Despite recent sluggish growth, the insurance industry has a vast opportunity for expansion as 60% of the population is uncovered.
BY NEWBIZ TEAM
In 2015, the Gorkha Earthquake claimed the lives of 8,962 individuals and injured over 21,952 people. Additionally, more than 750,000 homes were either destroyed or damaged, and countless heritage sites were reduced to rubbles. This was one of Nepal's most devastating events since the 1934 Nepal-India earthquakes.
The aftermath of the disaster also exposed a sobering reality: only a small fraction of the deceased had life insurance with just three percent of the victims being covered. Property insurance was virtually non-existent, leaving countless individuals vulnerable to unforeseen tragedies. As a result, the government faced the daunting task of allocating billions of dollars towards relief and reconstruction efforts.
A decade after the catastrophic event, Nepal continues to grapple with human and property losses due to natural calamities, such as earthquakes, floods, storms and lightning strikes. Following the 2015 earthquakes, several Tarai villages were completely engulfed by floods in 2021. Similarly, the 2023 earthquakes in Jajarkot claimed 153 lives and destroyed property worth hundreds of millions of dollars.
Despite mounting annual losses attributed to various factors, the absence of adequate insurance practices to mitigate these risks has placed significant burdens on the state treasury for relief and reconstruction efforts. According to the National Disaster Risk Reduction and Management Authority, Nepal ranks fourth in climate change impact risk, fifth in lightning risk, 11th in earthquake risk, 13th in flood risk, and 20th overall in global risk assessment. Nevertheless, government statistics reveal a weak penetration of insurance, the primary tool for risk transfer, among Nepalis. Over half of the Nepali population still lacks access to insurance.
According to the Nepal Insurance Authority (NIA), 43.32% of the general public has insurance coverage as of mid-April 2024, marking a slight decrease from the 44.55% coverage recorded in mid-April 2023. However, excluding temporary micro-insurance and foreign employment insurance, only 17.24% of Nepalis are covered by insurance. Similarly, the coverage drops to 36.65% of the general public if foreign employment insurance is excluded.
This indicates significant growth potential for the insurance sector. However, since the last fiscal year, the insurance industry's business growth has been far from satisfactory. The sector is currently experiencing an intriguing period, with companies encountering challenges in expanding their operations amidst an economic downturn. They, however, have managed to generate significant profits.
The insurance sector, encompassing both life and non-life insurance, experienced a modest growth of 2.85% in 2022/23, a sharp decline from 16.48% growth in the previous fiscal year. Life insurance companies saw their business increase by 2.64% in 2022/23, while non-life insurance companies grew by 3.6%. The trend of single-digit growth continues in the current fiscal year. Data shows that the business of non-life insurance companies expanded by a mere 0.46% in the first nine months of 2023/24, while life insurance grew by 5.18% during the period.
According to the NIA, life insurance companies collected premiums amounting to Rs 110.16 billion till the third quarter of the current fiscal year, while non-life insurance companies collected Rs 30.01 billion. In comparison, premium collection till the third quarter of 2022/23 stood at Rs 104.73 billion for life insurance companies and Rs 30.15 billion for non-life insurance companies.
Third-quarter reports of insurance companies for the current fiscal year, however, reveal significant profit improvements. Among the 28 companies that published reports, 25 have reported net profit growth, while three reported declines. Asian Life Insurance recorded the highest profit increase at 254.96%. On average, life insurance companies have seen a net profit rise of 41.20%, and non-life insurance companies have experienced a 55.07% net profit growth.
In total, life and non-life insurance companies have earned a net profit of Rs 10.28 billion in the first nine months of the current fiscal year, reflecting a 48.55% increase compared to the same period of 2022/23.
Impact of Economic Slowdown
Insurance company executives attribute the slowdown in business growth to a noticeable decline in major sectors such as construction, industry, services, banking and the capital market. This downturn has consequently impacted the insurance industry. Despite demonstrating significant resilience during the pandemic, the insurance sector is now affected by the broader economic slowdown, experiencing a decline after years of strong growth.
According to Dip Prakash Panday, CEO of Shikhar Insurance, it is natural for the insurance business to be affected when the overall economy of the country is sluggish. "The direct reason for the decline in the business of insurance companies is linked to people's economic conditions," he said. "When people's daily needs are not being met, who will think about insurance for the future? Therefore, for the development of insurance, the economy needs to develop first."
the absence of adequate insurance practices to mitigate these risks has placed significant burdens on the state treasury for relief and reconstruction efforts.
