FINANCIAL MANAGEMENT

OF INSURANCE COMPANIES
IN NEPAL

Submitted by: Submitted to:

Ojashwi Acharya Mr. Ram Koju
Jyoti Agrawal (Faculty)
Aakanchya Karmacharya
Subiksha Poudel
Soyuz Chitrakar
Mustapha Rayeen

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 Acknowledgement
We take this opportunity to express our gratitude to the people who
have been instrumental in the successful completion of this project.
We would like to show our appreciation to Mr. Ram Koju who
organized this report writing besides whose able guidance supported
us during this report formation. We are grateful for their constant
support and efforts.

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 Table of Contents

Introduction........................................................................................................................
Organizational Chart of Insurance Companies.....................................................
Concept of Financial Statement in Insurance.......................................................
Directives related to Preparation of Financial Statement....................................
Directives of Investment issued by NIA...............................................................
Importance of investment for Insurance comapanies..........................................
Objectives of Investment in Insurance.................................................................
Conclusion...........................................................................................................
References...........................................................................................................

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 Introduction

Financial management is the business function concerned with

profitability, expenses, cash and credit, so that the "organization may
have the means to carry out its objective as satisfactorily as possible.
The role of financial management in insurance is to plan, direct, and
coordinate risk and insurance programs of establishment to control
risk and losses. The CFO is responsible for all of the financial
operations within the insurance company, including overseeing the
employees in the finance department and establishing strategies that
the company will use to invest and maintain their financial health.
Accurate financial reports help businesses to make healthy business
decisions, and these financial reports are prepared with the help of
accounting.

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 Organizational Chart of Insurance Companies

Roles, responsibilities and the qualifications of personnel.

1. Board of Directors:
must have goal and objective, knowledge and understanding
of the business and related risks of the company to ensure that
problems get properly resolved and to make the effectiveness
of the internal control system.

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2. Audit Committee:
is responsible for monitoring the management and the Board
of Directors by reviewing the internal audit report, the scope
of work and the legal practice.

3. Risk Management Committee:

establishes a policy framework and risk management
guidelines in line with the company’s strategy to propose to
the Board of Directors to consider risk management. The
strategy is in line with the risk management policy.

4. Investment Committee:
is responsible for overseeing the company’s investment to
comply with the investment policy framework and the risk
management policy, investment laws and the requirements of
relevant laws, considering the risks inherent in investing and
the management approach, control and verify the risk of
investing, covering key issues.

5. The Investment Department:

shall invest in accordance with the investment policy
framework set by the Investment Committee. It also complies
with the terms and conditions of the OIC regarding investment
in other businesses of insurance companies including other
laws associated.

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6. Risk Management Agency:
establish a framework and guidelines for risk management,
risk assessment, and risk indicators and provide guidance on
risk control and mitigation.

7. Internal Audit Department:

has an important role in assessing effectiveness. The company
is responsible for reviewing and testing the control system and
risk management system.

8. Regulatory Compliance:
responsible for monitoring and supervising the operations of
all departments within the company comply with the
regulations and other laws associated.

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 Concept of Financial Statement in Insurance

A financial statement, in the context of insurance, is the official

record of the financial activities, transactions, and position of a
person, organization, or company used by underwriters to assess the
insurability of the entity concerned, its ability to pay the premiums,
and its commitment to loss control.

➢ Thefollowing are some of the basic provisions for preparation of

financial statements of insurance business:

Application of Accounting Standards:

Every Balance Sheet, Receipts and Payments Account [Cash Flow
Statement] and Profit and Loss Account [Shareholders’ Account] of
the insurer shall be in conformity with the Accounting Standards
(AS) issued by the ICAI, to the extent applicable to the insurer
carrying on general insurance business, except that:

(i) Accounting Standard 3 (AS 3) – Cash flow Statements shall be

prepared only under the Direct Method.

(ii) Accounting Standard 13 (AS 13) – Accounting for Investments

shall not be applicable.

