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Situation Analysis of Insurance Services in Nepal

Article  in  SSRN Electronic Journal · January 2020

DOI: 10.2139/ssrn.3556498

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 Situation Analysis of Insurance Services in Nepal
Rabindra Ghimire, PhD
Associate Professor, Pokhara University
rabindraghimire@pu.edu.np
Abstract
The paper aims to analyse the current situation of insurance services offered by different
institutions in Nepal and explore the opportunities and challenges of insurance sector. It also
discusses the regulatory and development issues in insurance sector. The paper has been
prepared based on desk review. The study concludes that Nepalese insurance industry
experienced slow growth, limited coverage and low penetration and density over the long period
prior to 2001 which is gradually increased thereafter. There is the domination of commercial
insurers in insurance industry, domain of social insurance and social security programs also
growing immensely but deposit insurance and insurance services by noninsurance organizations
is in small scale. The regulatory issues in insurance sector is crucial as the industry has been
faced poor corporate governance practices, poor quality of services, rising of fraudulent
activities, low insurance coverage and penetration, under insurance, mis-selling and force selling,
lack of qualified insurance personnel. Insurance is a pillar of the financial system, permanent
sources of fund to banking sector and capital market. For the financial stability and sustainable
economic growth, there should be sound coordination among the regulatory authorities and
market players. The ultimate goal of these organizations should be to ensure the protection of
rights of the customers.

1. Introduction of Insurance
1.1 Origin of Insurance
The history of insurance is as old as human civilization. Insurance was practiced around 5000
years before (Vaughan, 1996). In ancient time risk was managed by entire members of the
society where each member of the society contributed certain amount of goods or money and
signed in the contract as contributor. Initially, entire people of the certain society were
participated in insurance for the mutual benefits. The concept of mutual insurance originated in
England in the late 17th century to cover losses due to fire. The mutual insurance industry began
in the United States in 1752 when Benjamin Franklin established the Philadelphia
Contributionship for the Insurance of Houses From Loss by Fire (Janet, Wadsley and Artandi,
1994). Almost 400 insurers from 74 countries are members of International Cooperative and
Mutual Insurance Federation. Mutual insurers distribute the profits to its policyholders, raise the
equity fund from policyholders, manage the company by the policyholders and there is no
existence of separate stockholders (outsiders).1
Primarily, insurance was originated as a social security device, gradually developed as a
cooperative institution, further it was developed in the form of mutual insurance while insurance
companies now are operating as a commercial institution. Nowadays, the number of mutual
insurers gradually decreases while there is the dominance of stock insurers. Policyholders are
entitled to get claims (nonlife) and claims and bonus (life) only, they have not rights to elect the
Board of Directors, voice of policyholders carry over by the regulators and whistleblowers.

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https :// www.icmif.org
Year 39 Volume 39 Feb 2020

Modern insurance is a legal contract between insurer and insured where insurer promises to pay
compensation in case of any financial loss occurs due to the covered risk and insured promises to
pay premium. Insurance was considered as a gambling and speculative devices. Insurance is guided
by many principles viz. principle of indemnity, insurable interest, subrogation, utmost good faith,
contribution, risk mitigation and proximate causes which were developed over the long period to
make the insurance business more professional and less speculative. Now, thousands of insurers
and reinsurers are operating across the globe.

The working paper aims to discuss about the commercial insurance, social insurance (health and
agriculture), deposit insurance, other insurance activities carried out by non-insurance
institutions, highlight some regulatory and development issues and prospects of insurance
industry in brief. The paper has been prepared based on secondary information, research papers
and publications of concerned organizations.

1.2 Types of Insurance Services

Wide range of insurance products are available across the globe. Insurance carriers as well as
government design various types of insurance products as per the demand of policyholders and
society. Insurance product or services can be classified on different bases. Some of the bases and
classes are presented in Table 1.
Table 1: Classification of insurer and types of insurance products
Basis of classification Classification of insurer and insurance products I / IP
1. Proportion of Insurance and reinsurance I
sharing risk
2. Ownership type Mutual (policyholders) and stock (shareholders) I
3. Type of Carrier Private (Commercial) and government (social) I
4. Profit orientation Commercial (private) and social (Contributory) IP
5. Size of policy Commercial and micro- insurance IP
6. Duration Short term (life/nonlife) and long term (life-endowment & whole) IP
7. Types of products Life (Term, Endowment, Whole) IP
Nonlife (Property, Liability and Health)
Reinsurance (Treaty and Facultative)
8. Investments feature Only risk protection (non-refundable) and investment feature IP
(refundable), Linked investment
Source: Compiled by author from various sources
I: Insurer, IP: Insurance product