A total of 37 insurance companies are in operation at present. This includes 14 life insurance companies, 14 non-life insurance companies, two reinsurance companies, and seven microinsurance companies. Their data indicates that the overall insurance business in Nepal is declining.
Companies Eye Property Insurance
Given the slowdown in the automobile business, non-life insurance companies have increasingly focused on property insurance to grow their business. This shift is largely driven by the fact that claim payouts for property insurance are relatively low compared to the premiums collected, making it a profitable product. Because of this, most insurance companies are now actively selling home insurance policies.
The non-life insurance sector has long been dominated by motor insurance. However, recent data from the NIA indicates a significant shift towards property insurance. Over the first nine months of the current financial year, the share of property insurance in the non-life insurance market has increased by 11.15%. Consequently, property insurance now constitutes 24.63% of the non-life insurance business, up from 22.26% during the same period last year.
Insurance companies have collected premiums amounting to Rs 7.42 billion for property insurance in the first nine months of 2023/24, compared to Rs 6.68 billion during the same period of 2022/23. The share of motor insurance in the non-life insurance business, however, has dropped from 32.94% last year to 30.80% this year, marking a 6% decrease.
Insurance companies collected Rs 9.28 billion in motor insurance premiums until mid-April 2024, compared to Rs 9.88 billion until mid-April 2023.
Companies Struggling with Capital Requirements
In mid-April 2021, the then Beema Samiti, now restructured as Nepal Insurance Authority, set a minimum capital requirement of Rs 5 billion for life insurance companies and Rs 2.5 billion for non-life insurance companies. Initially, companies were given one year to meet this requirement. It was later extended by three months to mid-July 2023.
Although it has already been 11 months since the deadline expired, 10 life insurance companies and eight non-life insurance companies still have not met the minimum capital requirement. However, the NIA has not been able to take any action against these companies. As a result, the number of insurance companies has come down by 10. Consequently, the number of branches and employees of the insurance companies has been reduced.
According to the NIA, by mid-April 2023, the number of insurance company branches had declined by 6.91% to 2,936 from 3,145.
Chunky Chhetry President of the Nepal Insurers' Association, said that insurance companies have bolstered their capital base and increased their capacity to take on risk responsibilities post-merger.
Among the 28 companies that published reports, 25 have reported net profit growth, while three reported declines.
Insurance Awareness Lags
Despite the potential risks posed by natural disasters, accidents and unforeseen events, there is a lack of interest among people in obtaining insurance cover for risk mitigation. While insurance mandated by the government or other authorities exists, only a small percentage of people view insurance as a form of savings. Surya Prasad Silwal, Chairperson of NIA, said that the number of individuals acquiring insurance for risk mitigation purposes and understanding insurance as a primary risk management tool is relatively low. "Nepal still lacks sufficient information about the reasons and purposes behind purchasing insurance policies," he said. "The government and insurance companies must collaborate to enhance insurance literacy."
To promote insurance literacy, the regulatory authority established insurance training centres five years ago. These centres play a crucial role in educating the general public about insurance and addressing the awareness gap in the sector. Silwal said that the NIA has been actively working to raise awareness about insurance by establishing provincial offices in all seven provinces.
Insurance company executives say that both the general public and the government lack seriousness regarding insurance. "The government continues to allocate a substantial budget for disaster relief and rehabilitation following natural disasters and accidents, rather than prioritising insurance," stated Chhetry, President of the Nepal Insurers' Association.
"After earthquakes, Nepal allocated significant funds for relief and rehabilitation, but the government has not prioritised insurance as a pre-disaster measure," he said. "After the government made third-party insurance for vehicles mandatory, it has significantly reduced the financial burden in accidents. Insurance should also be made mandatory for home construction completion."
Poshakaraj Paudel, President of the Nepal Life Insurers' Association and Chief Executive Officer of Citizens Life Insurance, agreed with Chhetry. "If the government intends to reduce the tax range for life insurance, it should be raised to a minimum of Rs 100,000," he demanded.
A total of 37 insurance companies are in operation at present. This includes 14 life insurance companies, 14 non-life insurance companies, two reinsurance companies, and seven microinsurance companies.
