Insurance companies are risk managers. The relationship between their business and risk goes in one direction. As the risk increases, so does the insurance business, and when there is no risk, there is no need for insurance. The Covid-19 pandemic has caused extreme risk around the world since 2020. In this situation, a question that how successful insurance companies have been managing risk have arisen in people’s mind.

The three sub-sectors of the financial sector -- banking insurance and the capital market -- are interdependent. While the capital market gets quickly affected by short-term external events, the banking sector is less affected by such events. The insurance sector is the least affected as there it is only impacted by long-term strategic decisions. Due to the socio-economic impacts of the pandemic, every sub-sector of the insurance sector -- life insurance, non-life insurance and reinsurance -- has been affected.

From a theoretical point of view, alternative investment opportunities, savings rates, and income levels are the factors affecting the life insurance market. Demographic composition, cultural, religious, political, legal reasons, social security policy and insurance policy of employers for their employees also affect it. As the pandemic has caused a decline in the attraction of alternative investment opportunities, life insurance has become attractive and demand for term life insurance policies has risen.

Many people have accumulated money in regular income, but they have only a very few investment opportunities at present. So, they have purchased life insurance policies. This year, the total premium collection of the life insurers has increased by Rs 27 billion. However, under normal circumstances, more premiums would have been collected. As the number of policyholders borrowing loans from insurance companies has increased, insurers have the opportunity to invest in higher returns than banks.

Talking about some of the impacts of the pandemic on the life insurance sector, it is mainly related to the decrease of return on investments of insurance funds of companies. This fund is the second largest source of income for companies. Currently, such funds of the insurance companies total nearly Rs 285 billion which they have deposited in fixed deposit accounts. However, banks have reduced interest rates in deposits over the last one and a half years which has affected the income of insurance companies, thereby reducing the chances for shareholders and policyholders to receive good returns.

At present, many small policyholders are unable to pay the premium amount they owe to insurance companies due to the decline in income as a result of the pandemic. Because of the non-payment, some insured have been forced to surrender the policies. In the last fiscal year, 63,331 policies were surrendered. Similarly, they also face risks of policy lapse and non-renew of policies for the next few years.

Non-life insurers have lost money in insurance coverage of the big projects due to the sluggishness in the government's capital expenditure. Meanwhile, their income from air travelers' insurance and visit insurance has also declined sharply. Currently, the companies also seem to be confused about the risks they should cover and what they should not. There is also a possibility that a large number of claims will be made after commercial vehicles that have been parked in the garages for a long time start ply on the roads again.

Handling the Covid-19 insurance claims has proven arduous for non-life insurance companies. Not only they could not generate any profit from the sale of the policy, they even lost their contingency reserve funds to settle some of the claims. The government has not shown interest to resolve the issues surrounding the non-payment of the claims. As a result, public trust in insurance has eroded.

It has become necessary to start introducing different types of insurance policies that are sold in the foreign markets. If the workers have unemployment coverage, they would not have run out of food if they lost their jobs. Similarly, employers don't have to pay the salaries of their staff by borrowing money from banks. This will help to keep the wheels of the economy rolling even in times of crisis.

(Dr Ghimire is Associate Professor at School of Business, Pokhara University.)