In Nepalese insurance market all types of insurers except mutual insurance and all types of products
except linked investment products are available. Recently, social insurance products are introduced by
Health Insurance Board and Social Security Fund. Microinsurance products are mandatory to sell by
commercial insurers. We have a commercial reinsurance company and a deposit insurance company. Still,
there is no separate microinsurance company.

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2. Evolution of Insurance Services in Nepal

First home grown general insurance company Nepal Mal Chalani tatha Beema Adda (currently
known as Nepal Insurance Company) was jointly established by Nepal Bank Limited and private
investors in 1947. Indian companies sold general insurance policies without registering their
office in Nepal since 1930s till 19672 and life insurance policies till 1974.3 Insurance market was
regulated after passage of Insurance Act, 1968. First life cum nonlife insurer Rastriya Beema
Sansthan was established as a national flagship company in 1968 under special act. Financial
liberalization policy allowed private sector (both domestic and foreigner) to establish insurance
companies in Nepal. Currently, 40 insurers (20 nonlife, 19 life and a reinsurer4) are in operation.
Beside the commercial insurance, social insurance services and insurance for deposits and loan,
community based health insurance and insurance likely social protection activities are also
available in Nepal. The insurance industry gradually increased and insurance penetration reached
almost 3.0 percent in FY 2075/76.5

2.1 Life Insurance

Life insurance is a contract between insured and insurer, insured pays premium in regular basis
for certain period and insurer provides benefits to insured as per the terms and conditions. Life
insurance plans are two types viz. risk protection plan and risk protection cum investment plan.
Investment plan are two categories viz. endowment plan and whole life plan.
a) Term Insurance Plan: Term plan covers the risk but it has no saving/investment components
so the premium is lower as compared to endowment and whole life. This plan is more popular in
corporate sector (for employees), financial institution (for borrowers), and manpower companies
(for foreign migrant workers) and less demanded among the individual, traders and
professionals. The number of policies enforced increased over the period due to the decision of
GoN that term insurance is mandatory for the foreign migrant workers6.
b) Endowment Plan: Under the endowment plan, policyholder either gets death benefit or
maturity benefit which occurs earlier so the premium is higher than term and whole life plan.
Various endowment plans are available in the market viz. general endowment, limited payment,
single payment, money back, child endowment, joint endowment, pension plan etc. Nowadays,
critical illness benefits is also inbuilt to attract the customers. Riders are common in endowment
plan.
c) Whole Life Plan: The plan covers the risk for entire life of the policyholder and provides
death benefits to beneficiaries. Some companies provide the benefits after certain age before the
death of the policyholders. Whole life plan is suitable to those who has not sufficient money for
saving but need financial support at elder age and after death. Almost all life insurers have such
type of product.

List of commercial life insurance companies registered under Insurance Board of Nepal has been
presented in Table 2.

Table 2: List of Life Insurers in Nepal

2
The oriental Insurance (India) registered Nepal branch in 1967.
3
LIC of India handed over all policies in 1974 to Rastriya Beema Sansthan and stopped to sell the policies formally.
4
Converted from Insurance Pool and established in 2014 as Nepal Reinsurance Company
5
Insurance penetration is a ratio of gross premium to GDP in percentage. Premium $ 831 million and GDP $ 29
Billion.
6
Entitled to get up to Rs. 1 million under different head of expenditure.