Insurers say encouraging policies from the government could play a positive role in enhancing insurance coverage. "Currently, when individuals pay premiums to life insurance companies, they receive a discount of 40,000 rupees in calculation of taxable income. Expanding this discount to a minimum of Rs 100,000 would significantly enhance access to insurance," said Pravin Raman Parajuli, CEO of Nepali Life Insurance Company.
Nirmal Kajee Shrestha, Vice President and General Manager of MetLife Nepal, also said tax exemptions should be given to encourage the general public to obtain insurance. "The current exemptions are not sufficient. The minimum exemption should be above Rs 100,000, as is the case in neighbouring countries," he stated. "Tax exemptions do not reduce state revenue; instead, they help formalise the informal economy. Ultimately, this increases the scope and size of the tax base."
Was COVID-19 Insurance Rationale?
Insurance coverage for pandemics is uncommon, with insurance companies typically excluding such situations in their policies. However, in April-May 2020, the insurance regulator issued guidelines for COVID-19 insurance policies. According to these guidelines, insurance companies were mandated to cover claims up to Rs 100 billion. Claims ranging from Rs 1-2 billion were to be covered by the Nepal Reinsurance Company, and claims exceeding Rs 2-3 billion were to be jointly covered by the NIA and the Ministry of Finance. As per the agreement, the government was obligated to cover the remaining amount of approximately Rs 11 billion if insurers failed to pay.
Chhetri said that if the government fails to meet its obligations for pandemic insurance, companies will incur losses. "If the government doesn't fulfil its liability for pandemic insurance, we'll suffer losses, impeding the expansion of other insurance programs," he explained.
However, the Office of the Auditor General has criticised the government for accepting unlimited liability for COVID-19 insurance, suggesting that companies should bear this responsibility.
While insurance mandated by the government or other authorities exists, only a small percentage of people view insurance as a form of savings.
According to insurers, the non-payment of these claims has led to a decline in the insurance business. Addressing the pending COVID-19 insurance claims and unresolved agricultural insurance payments is important for the business, they say. "Fulfilling these claims would have not only stabilised the market but also paved the way for broader health insurance coverage," Chhetri added.
The lack of synchronisation between the government and the NIA has led to operational challenges for insurance companies. Consequently, non-life insurers have stopped offering agricultural insurance.
Despite being a "forced market", the insurance sector has seen growth, with the agricultural insurance business now valued at Rs 3.5 billion. "However, the government has failed to disburse subsidies accordingly. Shikhar Insurance alone is yet to receive Rs 700 million from the government. When we brought our concerns to the government's attention, they did not offer to sit down and resolve the issue," said Deep Prakash Pandey, CEO of Shikhar Insurance.
Need for Investment Diversification
Insurers highlight the need to diversify the investments of insurance companies which have traditionally focused on fixed deposits. Life insurance companies typically bear liabilities from insured individuals for 15-20 years, while wealth creation typically occurs within three years. "Therefore, as a policy, the state should introduce investment tools that facilitate the deployment of capital from insurance companies into the productive sector. This would enable diversification of investments, which currently heavily rely on fixed deposits, often up to 90%," said Parajuli.
According to Asian Life Insurance CEO Dinesh Lal Shrestha, if the insurance sector receives the same level of importance as the banking sector, it can play a significant role in the country's development. As the funds of insurance companies grow, they can help raise capital for national development projects. "Asian Life Insurance has invested in sectors ranging from hydropower to aviation. The government can utilise insurance funds for development by issuing separate savings bonds or bonds. Currently, we have to keep deposits in banks at a 5-6% interest rate that too is subject to rapid fluctuations," he added.
Insurers highlight the need to diversify the investments of insurance companies which have traditionally focused on fixed deposits. Life insurance companies typically bear liabilities from insured individuals for 15-20 years, while wealth creation typically occurs within three years.
The fund of one life insurance company has reached up to Rs 200 billion, with other companies holding around Rs 100 billion each. Proper utilisation of these funds can significantly contribute to economic development.
Insurers say that currently, insurance companies must keep fixed deposits at low interest rates. According to them, if these insurance companies could invest in co-financing with banks, common people could receive loans at lower interest rates, and the returns for insurers would be higher than those from term deposits.
