Nepal's Shift to Risk-Based Capital: Building a Resilient Future for Life Insurance

RBC is not just a compliance hurdle. Done right, it is Nepal's chance to align solvency with strategy, efficiency with resilience, and finally separate insurers that are merely surviving from those that are truly building for the future.

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Global perspective: Do insurance companies fail?

Life insurance is one of the few promises which is designed to outlast generations. For that promise to endure, the financial strength of insurers must be as resilient as the commitments they make. Yet in today's volatile environment, insurers themselves are vulnerable to the failures.

Have life insurance companies actually failed? The answer is "yes". Over the past 24 years, 324 life insurance companies worldwide have collapsed-an average of 13 each year according to PACICC (Property and Casualty Insurance Compensation Corporation). These failures were not confined to any specific geography or business model; they have been a global reality.

The reasons are well known as poor risk selection, mispriced products, inadequate reserving, reinsurance defaults, fraud, and overly complex structures. Historically, such weaknesses eroded the solvency from within. But today, external pressures are just as severe. Climate change has intensified natural catastrophes, increasing both their frequency and severity. What were once local, or cyclical shocks have become systemic threats. The survival of insurers is now inseparable from their ability to withstand nature's volatility.

This is why regulators worldwide turned to Risk-Based Capital (RBC) framework in the early 1990s. RBC marked a decisive shift from static solvency margins to risk-sensitive capital standards, requiring insurers to hold capital in proportion to their actual exposures of risk. What began in the United States got spread globally including Nepal.

Introduction: A New Era of Insurance Regulation in Nepal