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Year 39 Volume 39 Feb 2020

SN Name of Company YOO Ownership Type

1 Rastriya Beema Sansthan 1968 Govt. Owned
2 National Life Insurance Company Limited 1988 7Joint Venture&
3 Nepal Life Insurance Company Limited 2001 Domestic
4 Life Insurance Corporation (Nepal) Limited 2001 Joint Venture*
5 American Life Insurance Company 2001 Foreign branch**
6 Asian Life Insurance Company Limited 2008 Domestic
7 Gurans Life Insurance Company Limited 2008 Domestic
8 Surya Life Insurance Company Limited 2008 Domestic
9 Prime Life Insurance Company Limited 2008 Domestic
10 I.M.E. Life Insurance Company 2017 Domestic
11 Jyoti Life Insurance Company 2017 Domestic
12 Union Life Insurance Company 2017 Domestic
13 Sun Nepal Life Insurance Company 2017 Domestic
14 Reliance Life Insurance Company 2017 Domestic
15 Reliable Nepal Life Insurance Company 2017 Domestic
16 Citizen Life Insurance Company 2017 Domestic
17 Sanima Life Insurance Company 2017 Domestic
18 Prabhu Life Insurance Company 2017 Domestic
19 Mahalaxmi Life Insurance Company 2018 Domestic
Source: Insurance Board Nepal, 2019
YOO: Year of operation
& with UK national, * with LIC of India, MetLife (US based company)
All life insurers sell term, endowment and whole life insurance policies under their own brand
name. These products are almost same with small deviation in benefits and premium.

2.2 Non-Life Insurance

Insurance Regulation, 1993 section 5(1) classifies nonlife insurance products in six categories: a)
Fire, b) Motor, c) Aviation, d) Engineering and Contractor's Risk, e) Marine, and f)
Miscellaneous insurance. Miscellaneous insurance is further divided into Agriculture and
Miscellaneous. Globally, general insurance is divided in three categories viz. a) Property, b)
Health, and c) Liability. General insurance categories and plans are presented in table 3.

Table 3: General insurance categories and Plans

Branch of General Sub Branch of General Insurance Remarks
Insurance
1. Property i. Auto insurance The policy provides financial protection
against the pecuniary loss of the property
ii. Aviation insurance
iii. Homeowners insurance

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iv. Agriculture insurance

v. Flood insurance
vi. Marine insurance
vii. Infrastructure and Project
insurance
viii. Catastrophic insurance

2. Health i. Hospitalization insurance The policy provides financial protection

against the medical expenses (cost of
ii. Surgical and nursing medicine, surgery, nursing and
iii. Medicine and consultation hospitalization, and consultation) for
treatments of any types of diseases or
accident.

3. Liability i. Professional Indemnity insurance The policy provides compensation to third

person due to the harm or loss by first
ii. Public liability person. Amount of liability is set by
iii. Third party liability (auto) contract or decided by court. There is high
risk since the liability in some cases is
unpredictable and very high.
Source: Compiles by author

Above mentioned insurance products have been sold by almost all general insurance companies
in Nepal. Agriculture insurance is a scheme supported by Government of Nepal since 2013
providing 75% subsidies on premium to all policyholders disregarding the economic status of the
policyholders, size of the sum assured and types of risks to be covered. Third party liability
insurance was became compulsory in all types of vehicle after 20098. Following companies are
offering nonlife insurance products in Nepal (Table 4).

Table 4: Nonlife Insurance companies and year of operation

SN Name of General Insurance YOO SN Name of General Insurance YOO
1 Nepal Insurance 1947 11 IME General Insurance 2000
2 The Oriental Insurance* 1967 12 Prudential Insurance 2002
3 National Insurance * 1974 13 Shikhar Insurance 2004
4 Himalayan General Insurance 1993 14 NLG Insurance 2005
5 United Insurance 1993 15 Lumbini General Insurance 2005
6 Premier Insurance 1994 16 Siddartha Insurance 2006
7 Everest Insurance 1994 17 Rastriya Beema Company& 2014
8 Neco Insurance 1996 18 Ajod Insurance 2018
9 Prabhu Insurance 1996 19 General Insurance 2018
10 Sagarmatha Insurance** 1996 20 Sanima Genaral Insurance 2018
Source: Insurance Board, 2019, YoE: Year of established

8
Vehicle Transportation and Management Act, 1992 Clause 148-152, and Vehicle Transportation and
Management Rule, 1997, Third amendment, 2009, Section 52-55

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*Branch of Indian insurers, ** joint venture with Ceylinco (Sri Lanka), & demerged from Rastriya Beema Sansthan