Microinsurance Companies Ramp Up Expansion
When established insurance companies hesitated to venture into the microinsurance sector, new companies entered the market. Within just one operational year, non-life microinsurance companies managed to collect Rs 78.88 million in premiums by selling 34,114 policies until mid-April. By the end of mid-March of the current fiscal year, non-life insurance companies had collected Rs 153.05 million in premiums from 68,779 policies.
To expand insurance coverage to the impoverished and vulnerable segments of society, NIA issued directives for microinsurance nine years ago. Similarly, in 2018, insurance companies were instructed to allocate up to 10% of their total business to microinsurance. The regulator has also mandated a provision where individuals can obtain insurance coverage up to Rs 500,000 for micro life insurance and up to Rs 5,000,000 for micro non-life insurance.
Following the failure of major insurance companies to comply with the directives, the NIA granted permission to three companies for micro life insurance and four companies for micro non-life insurance in June last year. Although the directive requiring all companies to participate in microinsurance business has not been revoked, some companies have chosen to withdraw from microinsurance operations.
Insurance Also Plays a Role in Preventing Corruption
We have noticed a significant gap in the understanding of life insurance. Efforts are underway to bridge this gap gradually. It is crucial for the government to incorporate life insurance into its policies and programs. While the government has started to acknowledge the importance of insurance in its annual policies, there is a necessity to enhance the involvement of government agencies in implementing it.
More than 300,000 agents are employed in the life insurance sector. It is estimated that 50% of our economy operates informally. Insurance agents play a vital role in formalising the informal economy by reaching out to people and providing coverage. Thus, we possess the potential to formalise the informal sector through insurance. Encouraging policies from the government are essential to harness this potential. It is crucial to emphasise education both at the grassroots level and among policymakers to understand its significance for the further advancement of the sector. Insurance is acknowledged as a significant tool for preventing corruption in developed nations. Adequate insurance coverage for a person's post-retirement life needs can deter corrupt practices, as it alleviates concerns about the future. Implementing a practice of verifying adequate insurance coverage during oath-taking ceremonies, as done in developed countries, could be beneficial.
Insurance companies typically oversee long-term retirement funds. In foreign countries, these companies often receive a 2% interest rate advantage on their bank deposits compared to other entities. The situation here is the opposite. Our operational costs are higher due to our extensive work in rural areas. Currently, Nepali insurance services are exported through reinsurance companies. While insurance companies have the potential to export services through co-insurance, they are restricted to conducting business solely in Nepali rupees. Without the ability to transact in another currency, exporting services becomes challenging.
To propel the insurance sector forward, there should be a focus on technology-based services and adopting international best practices. Although bancassurance has been successful globally, it has not been fully embraced here. Reducing the cost of insurance is now a primary concern for us. To achieve this, our services need to be more technology-friendly. Additionally, facilitating claim payments requires coordination among three government agencies at present. Documents for claims must be obtained from the local units, police administration and hospitals. Delays in claim payments often occur because customers struggle to gather these documents, and it takes time for us to verify them. Therefore, establishing a mechanism to centrally collect these documents for insurance claims payment would be highly effective.
Insurance is A Business, Not a Social Service
We believe that the government does not fully comprehend the importance of insurance. A better understanding of what insurance is and its benefits would facilitate our efforts to reach the general public. Following the 2015 earthquakes, we disbursed Rs 15 billion rupees in claims, thereby earning commendation for our prompt response. However, the absence of a coherent government strategy to safeguard investments made for post-earthquake reconstruction is concerning.
Given Nepal's vulnerability to earthquakes, floods and climate change impacts, the need for robust insurance coverage is critical. Contrary to popular perception, insurance is not solely a social service; it's a business. We shoulder the substantial responsibility of paying out claims that often exceed the insurance premiums collected. There is a misconception that obtaining insurance allows one to evade responsibility. Even in the face of significant losses from claims payouts, we strive to recuperate and strengthen our financial position for the future. Nevertheless, government-mandated insurance initiatives have not been executed efficiently. The discrepancy between the number of vehicles and the issued vehicle insurance policies highlights this inefficiency. There is a concerning trend of insuring two-wheelers upon purchase but neglecting to renew policies thereafter. The recent mandatory requirement for agricultural insurance underscores this phenomenon. As a result, the agricultural insurance market has rapidly expanded to Rs 3 billion. In sectors where insurance adoption is already widespread, subsidies should be reduced, and focus should shift to areas lacking insurance penetration. This approach facilitates expansion of insurance coverage to underserved segments.