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➢ General Instructions for Preparation of Financial
Statements:
1. The corresponding amounts for the immediately preceding
financial year for all items shown in the Balance Sheet, Revenue
Account and Profit and Loss Account should be given.

2. The figures in the financial statements may be rounded off to the

nearest thousands.

3. Interest, dividends and rentals receivable in connection with an

investment should be stated as gross value, the amounts of income
tax deducted at source being included under ‘advance taxes paid’.

Figure: Example of income statement of a life insurance

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 Directives related to Preparation of Financial
Statement
The Accounting Standards Board (ASB) Nepal has been formed with
the responsibility to formulate accounting standards for the
preparation and presentation of financial statements in Nepal. The
ASB Nepal is primarily responsible for setting accounting standards
for business enterprises in line with the International Financial
Reporting Standards (IFRSs).
The Nepal Financial Reporting Standards (NFRS) 2018 is a set of
accounting standards that are issued by the ASB Nepal. These
standards are applicable to all entities that are required to prepare
financial statements in accordance with NFRSs.
Now, the directives related to preparation of financial statement are
as follows:

1. Company Act 2063(Nepal): This act comprises of the

following rules-
● Any person desirous to establish any enterprise with a profit
motive may incorporate a company in the Office of Company
Registrar.
● Without registering a company under the Company Act, no person
shall use the name of the company and carry on any of the
transactions by the name of any firm or institution.
● Any person desirous to incorporate a company shall make an
application to Office of Company Registrar in the format

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prescribed by office along with pre-specified fees and following
documents:
➔ Memorandum of Association of the proposed company
➔ Article of Association of the proposed company
➔ In the case of a public company, a copy of the agreement
between the promoters prior to the incorporation of the company
(if any)
➔ In case of a private company, a copy of consensus agreement (if
any)
➔ When the promoter is a Nepalese Citizen, a certified copy of the
citizenship certificate and where a corporate body is a promoter,
a certificate of registration of incorporation, decision of BODs,
and major documents regarding incorporation
➔ Where the promoter is a foreign citizen, a document providing
the country of his citizenship

2. Nepal Financial Reporting Standards: NFRS requires an

insurer to disclose information that identifies and explains the
amounts in its financial statements arising form insurance
contracts and enables users of its financial statements to evaluate
the nature and extent of risks arising from insurance contracts.
Credit decisions, investment decisions, union bargaining
decisions, taxation, and other considerations are all informed by
financial statements. But revealing this financial information is
just the beginning of what is required.

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3. Accounting Standards Implementation: Accounting standards
ensure the financial statements from multiple companies are
comparable. Because all entities follow the same rules,
accounting standards make the financial statements credible and
allow for more economic decisions based on accurate and
consistent information.
The purpose of accounting assumptions is to provide a basis of
consistency that the readers of the financial statements can use
to evaluate the genuineness of a company's financials and
confirm its financial well-being depicted in the same.

4. Directives of Auditing Standards: The OAG has also issued a

directive on auditing standards which outlines the standards and
procedures to be followed by auditors in Nepal. It includes
requirements related to the audit of financial statements,
reporting and ethical considerations.

5. Income Tax Act (2058): This directive prescribes the

requirements for the preparation of financial statements for tax
purposes. It specifies the format and disclosures required in the
financial statements submitted to the tax authorities.
6. Nepal Rastra Bank Directives : This directive required that an
entity’s first NFRS compliant financial statements shall include
at least three statements of financial position, two statements of
comprehensive income, two separate income statements (if
presented), two statements of cash flows and two statements of
changes in equity and related notes.

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 Directives of Investment issued by NIA

Nepal Insurance Authority is the sole Regulatory Agency established

to systematize, regularize, inspect and supervise insurance business in
Nepal. It is an autonomous institution, established as per section 3 of
the Insurance Act, 2079 BS, having a legal personality with perpetual
succession.

