IB vetos repatriation of premium earnings

A well-structured attempt by two big insurance companies to use insurance premium of common policyholders for technical expenses was blocked after Insurance Board (IB) intervened, citing the plan as being 'against basic insurance norms'.

Knowledgeable sources informed that American Life Insurance Company (Alico) and Life Insurance Corporation (Nepal) recently requested IB to allow them pay 5 percent of their premium earnings to the head office and the Indian JV partner respectively for technical supports that they receive.

Alico in Nepal is associated with American Insurers Group (AIG) and LIC (N) is a joint venture of LIC of India.

As per Insurance Regulations, companies cannot use premium earnings for such expenses, as it is a saving of policy holders and need be returned along with agreed volume once mutually agreed scheme expires.

"Licensing conditions of the IB and companies' prospectus do not offer them any concessions on the matter," said Madhav Prasad Upadhyaya, Chairman of the IB. He said that such a proposal of the companies was against basic insurance practices as well.

Office bearers of both insurance companies could not be reached for comment.

Sources said that Alico sought IB's approval for paying 5 percent of gross premium earning - premium collected from clients - to its head office every year under the Technical Service Agreement it wished to sign with its parent company in future.

LIC (N), on the other hand, proposed that it would transfer 5 percent of first premium earnings to LIC of India as payment for acquiring technical services. If their proposal was endorsed, the two companies would have repatriated over Rs 40 million worth of clients' savings every year, according to the latest IB data.

Data shows that the annual premium earning of Alico was Rs 648.20 million in 2004/05 and its annual growth was about 30 percent. Likewise, LIC (N)'s premium earning was over Rs 399 million, of which about 25 percent was the first premium earning during 2004/05.

"Endorsing the proposal would mean exposing public savings to extreme risks," said Upadhyaya.

Citing that international standard limits the total administrative and technical costs for any insurance company to less than 2.5 percent of premium earning, Upadhyaya said that the board of IB decided to intervene on the matter recently.

He said that the board of the IB has arbitrated Alico not to lay hands on premium earnings or any other fund, if it is entering into a TSA with head office.

"Providing technical assistance to a branch office is a basic responsibility of head office. If it was outsourcing the services, then it would have been a different case," said a member of the IB board.

As for LIC (N), the IB has decided to ask it not to tie up TSA with premium. The board has asked the company to make payment as and when services are procured and not to fix the payment on annual rate.

-Milan Mani Sharma
Source: eKantipur