We had advised the government against implementing COVID Insurance, but they insisted on including it in the budget. With the rapid spread of the virus, controlling the surge in fraudulent claims became increasingly challenging, particularly as private lab reports were accepted as proof for payments. Presently, Rs 11 billion in COVID Insurance claims remain outstanding. While the government has not explicitly disclaimed responsibility, only Rs 1 billion has been disbursed so far. The non-payment of these legitimate claims has led to a decline in the insurance market. Fulfilling these claims would have not only stabilised the market but also paved the way for broader adoption of health insurance coverage. The government's management of health insurance programs, particularly when payments are insufficient, adds to our financial burden. Addressing the pending COVID Insurance claims and unresolved agricultural insurance payments is crucial for the sector's progress. Additionally, the disparity in tax rates between non-life insurance (25%) and life insurance (30%) companies cannot be justified. The issue of double taxation on house rent further exacerbates our financial strain. We are subjected to full taxation even during asset transfers in mergers and acquisitions.
Life Insurance Requires Investment Instruments of a Mixed Nature
Currently, when individuals pay premiums to life insurance companies, they receive a tax discount of Rs 40,000 in calculating taxable income. Expanding this discount scope to a minimum of Rs 100,000 would significantly enhance accessibility to insurance.
The new insurance act has paved the way for insurance companies to establish subsidiary companies, facilitating the diversification of their investments. Moreover, the investment guidelines have opened up new avenues, allowing insurance funds, traditionally focused solely on fixed deposits, to be diversified into various investments. However, these measures have not been sufficient. Even now, we lack government bonds specifically targeted for insurance companies. Without such bonds, companies often face challenges in asset and liability management.
Life insurance companies typically bear liabilities from insured individuals for 15-20 years, while wealth creation typically occurs within three years. Therefore, as a policy, the state should introduce investment tools that facilitate the deployment of capital from insurance companies into the productive sector. This would enable diversification of investments, which currently heavily rely on fixed deposits, often up to 90%. We require investment tools of a mixed nature to achieve this goal. When investing, a consistent return is necessary to meet ongoing obligations to policyholders. Therefore, while a substantial return after 10 years may be appealing, we also need to ensure a steady average return on investment to meet our commitments to policyholders.
At the recently concluded Nepal Investment Summit, over 151 projects were showcased before the investors. If a project demonstrates promising returns and is commercially viable, insurance companies should be permitted to invest in it. Having investment tools of a mixed nature would enable insurance funds to contribute to the state's development. As a policy consideration, it is evident that insurance companies require some facilitation regarding taxes. Currently, when companies deduct expenses from income, they are unable to include bonuses provided to policyholders as part of their expenses. This policy issue needs to be addressed within the tax policy framework.
Furthermore, companies are required to allocate one percent of their profits for Corporate Social Responsibility (CSR). However, these funds can only be set aside after taxes have been paid to the government. Since CSR contributions are intended for social welfare activities, there should be provisions to separate these funds before taxation.
Lack of Coordination Between Govt, NIA Creates Challenges
There have been significant advancements in the insurance sector, with regulatory bodies adapting policies to align with current needs. The mandatory implementation of various insurance types, starting with third-party vehicle insurance, has expanded the scope and reach of insurance coverage. Compared to a decade ago, the insurance industry has made considerable progress. However, certain issues have caused discomfort and challenges for insurance companies. For example, the inclusion of agricultural insurance within the agricultural domain is a commendable move that has expanded the business opportunities for non-life insurance companies. Despite this positive development, delays in the disbursement of government subsidies have dampened the enthusiasm. The NIA has raised valid concerns about delays in the settlement of agricultural insurance claims by insurance firms. However, companies are facing difficulties due to the delay in release of subsidies by the government. United Ajod Insurance alone is yet to receive over Rs 180 million in pending subsidies from the government. This lack of synchronisation between the government and the NIA has led to operational challenges and uncertainties for insurance companies.
