Central bank plans to license reinsurance companies

To strengthen the insurance sector in the face of rapid economic development in the country, the central bank of Bhutan, Royal Monetary Authority (RMA) is planning to license reinsurance companies in the country.

This, according to RMA, will help the insurance sector get into mega projects and help reduce outflow of money from the economy.

At present, insurance companies in the country affiliate themselves with reinsurance companies abroad to share the burden of risk. With this, the companies retain a certain percentage of the sum insured and give away the rest to the reinsuring companies so that any losses can be mitigated with a joint effort.

Tshering Penjor, an examining officer of RMA, said through reinsurance, the Bhutanese insurance companies pay a major chunk of the premium to companies abroad.

According to him, around 60 percent of the premium paid to the Bhutanese insurance companies goes to the reinsurance companies abroad.

“With this regulation, we hope to establish some reinsurance companies within Bhutan so that we can retain the money which is flowing out,” he said.

Eden Dema, one of the two deputy governors of RMA, said the main objective of licensing reinsurance companies is to develop the insurance sector, especially for the hydropower sector.

According to Kunzang Gyeltshen, the assistant manager of the risk management division of Royal Insurance Corporation of Bhutan Limited (RICBL), the corporation has reinsurance with some nine companies from India, Bangkok and Japan.

He said that due to the ongoing hydropower development in the country, RICBL has to reinsure around 90 percent of the total sum insured for the projects with companies outside Bhutan as the insurance value for the projects is high.

Bhutan Insurance Limited (BIL) has its reinsurance with around five companies in India and Bangkok. BIL’s chief executive officer, Tshering Gyeltshen, said the company reinsures 70 percent of the total sum abroad.

Reinsurance regulation

Since 2010, RMA has received around four applications for reinsurance companies, out of which only two have submitted detailed proposals. RMA is still reviewing the proposals.

According to the regulation, a reinsurance company should be a public limited company registered under the companies act and will have to be listed with the Royal Securities Exchange of Bhutan Limited.

The reinsurance company will have to divest 30 percent of its paid up capital through initial public offerings within one year of its operation. The initial paid up capital for the reinsurance companies will have to be between Nu 300 and 800 million.

With the establishment of reinsurance companies in Bhutan, the insurance companies in the country will be required to reinsure 50 percent of the sum insured with reinsurance companies within the country.

However, such limits, Eden Dema said, will be determined according to the risk appetite of the reinsurance company.

The two insurance companies in the country are concerned that RMA would make it mandatory for them to reinsure 50 percent of the sum insured within the country.

Kunzang Gyeltshen said that if the regulation is finalized, the corporation might lose the commission it gets from reinsurers abroad although having reinsurance companies within the country might help reduce administrative costs.

At present, RICBL gets commissions from reinsurers based on the percentage of the sum reinsured.

“If RMA makes it compulsory for us to reinsure 50 percent with companies within the country without a competitive bid, we might have to do away with the commissions,” he said.

Tshering Gyeltshen said the issue needs to be debated before it is finalized. He said,   “Even in India, the insurance companies only retain 10 percent of the total sum insured and give the rest to the reinsurers.”

By Pushkar Chhetri