Need to Review Board Structure of Insurers for Good Governance: Governance at Risk
The Insurance Act 2079, by not specifying the tenure or age limit for members or the chairperson appointed to the board of insurers, has posed challenges to institutional governance. While independent directors have a single-term limit, directors elected or representing ordinary or founding shareholders have no such limit, risking long-term dominance by the same individuals and increasing conflicts of interest. Bangladesh's experience shows that such weaknesses can lead to severe distortions in the insurance sector.
Kathmandu. The Insurance Act 2079 has posed serious challenges to institutional governance by not specifying the tenure or age limit for members or the chairperson appointed to the board of insurers.
Section 48 of the Act provides that the term of a director shall be a maximum of four years and that they may be reappointed or renominated. The same section stipulates that an independent director may be appointed only once. Section 47 contains provisions regarding the formation of the board of insurers, under which the board shall have a minimum of 5 and a maximum of 7 members.
While Section 48 sets a term limit for independent directors, it does not specify any limit for directors elected or representing ordinary shareholders or founding shareholders. They can remain directors any number of times and until death (as long as they live). In Nepal, 60 years is generally considered the eligible age for employment. Although the experience of board members increases as they age, there remains the risk of weakened decision-making capacity, unfamiliarity with new technology and challenges, and reduced productivity.
Moreover, the same individuals dominating the board of a single company for a long time poses challenges to institutional governance. There is a strong possibility that the board may influence senior management to make improper policy decisions and misuse the insurance company's investments in projects or activities connected to their own interests.
Exploiting loopholes in the Act, the promoter group of insurers has been engaging in the wrong practice of bringing the same person into the board as an independent director and, before the first term is completed, bringing them back into the board as a representative of founding shareholders or ordinary shareholders.
The legislative intent behind the provision that an independent director may be appointed for only one term is to ensure good governance and that the board receives monitoring, advice, and suggestions from an independent person. However, on the ground that the Insurance Act does not have a provision preventing a person who has been an independent director from being reappointed as an independent director for a second term, Nepal Insurance Authority has remained silent while insurers bring the same person in through some other cover.
Learn from Bangladesh's plight or await the same fate?
The lack of institutional governance is behind the extreme distortions in the insurance sector of South Asian neighbor Bangladesh. It was not the lack of regulatory control and laws there, but the dominance of the same interest group and the same individuals on the board for a long time that gave directors the opportunity to use billions of rupees from insurance funds for personal interests. Directors of insurance companies have maintained ownership of the company's institutional shares without actually investing money. Due to corruption and distortions, insurance companies there have now reached a state where they cannot pay claims to policyholders.
According to The Financial Express, insurance companies in Bangladesh still owe 70 billion Bangladeshi taka (rupees) in claim payments. After regulatory activism there, the claim payment ratio of insurers has now risen to 57 percent. In Bangladesh, irregularities have been repeatedly made public, including the board of insurers investing in companies of their own financial interest, acquiring share ownership without investing money, and spending collected insurance premiums under collusion with the board without depositing them in the insurance company's account. In addition, a life insurance company there misused more than a billion rupees for the purchase of land that existed only on paper, claiming to operate a housing scheme.
Looking at the charges mentioned in the charge sheet filed by the Government of Nepal against the promoters and directors of Himalayan Reinsurance and their affiliated insurance companies, insurance brokerage companies, and share investment companies, and the evidence used as the basis for those charges, the state of institutional governance in Nepal's insurance sector is also weak. Regulatory influence appears very weak. In such a situation, the Nepal Insurance Authority must immediately curb the misinterpretation of loopholes in the Insurance Act. Moreover, the Authority must immediately initiate efforts to amend the unclear and inadequate provisions in the Insurance Act.