Page 21 - The Insurance Times September 2025

local, or cyclical shocks have become systemic threats. The in dealing with different product designs and managing their
survival of insurers is now inseparable from their ability to risks. RBC helps to protect policyholders by ensuring market
withstand nature's volatility. stability and prepare the insurers for more volatile future.
For Nepal, adopting an RBC framework marks a turning
This is why regulators worldwide turned to Risk-Based Capital point in the maturity of its insurance market. It positions
(RBC) framework in the early 1990s. RBC marked a decisive the country within a broader global movement toward
shift from static solvency margins to risk-sensitive capital stronger solvency standards and better governance.
standards, requiring insurers to hold capital in proportion
to their actual exposures of risk. What began in the United Under the Risk-Based Capital framework, capital
States got spread globally including Nepal. requirements are calculated based on a comprehensive
assessment of risks specific to each insurer. These risks
Introduction: A New Era of Insurance typically fall into the following categories:
Market Risk: The risk of adverse movements in
Regulation in Nepal
investment markets impacting the value of assets
Nepal's insurance industry has long stood as a guardian of backing policyholder liabilities.
financial security, helping individuals and families to navigate Credit Risk: The risk of counterparty default,
risks and safeguard their futures. But as the sector has
particularly in reinsurance, investment portfolios, and
grown in terms of size, scope, and complexity, so too has
premium receivables.
the need for a regulatory framework that keeps pace with
the modern challenges. In response to this evolution, the Life Insurance Risk: The risk of claims deviating from
Nepal Insurance Authority (NIA) has taken a historic step expected patterns due to changes in mortality,
forward: the introduction of the Risk-Based Capital (RBC) morbidity, or persistency.
regime. Operational Risk: The risk arising from internal process
failures, system breakdowns, fraud, or human error.
This paradigm shift represents not just a change in how
capital adequacy is measured, but a complete The RBC model assigns capital charges (based on stress
transformation as to how insurers evaluate, manage, and scenarios) to each risk category, which are then aggregated
respond to the risks. By aligning regulatory capital with the (using correlation matrices) to determine the total required
true risk profile of each insurer, RBC offers a forward-looking, capital. An insurer must maintain capital in excess of this
dynamic framework designed to enhance policyholder threshold to remain solvent. The regulator has prescribed
protection, market stability, and long-term growth. the minimum threshold of 130% as solvency capital in Nepal.

This article explores what Risk-Based Capital means, why it Global Evolution of RBC
matters, how it will reshape the insurance landscape in
The journey of RBC began in the United States in 1993, when
Nepal, what are the global lessons which can be learnt, and
the National Association of Insurance Commissioners (NAIC)
what insurers, regulators, and stakeholders must do to
introduced the first formal RBC system for life insurers. This
prepare for a successful transition.
approach replaced blunt solvency margins with capital
charges calibrated to risk categories such as asset quality,
Understanding Risk-Based Capital: underwriting exposures, and interest rate sensitivity.
Moving Beyond One-Size-Fits-All
Europe soon followed its own path, moving from Solvency I
Risk-Based Capital (RBC) has been one of the most significant
to Solvency II in 2016. Solvency II remains the most
regulatory shifts in the insurance sector over the past three
sophisticated global model, offering both a standard formula
decades. At its core, RBC is about aligning an insurer's
and internal models approved by regulators, supported by
capital requirements with the actual risks it carries-whether
diversification credits and advanced risk correlation tools.
from underwriting, investments, operations, or external
shocks. Moving away from fixed solvency margins toward In Asia, Singapore introduced RBC in 2004, refining it into
risk, sensitive capital requirements make capital based on RBC2 by 2020, which emphasized market-consistent
the risks presented by different insurers, who have a choice valuation and diversification benefits. China's C-ROSS (2016)

20 September 2025 The Insurance Times