2.3 Micro-insurance
The word "microinsurance" was coined around 1999. Insurance that is accessed by the low-
income population, provided by a variety of different entities, but run in accordance with
generally accepted insurance practices. Importantly, this means that the risk insured under a
microinsurance policy is managed based on insurance principles and funded by premiums (IAIS,
2007), The size of both premium and sum assured is small as compared to commercial insurance
since the economic status of target policyholders is very low. Most of the countries in the world
have designed and implemented the microinsurance products to economically poor,
marginalized, deprived community with special location and community who are not served by
the formal insurance services. Microinsurance Directives, 2014 was issued by Insurance Board
and directed insurers (life and nonlife) to sell microinsurance products and require to collect at
least five percent premium out of total premium. In FY 2076/77, the percentage increased to 10
percent. Following MI products are available in Nepalese market (Table 5).

Table 5: Microinsurance products in Nepal

Types of products Upper Premium& Commission *
Limit (Rs.)
Term Life 150,000 As per the 15%
Endowment Life 100,000 insurers' rules 15%
Household (nonlife) 200,000 0.25% 15%
Health (nonlife) 35,000 4.00% 15%
Accident (nonlife) 150,000 0.10% 15%
Cattle and Birds (nonlife) 150,000 5.00% 15%
Crops (in cost of production) 50,000 5.00% 15%
Source: Microinsurance Directives, 2014; Insurance Board.
& based on amount of sum assured, * based on amount of premium

In Nepalese context, we can see that microinsurance (MI) and conventional products are not
different in terms of size of sum assured. Difference is found in terms of marketing channels
where MI products are only sold through institutional agents and agent are entitled to get 15%
commission for every product. The MI directive is not clear on various issues viz. economic
status of target policyholders, method and frequency of payment, claim settlements method etc.
In Nepal, microinsurance need to sell by commercial insurers to fulfill the social responsibility
instead of earning more profit. MI products are sold through the pool and it is managed by
Nepal Insurers Association with support of Sakshyam9. Microfinance institutions help to sell the
products to their clients. Since the MI portfolio generates low profit, need more time commercial
insurers are not shown interest to sell the micro insurance products. They are interested to
manage the products through separate institution. Since the objective of MI is to cater the service
to informal sector, marginalized and ultra-poor population, insurers need to do extra efforts.

2.4 Deposit and Credit Guarantee Fund

9
https://sakchyam.com.np/financial-inclusion/nepal-insurers-association-nia/, Sakshyam is UK based organisation

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Year 39 Volume 39 Feb 2020

Deposit insurance is a widely adopted policy to promote financial stability in the banking sector.
Deposit insurance helps ensure depositors' confidence in the financial system and prevents
spreadable bank runs, but it also comes with an unintended consequence of encouraging banks to
take on excessive risk (FDIC, 1988).
Previously the Deposit and Credit Guarantee Fund was known as Deposit and Credit Guarantee
Corporation Pvt. Ltd. (DCGC) which was established by government of Nepal in 1974. The
objective of the corporation is to guarantee the deposit accepted by and credit issued by financial
institutions. Deposit and Credit Guarantee Fund was established by the special act "Deposit and
Credit Guarantee Fund Act, 2073". Equity is participated by GoN and Nepal Rastra Bank. The
scope of the fund is to make guarantee the deposit received and credit issued by the Commercial
banks, Development banks, Finance companies and Micro credit development banks (Annual
Report, 2018).
Maximum Sum Assured (SA) of deposit and loan, premium rate, and mode of payment of
premium and types of compensation has been presented in Table 6.
Table 6: SA, Premium, and mode of payment of Deposit and Credit Insurance
Types Maximum S A Rate of Premium Compensation by
(annual) DCGF
1. Individual deposit Rs. 3,00,000 (each person each 0.16% (four times a year 100% of
in current, call, bank) Shrawan, Kartik, Magh
saving and fixed and Baishakh)
account (A, B and
C class Bank)

2. Microfinance and a) Group loan without mortgage 1% (once or twice a Maximum 75% of
Deprived sector Rs. 5,00,000 year) default loan
loan
b) With mortgage
Rs. 10,00,000
c) Women promoted micro
enterprises Rs. 7,00,000

d) Education certificates loan Rs.

