Kathmandu. The Nepal Insurance Authority (NEA) has issued a new directive for the objective assessment of the assets and liabilities of insurance companies. NEA has issued ‘Mark-to-Model Valuation of Assets’ guidelines for the effective implementation of risk-based capital and research capacity (solvency).
Due to the lack of a deep, liquid and transparent market for the buying and selling of investable assets in Nepal’s financial market, this new provision has been brought in line with the provisions of CAP 14 and CAP 17 propounded by the International Insurance Supervisory Association (IAIS). This directive will be applicable to all types of insurers licensed by the Nepal Insurance Authority (NIA) i.e. life, non-life, reinsurance and micro insurance companies.
What is the ‘Mark to Model’ method?
According to the new provision, if the market value of a property is readily available, the insurance company will have to use the same price for the purpose of valuation the property. However, in the case of assets that are not traded in the market or the market value is not clear, companies will now have to adopt the ‘mark-to-model’ method. Under this method, companies will be able to determine the value of assets using financial formulas and methods, especially discounted cash flows. The price so drawn should be as close and reliable as possible to the market price.
In the 18-page guideline, the authority has also suggested mathematical formulas, methods and standards for the valuation of property using the mark-to-model method.
Responsibilities of CEOs and CFOs increased:
The NRA has brought strict provisions to prevent arbitrariness in the valuation of properties whose market value is not disclosed. According to the guidelines, the model and methods used in the evaluation will have to be certified by the Chief Financial Officer (CFO) of the company. The Chief Executive Officer (CEO) has to approve it. A complete record of every detail of the evaluation process should be kept. Such records should be accessible to a third party or independent expert to understand and recalculate the models and results used.
How to evaluate investment?
The directive also recommends using the ‘discounted cash flow’ method in case of assets with fixed cash flows, such as debentures, deposits and loans. The current value of the asset will be calculated by adding the appropriate credit spread to the ‘risk-free rate’.
Through this supplementary guideline, the authority aims to bring transparency in the research capacity of insurers and develop an international level supervision system.