Insurance is a Business of Trust
Insurance is a business of trust. The government, regulators, insurance companies, and all stakeholders play a crucial role in maintaining this trust. Currently, all non-life insurance companies are awaiting significant payments from the government for different subsidies, which has shaken the confidence of many insured individuals. The government must address this issue promptly. Although agricultural insurance has been prioritised by the government, its successful implementation has not been achieved. The lack of clear communication to the insured has led to a crisis of trust in the insurance sector. If the government clearly explains the current problem to the insured and assures them of payments, both the insurance market and the insured will benefit. Moreover, policy stability from the regulator is essential for the business. If policies remain stable for a certain period, it will facilitate smooth operations and benefit everyone. Our business is also impacted by international factors. With Nepal adopting IFRS 17, insurance companies are beginning to implement this financial reporting standard, which requires substantial investment in technology. We need to assess our country's preparedness, the insurance sector's readiness, and effective implementation strategies.
An Insured Society is a Hallmark of a Developed Country
An insured society is a hallmark of a developed country. The responsibility of creating such a society lies not only with insurance companies but, more importantly, with the government. Therefore, the government should work to facilitate the insurance industry and motivate the public to establish an insured society.
Currently, common people pay various taxes to federal as well as subnational governments. However, there is widespread concern about the tangible benefits received in return for these taxes. One crucial service the government could provide is insurance, which helps individuals manage financial difficulties without compromising their financial stability.
Tax exemptions should be given to encourage the general public to buy insurance products. The current exemptions are not sufficiently motivating. The minimum exemption should exceed Rs 100,000, as is the case in neighbouring countries. Tax exemptions do not reduce state revenue. Instead, they help formalise the informal economy which ultimately expands the scope and size of the tax base.
Currently, insurance is not treated as a priority. Just as the state considers journalism the fourth pillar of the country, insurance should be recognized as a fundamental need. After food, shelter and clothing, insurance is the fourth basic necessity, as it provides protection against risks. The government is spending substantial amounts on relief for victims of various accidents and natural disasters. Creating an insured society would help reduce these relief expenses. The funds currently allocated for relief could instead be used to include populations below the poverty line within the scope of insurance. While health insurance is currently managed by the Health Insurance Board, it should also be promoted by insurance companies using their industry expertise.
Additionally, there is a rule that institutional depositors receive one percentage point less interest than individuals when depositing in banks. Insurance companies also receive one percent less interest, despite their deposits representing common people's savings, not institutional funds. Since the money is collected from policyholders, the interest on the deposits of insurance companies should be equivalent to that of individual deposits. This change would benefit the general public and boost the insurance industry. Moreover, the government needs to insure the property of government agencies to lead by example.
Insurance Sector Suffering from Govt's Unpaid COVID Insurance Obligations
Despite our extensive experience in the insurance sector, its growth remains sluggish. We attribute this to inadequate insurance education and awareness. However, the primary factor hindering growth is the economic condition of individuals. When people struggle to meet their daily needs, investing in insurance for the future becomes less of a priority. Thus, fostering economic development is essential for driving the advancement of the insurance industry. Even among those who comprehend the importance of insurance, some have yet to invest in it. The government has not given insurance the priority it deserves. The mandatory requirement for third-party vehicle insurance emerged following a surge in road accidents and fatalities. Despite being a 'forced market' driven by regulation, the insurance sector has seen growth, with the agricultural insurance business now valued at a sizable Rs 3.5 billion. However, the government has failed to disburse subsidies to insurance companies accordingly. Even a major player like Shikhar Insurance is yet to receive Rs 700 million in pending subsidies from the government. When we raised the issue with the government, they did not demonstrate a willingness to resolve it.
When the government introduced agricultural insurance over a decade ago, we initially perceived it as a top-down mandate. Initially, insurance companies were allocated specific districts for agricultural insurance, but it ultimately led to expansion of the insurance market. However, despite the initial promise, the growth of agricultural insurance has reached a standstill. In the past, there were doubts about the ability of insurance companies to handle the influx of third-party vehicle insurance when it became mandatory. Today, we have proven our resilience, with no hindrance to individuals seeking this mandatory coverage. Looking ahead, we aspire to make Nepal a secure destination for tourism by integrating insurance into the visa fee structure. This would foster trust among visitors, promising them medical coverage during their stay. Such an initiative would not only bolster the tourism market but also expand our business.