7,00,000

3. Loan to small and a) Up to Rs. 5 million, 0.35% (annual) 80% default loan
medium enterprises b) Above Rs. 5 to up to 10 million 0.30% 70% of default loan
( service and
industry)

4. Loan for Cattle One cattle up to Rs. 1,50,000 1.5% (4.5% amount is 90% of default loan in
and Birds provided by government case of death and 50%
as subsidies ) of default loan in case
of infertility of cattle
Source: Annual Report 2074/75

The rate of premium ranges from 0.16 to 1.5 percent and coinsurance provision ranges from 0 to
30%. The basis of calculation of premium and coinsurance need to be on scientific ground. All
BFIs have paid premium for the deposit but only few have paid premium for the loan. The credit
guarantee schemes also need to be mandatory to all BFIs. The fund has observed total risk
(liability) of NRs. 4.41 trillion as at July 15, 2018. The capital of the fund is 0.18% of the total

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Year 39 Volume 39 Feb 2020

risk. The fund alone is not sufficient to absorbed entire risks but there is no provision of
reinsurance. It is suggested to fund to acquire the reinsurance policy for the safeguard of the fund
as well as the stability of financial sector.
0 to 30 percent …

2.5 Social Security Fund

Social security is backbone of the welfare state. In Nepal, the social security programs are
fragmented. Many schemes have been introduced with political motives rather than long term
vision and sustainability. Most of the programs are tax funded (old age allowance, child, widow
and minority caste protection allowances). After long exercise, a fund was created in 2009 and
managed under Social Security Fund (Management and operation) Regulation, 2010. Since 2009,
every employee (public and private sector) requires to contribute 1 percent of salary (up to
certain slab) in social security fund in terms of social security tax. The fund is now operated
under Contribution based Social Security Act, 2017. The contributory social security scheme
became mandatory by May 22, 2019. Employees should contribute 11% of their basic salary
whereas employers should contribute 20% of basic salary and total 31% has been allocated for
the welfare of the employees as per the following schemes. The source of Nepalese social
security fund is tax from employees as well as contribution from employees and employers
which is typical and unique in the world.

Table 7: Social Security Schemes and allocation of fund

S.N. Social Security Percentage Benefits
Schemes of Fund
1 Medical Max. Rs. 1,00,000 in case of hospitalization and Rs.
Treatment, Health 25000 home care
1.0%
and Maternity
Protection Scheme
2 Accident and Accidental: Entire medical expenses in case of
Disability workplace injury and up to Rs. 7,00,000 in case
Protection Scheme accident.
1.40% Disability: Amount equivalent to 60% of the
employee’s basic remuneration until s/he resumes
to work. Lifetime monthly pension based on the
ratio of disability of the Contributor.
3 Dependent Family Pension Benefits : 60% of last drawn basic
Protection Scheme remuneration
Scholarship Schemes to the Contributor’s Children:
40% of the last drawn basic remuneration every
0.27%
month
Benefits to the Contributor’s Parents: 60% of the
basic remuneration for life time
Entitlement of funeral expenses: Nrs. 25,000.
4 Old Age Protection The contributor should have completed the age of
Scheme 60 and should have contributed for at least 180
28.33% months or 15 years. Should work prior to Shrawan
1, 2076 are entitled to get pension and gratuity.
Total 31%

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Year 39 Volume 39 Feb 2020

Source: www.ssf.gov.np, 2019

Many organizations are not registered under SSF due to the confusions, duplication of the
facilities, and mistrust over the fund10. Some of the schemes of SSF are similar to Employee
Provident Fund and some are already covered by universal health insurance and commercial
insurance. Well managed and sufficient database of each employer and employee, awareness
among the employers and employees, dedicated technical team, wide base of formal sector are
the basic requisites for the successful implementation of the fund. Since the scheme is in initial
phase, more effort is required to prepare the basic foundation and increase literacy on social
security.

2.6 Social Health Insurance

Social health insurance is a type of social insurance scheme among the nine different schemes
prescribed by International Labour Organisation11. There are various models of universal health
care across the globe, Nepal adopted mix model where certain amount is contributed by citizens
and remaining amount is funded by Government. Health Insurance Board (HIB) is an
autonomous body, established in 2015 to provide universal health insurance services all over
Nepal12. This is government flagship program, currently covered to 46 districts and aims to cover
entire country in near future. The scheme provides more than 500 types of medicine, cost of
hospitalization, charges of physician and nursing and surgery but does not provide expenses for
cosmetic and dental care along with medicine and treatments beyond the list of the HIB. The
amount of premium, benefits of the schemes has been presented in table 8.