In Nepal, insurance companies have certain investment directives and

guidelines set by the Insurance Board, which is the regulatory
authority for the insurance sector. These directives outline the
investment activities, asset allocation, and risk management practices
that insurance companies in Nepal must adhere to. Here are some key
investment directives for insurance companies in Nepal:

1. Asset allocation : Asset allocation is an investment strategy that

aims to balance risk and reward by apportioning a portfolio’s
assets according to an individual’s goals, risk tolerance, and
investment horizon. NIA has prescribed minimum and
maximum limits for the investment in different asset classes
such as corporate bonds, government securities, equities and real
estate. Insurance companies have to maintain a diversified
portfolio of investments.

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2. Valuation of investments: Valuation of different insurance
companies differs from one another due to unique character of
the insurer. Valuation of investment in insurance can be done
using several methods. One of the primary valuation measures is
the price-to-book ratio (P/B) which relates the insurance firm’s
stock price to its book value, either on a total firm value or a
per-share amount.
NIA has prescribed valuation morms for investment made by
insurance coampanies. Investments are required to be valued at
fair and any decline in value is reviewed and updated by NIA to
ensure that they remain relevant and effective.

3. Investment restrictions: Insurance companies must comply

with various investment restrictions imposed by the Insurance
Board. For example, there are limits on the amount of
investments that can be made in a single company or group of
related companies. Investments in highly risky and speculative
assets are also restricted to protect the policyholders' funds.

4. Solvency margin: Insurance companies must maintain a

minimum solvency margin, which is the amount of capital
required to support their operations and absorb potential losses.
The solvency margin ensures that insurance companies have
sufficient financial resources to meet their obligations to
policyholders. The investment directives provide guidelines on
the calculation and maintenance of the solvency margin.

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5. Reporting requirements: Insurance companies are required to
provide regular reports to the Insurance Board regarding their
investment activities. These reports contain detailed information
about the portfolio composition, asset valuation, income
generated, and investment performance. The reporting
requirements ensure transparency and oversight in the
investment activities of insurance companies.

It is important for insurance companies in Nepal to comply with

these investment directives to maintain financial stability,
protect policyholders' funds, and ensure the long-term
sustainability of the insurance sector. Failure to comply with
these directives can result in penalties, regulatory intervention,
and potential harm to the reputation and credibility of the
insurance company. Therefore, it is crucial for insurance
companies to have a well-defined investment strategy and a
robust governance framework to effectively manage their
investment activities in line with the directives provided by the
Insurance Board.

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 Importance of investment for Insurance company

Investment is incredibly important for insurance companies for

several reasons:

1. To recover losses: Insurance companies invest in order to

recover underwriting losses and to create more wealth for the
shareholders. They use money collected from premiums for
investments to keep your premium low and create more wealth
for the shareholders. Insurance companies also make a lot of
money from investment income. When an insurance company
receives its monthly premiums, the insurance company takes
those monies and invests them in the financial markets, to
increase their revenues.

2. Profitability: Insurance companies primarily earn money

through the premiums they collect from their policyholders.
However, these premiums may not be sufficient to cover the
payouts for claims and operational expenses. By investing the
premium payments, insurance companies have the opportunity
to generate income and increase their profits.

3. Insurance reserves: Insurance companies are required to

maintain reserves to ensure they can fulfill their obligations to
policyholders. These reserves act as a financial buffer to cover

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 any unexpected losses or claims. Investment income helps in
building and maintaining these reserves, ensuring that the
company remains financially stable and can meet future
obligations.

4. Risk management: Insurance companies deal with a variety of

risks, including investment risk. Diversifying their investment
portfolio helps mitigate risk and spread potential losses across
different asset classes. By managing their investment risks
effectively, insurance companies can protect their financial
health and minimize the impact on policyholders.

5. Policyholder dividends: Some insurance companies offer

policyholders dividends or refunds based on the company's
profits. These dividends are often funded by investment
income. By investing wisely, insurance companies can generate
higher returns, allowing them to share the profits with
policyholders.

6. Business growth and expansion: Investment income is crucial

for insurance companies looking to expand their business, enter
new markets, or develop new insurance products. It provides
the necessary capital for growth initiatives, acquisitions, and
other strategic investments, enabling the company to increase
its market share and diversify its offerings.

