has control over language used in the policy and should bear the responsibility for any ambiguities.
• The normative basis for "contra proferentem" lies in principles of fairness and equity especially due to the the party (insurer) with bargaining power and ability to draft the contract should bear the risk of ambiguity.
• The doctrine can be understood as strict liability rather than negligence, as the application of contra proferentem resembles awarding expectation damages for the promise of coverage in ambiguous provisions, bypassing the need for proving reliance due to its difficulty and cost, similar to tort law

Two dimensions of Contra Proferentem

A. The Linguistic Standard of Care

• This approach interprets policy provisions against the drafter if the language is reasonably susceptible to more than one interpretation.
• Simplifies decision-making and avoids admitting extrinsic evidence but can lack clear criteria for determining ambiguity.
  • Strict Liability: The "Ordinary Reader" Standard
  • Negligence: The Perfectibility Standard which considers whether the insurer could have made the language clearer, including Hindsight and Foresight approach.

B. The Policymaker Demand Standard

• Penalizes insurers for ambiguous language regardless of policyholder demand.
  • The Penalty Standard focuses on insurer responsibility for clear drafting, not reliance.
  • The Majoritarian Standard interprets ambiguous provisions in favor of coverage aligned with policyholders' reasonable expectations and willingness to pay and impacting insurer drafting practices.
• This application ensures that policyholders receive the coverage they reasonably expect and are not unfairly surprised by technicalities or obscure language, as the doctrine of "contra proferentem" ensures that these are construed narrowly against the insurer.
• Courts apply this doctrine by favoring interpretations that provide coverage to the insured when multiple interpretations are possible.
• Types of Ambiguities are are either Patent or Latent, depending on if it can be seen on the face of the policy, or something to be uncovered with surrounding evidence.

Judicial Interpretation and Doctrines

• Courts often look beyond the literal text to the intent behind the policy, the purpose, and the insured's reasonable expectations including waiver and estoppel

  • This doctrine prevents insurers from denying coverage especially if coverage is already acknowledged/failed to enforce.
    • Waiver occurs when when an insurer voluntarily relinquishes the right to deny coverage on a specific claim
    • Estoppel is prevents an insurer from asserting a defense if the insured has been mislead

• Reasonable Expectations Doctrine asserts that the expectation of the policyholder should be upheld, and that the reasonable expectations be prioritized if policy wording is unclear.

• Courts may look at extrinsic evidence such as negotiations leading up to policy's issuance to determine parties.

• Judges try balance interests of all parties to ensure policy fulfills its intended purpose of financial protection against promised losses.

Principle of Insurance Law

• Insurance represented in policy form, is a contract for individual/entity financial protection from an insurance company for damage (big or small) to their property.
• With this legal contract known as the insurance policy, both insurer and insured are legally bound to provide financial security as per the insurance policy.
• Obvious benefit of insurance is the payment of losses, which helps to manage cashflow uncertainty but also ensure compliance with legal requirements by meeting contractual and statutory requirements, also provides evidence of financial resources.
• Contributes to the efficient use of the insured's resources, insuranc is provided to the insured's for their credit to facilitate loans, while also reducing social burden by compensating accident society's accident victims.
• Hence Insurance is risk distribution by cooperation among a group of people

A. Utmost Good Faith

• Both insurance contract parties should act in good faith, providing clear/concise information on terms/conditions.
• Insured should also provide all relevant information related to subject matter.
• Insurance is frequently purchased thru broker or intermediary, to make an informed decision.

B. Proximate Cause

• Principle applies when/loss is two/multiple causes to find the nearest loss to the property.
• The "proximate cause” is one in which it is used to determine whether the loss or damage occurs, and whether it can be brought about.
• Claims consider not just the damage, but what role the damage plays to the policy.

C. Insurable Interest

• The insured must have an insurable interest in the subject matter. Meaning the subject matter for which they have entered the insurance must lead to damage or destruction.
• Insured must have insurable interest in contract and that owner is said to have an insurable interest until is not longer the owner.

D. Indemnity

• Indemnity is a guarantee to help restore insured to position before the uncertain incident that incurred loss.
• Insurance company promises to compensate and indemnify for the loss that is a part of the contact the insurer has agreed upon.
• Insurance contract for insurance should not be able to allow someone to make any profit but make them equal to the actual loss.

E. Subrogation

• Subrogation means one party stands in for another. And that ownership for the subject matter rights go to the insurer.
• File claims that can be paid to a third party, where all financial expense go the insurer.

