Kathmandu. Japan’s Prudential Life Insurance (PLIC) has been rocked by a 34-year-old financial scandal and a 3.1 billion yen fraud scandal. This incident has taught serious lessons for the insurance sector in Nepal as the life insurance market of Nepal is expanding at a rapid pace and the merger of various companies has taken a big shape.
This incident in Japan is not an accident, but a product of the weakness and wrong working style of institutional governance. Here are some lessons that the board of directors and top management of insurance companies in Nepal should learn from this case:
Risks and Commission Pressures of the Sales-Centric Model
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One of the main causes of fraud in Japan was the commission based on the sale of the first premium. In Nepal too, agents are put under a lot of pressure and temptation to bring in new business.
According to the recently released Risk Based Capital Directive 2082 issued by the Nepal Insurance Authority, companies should not only increase business but also pay attention to the quality of business. The authority has also directed the life insurer to give priority to the renewal insurance premium through the circular. Encouraging insurance agents to sell new policies runs the risk of misleading customers or showing them fake schemes.
Popular agents and opaque working style
Prudential Japan had a culture of treating many business agents as gods and ignoring their mistakes. In Nepal too, the reach and influence of an agent with titles such as MDRT and TOT goes beyond the company’s policies. The top management has given them unusual policy support in the name of facilitating them to do business.
No high-performing agent or employee should be placed above the rules and regulations of the organization. The company’s top leadership should constantly monitor the activities of big agents.
{{TAG_OPEN_strong_39}Digital Payments & Direct Interaction with Customers
In Japan, employees have been found to collect insurance premiums from customers individually or collect money in the name of the company. In Nepal, most of the insurance premiums are still paid in cash through agents. This is called premium lapsing.
Customers should be encouraged to pay through digital wallets or directly through banks, fully complying with Digital Insurance Directive 2081. As soon as the customer pays the money, the provision of sending a confirmation message SMS from the head office of the insurer should be strictly enforced.
Role and Good Governance of the Board of Directors
In the case of Japan, the board of directors did not adequately discuss the potential risks. Even in Nepal’s insurance companies, board meetings are mostly focused on profits and mergers.
The company’s board should make operating risk an agenda. There is a need to set up an independent monitoring mechanism to hear complaints of fraud and conduct. There should be an environment where employees or customers do not have to be afraid. Such a mechanism has also been provided in the Corporate Good Governance Guidelines of the insurer.
Risk Management after Employee Retirement
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In Prudential Japan, about half of the frauds were committed by employees after they quit their jobs. In Nepal, the customer does not know that the agent or employee has left the company and they are paying money on the basis of old relationships. If an agent or employee leaves the organization, a system should be developed to immediately inform the customers they are looking at through SMS or letter.
The current operating risk in Nepal’s life insurance sector is inflating like a big balloon. It has been accused of hiding under the carpet by the leadership. The incident in Japan warns that if ethics and technology are not taken together, decades of hidden fraud could eventually lead to the collapse of the company.