Reconstruction efforts after the 2015 earthquakes remain incomplete. Another earthquake struck Karnali Province recently, raising concerns about future calamities. If there is another major earthquake in the future, where will the necessary funds for reconstruction come from? A robust insurance system is the only viable option. While the government will undoubtedly provide humanitarian aid, the cost of rebuilding private and public property damage should be primarily covered through insurance policies. Regrettably, even government properties lack adequate insurance. Agricultural insurance subsidies should be depoliticized and streamlined based on economic realities. Targeted initiatives to provide affordable insurance coverage for modest homes of the impoverished should be implemented.
A Large Source of Investment Can Be Raised Through Insurance Companies
We have realised that the insurance sector is gradually becoming more organised. Improvements have been made in areas such as claim payments and investment diversification. Additionally, insurance companies have adopted Nepal Financial Reporting Standards (NFRS), and we are in the process of implementing NFRS 17. If the insurance sector receives the same level of importance as banking, it can play a significant role in the country's development. As the funds of insurance companies grow, they can help raise capital for national development projects. For example, Asian Life Insurance has invested in sectors ranging from hydropower to aviation. This highlights the potential of life insurance companies to operate on a large scale. The government can utilise insurance funds for development by issuing separate savings bonds or bonds. Currently, we have to keep deposits in banks at a 5-6% interest rate which is subject to rapid fluctuations. Currently, insurance companies must keep fixed deposits at low interest rates. If these companies could co-finance with banks, common people could receive loans at lower interest rates and the returns for insurers would be higher than those from term deposits. Additionally, the requirement to disclose the source of cash premiums over Rs 100,000 per annum for life insurance, aimed at preventing money laundering, has become overly restrictive and problematic for financial underwriting. It is also time to consider provisions for direct insurance. Opening up direct insurance could potentially reduce costs and make insurance more accessible to the general public.
Voluntary Participation in Insurance Should Be Increased
Although the commercial potential of the non-life insurance sector is vast, we have only reached 20-22% of the population, which is very low. It is necessary to enhance the roles of the government, the regulatory body Nepal Insurance Authority, insurance companies, and other stakeholders, if we are to increase access to insurance. At present, the capital collected from the insurance sector has not been invested proportionately. A large amount of money is accumulated in fixed deposits. Insurance funds should be invested for the country's economic development. For this, the relevant agencies need to ease existing legal and policy difficulties.
For the expansion of the insurance market, amendments and modifications to the insurance fee structure should be considered. At present, federal, state and local governments are trying to offer various subsidies for insurance. However, the government's physical infrastructure is still not insured. There are reports of budgetary provisions for insuring common people's houses in Karnali Province. It is necessary to clarify which types of housing and how old the houses are covered under the scope of insurance.
Claim payment is the basis for increasing trust in insurance. The faster the claim payment process is, the more trust will increase. Insurance companies must expedite the payment of large claims as quickly as possible.
Govt's Property Should Also Be Insured
The insurance industry is viewed as a promising sector within Nepal's financial landscape. A significant amount of money collected from the sector has been directly and indirectly utilised for the government's infrastructure development. Considering the current capital size and market of insurance companies, it raises a question: Was the capital requirement imposed by the regulator necessary? It is crucial to understand what kind of policy decisions made by the regulatory body would positively impact the insurance sector's business operations. Currently, the annual business of non-life insurance companies is about Rs 40 billion, and a similar amount of capital is being invested by these companies. How justified is the policy of a 1:1 ratio of business to capital? The regulator should also consider this issue. Insurance companies should create an environment of voluntary insurance by building trust. Globally, voluntary insurance coverage is not 100%, with at most 20-25% of people opting in voluntarily. The rest are insured due to government policies. In Nepal, almost 95% of the insurance business relies on compulsory insurance. The government has not expanded insurance because it has not made it compulsory in certain areas. For example, there is no mandatory provision for legal liability insurance in Nepal. Currently, the government mandates only third-party vehicle insurance. Just as the government requires electricity bill payment during real estate transfers, similar policies should be applied when building a structure, purchasing a vehicle or starting an industry. The government should mandate insurance across various sectors. In recent years, companies have not been able to offer even 5-10% returns. However, this is seen as an acceptable return given the economic slackness. Insurance companies have collected substantial sums. Instead of placing these funds in fixed deposits with banks and financial institutions, an environment should be created to invest through insurance bonds to build large infrastructure projects.