F. Contribution

• Contribution states the same thing as in “Principle of Indemnity which is that insured cannot make a profit.
• Allows indemnity for actual loss of insurance being incurred on their claim.

G. Loss Minimization

• Requires the insurer take necessary steps to minimize loss to insured property, and have responsible for taking all steps to minimize that loss.

Insurance Policy Guidelines 2080

• Nepal has a long history of insurance services before the Licchavi period due to previous Indian companies.
• The first company called "Nepal Mal Chalani Tatha Bima Company" was established in 2004, later came the "Rashtriya Bima Sansthan" in 2024 BS, which was under the Insurance Act of 2025 BS, after economic liberalization.
• The Nepal Insurance Authority replaced the previous regulatory body under the Insurance Act of 2079 BS to have 3 types of insurance including life, non-life, and reinsurance businesses.
• Nepal has around 14 life and non-life insurance companies, with 2 reinsurance, 7 microinsurance companies, and has about 44 percent coverage of the population.

Challenges

• The country has limited insurance coverage across the country but a lack of awareness of promotion.
• Government and regulatory concerns as well slow adoption of technology contributes to poverty.
• Policy has yet to have been implemented up until now and aims to be a more inclusive competitive sector, aligned with international standards with to aim to improve governance and financial industry stability. Vision
• "Development of an accessible, reliable, transparent, and high-quality insurance system."

Objectives

• Has to develop modern,sustainable insurances,reduce financial, protect both right and interest.

Key policies

• Is a pillar to the economy, global standard,capital, and poverty reduction programs.

Implementation Strategies

• Cover historical and government sites,social security incentives,and health care support,.
• Promotes local government, payment plans,regulatory authority, and disaster funds.

Monitoring and Evaluation

• Has a high level committee with the Finance Minister, a five year progress update.
• Risk Mitigation Implements international best practices that helps supervise companies by fraud
• The National 2080 sector aims to have financial and digital aliginemnt for transformation.

5. Reinsurance and Its Policy:

• Insurance for insurers and that transfer risk to another from the likihood of large payouts. It can be shared among many companies.
• Reinsurance protects insurers by staying stable and finanially well by shairng risks with other companies.
• There are three main types of reinsurnace (Facultative,Treaty and pool), they share how risks.

Types of Reinsurance Based on Risk Sharing:

• Both insurere and reinsurer share premiums and claims that have a fixed rate.

Non-Proportional Insurance

• Reinsurer pays when over certain am. Types are Per Risk, Castrophe, Aggregatge

Advantages:

• It allows the the insurere to have financial strain, protects their instabilitiy, and increased amount of capacity that allows the insurer to expand on their risk.

Features for Foreign Brokers 2024:

• "Reinsruance" is an contact where portion for premimum and indemify for loss

6. Financial Interest

• Director or basic company.

7 Money Laundering

• Is a process that criminals use. Has High risk/ AML/CFT
• AML/CFT policy and procedure in 2014.
• NO LAUNDRY UNDER THE PREVIOUL ARMS/ AMMUITION, FOREIGN EXCHANGE, CONCERNING PREVIOLAWS/DRUGS.

8. Insurance Business And Corporate Governance Policy

• Corporate governance is significantly impacted by by several factors, Transparency is easily accessible and easily access Fairness is workplace organization and justice. Accountability is taking control of ethical. Governance fosters fair transparent impact. BAFIA 2016 Nepal strengthens finance Objective for the people

Key factors of Corporate Governance

Regulatory,board,risk magement and internal controls,transparency

Financial Statement

Mediation & Arbitration Committee

• Resolution dispute wuth conciliation. Chair person from authorith Executive direftc regulatroy authorith.

Disputes must be setlltled by the commitiee and conciliation, etc.

The concilitioatin mediation duties aimed . Refferals in court Recordings and disoute by medi preoairing the month, inplementation,formula

Mediation- all actions must be confidential. Commuciations the parties Commitee

Claim Settlements

Resolution disputes in Nepal Governance body Insurance ac 2012 Regulations 2049 1995 Authority Insurere claim

Act 2079 insures must, assewss, deposit valid claim insurer complaitn in 5 days. 1 insruer,

process

claim in the must pay in 7 days death certificatee 3 Types if Insurance ( Aviation,Marine,Fire,Health,and terriosm) Avaiation is damage liability for parts and parts of accident, is narroew customer base Marine Hull Covers Cargo Protec loss. Has high-risk in industry. Professional Indembity (pl)