Lack of legal provisions has led to an increase in informal insurance raising the risk of customers not getting compensation for damage to their property, National Planning Commission (NPC) Vice-Chairman Yubaraj Khatiwada said Friday.

Speaking at the International Insurance Conference, Khatiwada added that many cooperatives had been insuring crops and livestock illegally. A number of these organizations have been collecting insurance premiums from their members in the name of risk sharing, mainly in the farm sector. 

However, such cooperatives neither maintain an insurance fund nor have reinsurance coverage. They may be unable to make compensation payment if harvest and livestock losses are very high. “This has made it difficult for farmers to get compensation for their losses,” Khatiwada said. 

According to him, the government has planned to bring such activities of the cooperative business under a legal framework through a new Cooperative Act. However, the proposed law has remained pending at the Cabinet for the last four months. 

Khatiwada also pointed out the need for coordination among regulators including Nepal Rastra Bank, Insurance Board, Securities Board of Nepal and Office of the Company Registrar to minimize systematic risks triggered by market phenomena. Although the government has formulated a financial sector development strategy to address the issue, it has been ineffective due to lack of relevant laws. 

“Because of this reason, many loopholes in cross-cutting issues have emerged, resulting in a number of cases of serious regulatory arbitrage,” Khatiwada said.

He also urged regional cooperation among financial sector regulators to address cross-border insurance and deal with spill-over effects that could arise from a global financial meltdown or natural catastrophe. 

According to him, expansion of effective insurance business including micro insurance can help to increase financial outreach and inclusion.