Mandatory Domestic Reinsurance Sparks Debate Over Risk Concentration in Nepal’s Insurance Sector

Kathmandu — The Nepal Insurance Authority’s decision to mandate 100 percent domestic reinsurance across life insurance and several non-life insurance categories has triggered widespread concern within the insurance industry, reopening a critical debate on risk concentration, regulatory overreach, and market stability.

The provision, introduced through the Insurers’ Reinsurance Directive–2080, requires insurers to place the entirety of their reinsurance business within Nepal. The policy applies not only to life insurance but also to motor insurance, agriculture and livestock insurance, riot and terrorism insurance, and other miscellaneous lines. Under Clause 8 of the directive, domestic reinsurers are legally barred from rejecting any reinsurance ceded to them.

Industry Pushback Reflects Systemic Risk Concerns

Life insurance companies argue that the directive undermines the core principle of insurance—risk diversification. By forcing all reinsurance to remain within a single country and a limited number of institutions, insurers warn that Nepal’s insurance system could face severe stress during large-scale catastrophes such as earthquakes, pandemics, or widespread economic shocks.

Industry representatives point out that Nepal is already a high-risk geography, exposed to seismic activity and climate-related disasters. Concentrating insurance and reinsurance risk domestically, they argue, removes a crucial global shock-absorption mechanism that international reinsurance markets traditionally provide.

How Reinsurance Is Meant to Work

At the heart of the controversy lies a technical but fundamental concept. Insurance companies accept risk from policyholders and retain only what their balance sheets can support. The excess risk is transferred to reinsurance companies. Reinsurers, in turn, further distribute portions of that risk globally through retrocession, ensuring that no single entity or country bears an excessive burden.

“This multi-layered global distribution is not optional—it is the backbone of insurance,” industry officials argue. Eliminating international reinsurance, they say, transforms reinsurance from a risk-management tool into a domestic liability pool, weakening the system rather than strengthening it.

Diverging Views Within the Regulator’s Circle

Former Insurance Authority executive director Rajuraman Poudel has defended the policy, particularly in the context of life insurance. He argues that domestic reinsurers already transfer catastrophic risk abroad through retrocession, meaning that risks are not entirely trapped within Nepal.

However, insurers contest this interpretation. They claim that the current directive, combined with limited domestic reinsurance capacity, effectively forces even catastrophic exposures to remain largely within Nepal’s financial system, increasing vulnerability during rare but high-impact events.

Experts Warn Against Regulatory Compulsion

Insurance experts have also raised red flags. Former Nepal Reinsurance Company chairman Dr. Rabindra Ghimire has criticized the mandatory nature of the directive, arguing that regulators should set prudential standards, not dictate commercial reinsurance decisions.

“Reinsurance should be based on actuarial analysis, not administrative instruction,” he said. According to experts, forcing insurers to reinsure only domestically risks distorting pricing, weakening underwriting discipline, and reducing competitiveness in the long term.

Proposal for a Balanced Model

The Life Insurers’ Association has proposed a middle-ground approach—requiring insurers to cede a defined portion of risk to domestic reinsurers while allowing the remaining exposure to be diversified internationally. Such models exist in many emerging markets, balancing domestic capacity development with global risk protection.

Insurers argue that supporting domestic reinsurance is a valid policy goal, but doing so by eliminating international diversification could backfire, especially during systemic crises when claim obligations peak simultaneously across sectors.

Allegations of Policy Bias Add Political Dimension

The directive was implemented during the tenure of former Insurance Authority chairman Suryaprasad Silwal. Industry sources allege that the policy disproportionately benefits Himalayan Reinsurance Company, promoted by the Shankar Group, which entered the market shortly before the rule was enforced.

Prior to this, there was no compulsory requirement to reinsure entirely within Nepal. While some insurers voluntarily worked with Nepal Reinsurance Company, mandatory domestic reinsurance emerged only after new players entered the sector, fueling speculation about policy intent.

Silence from Current Leadership

When asked about the allegations, current Insurance Authority executive director Sushil Dev Subedi stated that he was not aware of the claims. The Authority has yet to issue a detailed public clarification addressing industry concerns or explaining the long-term risk assessment behind the directive.

A Policy at a Crossroads

The controversy highlights a broader tension in Nepal’s financial regulation: balancing domestic capacity building with systemic resilience. While strengthening local institutions is a legitimate objective, critics warn that doing so at the cost of risk diversification could expose the economy to amplified shocks.

As insurers continue to lobby for revision, the debate is no longer just about reinsurance mechanics. It has evolved into a test of regulatory transparency, evidence-based policymaking, and the long-term stability of Nepal’s insurance sector.