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7. Competitive advantage: Insurance is a highly competitive
industry, and the ability to generate strong investment returns
can provide a significant competitive advantage. Higher
investment returns translate into better financial stability,
increased ability to offer competitive premiums, and improved
customer satisfaction. Overall, investment plays a vital role in
the success and sustainability of insurance companies. It helps
them generate income, manage risks, maintain reserves, and
drive business growth. By effectively managing their
investment portfolio, insurance companies can enhance their
financial performance and better serve the needs of their
policyholders.

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 Objectives of Investment in Insurance

The objectives of investment in the insurance sector are as follows:

1. Generate returns on investment: One of the primary objectives

of investment for insurance companies is to generate profitable
returns. By strategically investing their surplus funds, insurance
companies aim to maximize their investment income. These
returns can be used to enhance their financial performance, provide
better policyholder benefits, and improve the company's overall
profitability.

2. Maintain solvency and financial stability: Insurance companies

are required to maintain solvency and financial stability to honor
their commitments to policyholders. Investments play a crucial
role in achieving this objective by providing a source of liquidity
and ensuring that the company has sufficient assets to cover
liabilities. By investing prudently, insurance companies can build
and maintain the necessary reserves to meet their obligations.

3. Diversify risk: Insurance companies face various risks, such as

underwriting risk and investment risk. By diversifying their
investment portfolio across different asset classes, insurance
companies can spread their risk and minimize potential losses. This

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 ensures stability and protects the company from adverse market
conditions, economic downturns, or unexpected events.

4. Meet regulatory requirements: Insurance companies operate in

a highly regulated environment, and there are specific investment
guidelines and requirements that they must adhere to. These
regulations aim to protect policyholders and maintain the stability
of the insurance sector. The objective of investment in the
insurance sector is to comply with these regulations and fulfill the
necessary investment obligations set by regulatory authorities.

5. Support long-term obligations: Insurance companies have long-

term commitments to policyholders, such as providing coverage
for life insurance policies or annuity payments. Investments help
insurance companies generate the necessary income over the long
term to honor these obligations. By investing in long-term assets
like bonds or real estate, insurance companies can match their
liabilities and ensure they have sufficient funds for the future.

6. Enhance competitive advantage: The insurance sector is highly

competitive, and investment strategies can provide a competitive
edge. By generating higher returns on their investments, insurance
companies can offer more attractive products, provide better
policyholder benefits, and have greater financial strength compared
to their competitors. This can lead to increased market share and
improved customer satisfaction.

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 In summary, the objectives of investment in the insurance sector
include generating returns, maintaining solvency, diversifying risk,
meeting regulatory requirements, supporting long-term obligations,
and gaining a competitive advantage. These objectives ensure the
stability, profitability, and sustainability of insurance companies,
allowing them to meet the needs of their policyholders effectively.

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 Conclusion

The insurance sector revolves around managing and mitigating risks.

Financial management helps insurance companies identify, assess,
and manage various financial risks, such as underwriting risk,
investment risk, credit risk, and liquidity risk. By effectively
managing these risks, insurance companies can minimize losses,
ensure solvency, and maintain financial stability.Also, The insurance
sector operates in a highly regulated environment, and financial
management ensures compliance with regulatory requirements.
Insurance companies need to adhere to various financial reporting
standards, disclosure requirements, solvency and capital adequacy
regulations, and risk management guidelines. Effective financial
management practices enable insurance companies to meet these
regulatory obligations and maintain the necessary level of
transparency and accountability.

In conclusion, financial management plays a crucial role in the

insurance sector by facilitating risk management, capital allocation,
investment management, financial planning, budgeting, regulatory
compliance, and competitive advantage. It ensures the financial
stability, profitability, and sustainability of insurance companies,
enabling them to meet the needs of their policyholders effectively.

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 References
● https://nia.gov.np
● www.lbef.org
● https://oag.gov.np
● http://asbnepal.gov.np

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