Table 8: Universal Health Scheme Premium and Benefits

Particulars Previous Current
(Rs.) (Rs.)
Premium (up to 5 members) 2,500 3,500
Additional premium per head above 5 member 425 700
Additional benefits per head above 5 member 10,000 10,000
Maximum benefits for 5 persons 50,000 100,000
Maximum benefits above 5 persons 100,000 200,000
Additional benefit to each person having age above 70 year N/A 100,000
Source: www.shs.gov.np
More than 2 million people are enrolled in this scheme till August 17, 2019 (www.shs.gov.np).
Due to the poor services in the hospital and health centre, lack of some of free of cost medicine
in hospital pharmacy, the program is not popular among the people as per expectation.
Government needs to improve the quality of health service providers and list of medicine and
other health care prescribed medicine in the pharmacy of health service providers.

2.7 Insurance Services by Non Insurance Organisations

10 Till May 2019, only 2,567 employers within Kathmandu Valley have registered, source: The Himalayan Times, May 09, 2019
11
https://www.social-protection.org/gimi/ShowWiki.action?wiki.wikiId=792
12
established by Health Insurance Act, 2074

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 Year 39 Volume 39 Feb 2020

Insurance service is not only provided by commercial insurers and social insurance institutions,
but also provided by other various organizations without getting license and permission from
regulatory authority. Some of the insurance likely activities in Nepal are as follows:
I. Community based health insurance services have been offered by NGOs (Nirdhan and
DEPROSC13) The program was designed by Micro Insurance Academy, India and
supported by different INGOs viz. Save the Children Fund, Helvetas, etc.14). Previously,
such program was initiated in 1977 by United Mission to Nepal in Lalitpur district.
II. Hospitals (Model Hospital, BP Koirala Institute of Health Sciences, Patan Hospital)
designed a health insurance scheme to attract more customers in hospitals.
III. Microfinance institutions charged certain percent of loan amount from loanee and created a
fund for the welfare of the members. The fund was used to support to the members in case
of death of member, loss of property, or health problems.
IV. Some cooperatives provide supports medical assistance in case of accident or injury or
critical illness to their members. The supports was made from the members' welfare fund.
V. Employees Provident Fund has designed and offered some social assistance schemes to its
members viz. support to medical expenses, maternity care, and funeral expenses.
VI. Workers' Welfare Fund has been created by Contractors' Association of Nepal (CAN) in
different urban and semi urban area. The fund is collected from owner of the project and
managed by association. The fund is used to support to workers treatment in case of injury,
disability or death in workplace.
VII. Federation of Nepalese National Transport Entrepreneurs Association (FNNTEA) also
raises fund from vehicle owners who gets membership of association. The fund is used for
the welfare of the employees, injured and disabled persons, and survivors of died passengers
due to the death in road / vehicle accident. The third party liability insurance sometimes not
sufficient for the treatment of the injured.
VIII. Accidental insurance schemes have been offered by commercial banks to their depositors.
The objective of the scheme is to attract the customers or increase the amount of deposit.
Out of above examples, all except last activities are self-managed by organizations
themselves. None of the fund is created with actuarial calculation and linked with the
reinsurance. Some of the activities were discontinued due to the lack of fund and
sustainability in case of catastrophic loss while some are still in operation. Some funds are
exists but stopped to distribute the compensation.
Accidental insurance to depositors is supported by insurance company. However, the product
is designed by bank to attract the customers. Such activities are not regulated and monitored
properly.

3 Regulatory Issues
First Insurance Act, 1968 was promulgated 21 years after establishment of first domestic
insurance company. The act was repealed by current Insurance Act 1993. A long awaited
insurance bill which is drafted some decade before still under discussion in parliament. The
proposed bill is more wider and has various provisions which are not available in the existing
act. Insurance Board, a regulator of insurance industry formed many directives, guidelines,
manual and circulars time and again as per the requirement of the market. Some of the
selected directives are:

13
Dhadhing and Banke District https://nirdhanngo.org.np/?p=894
14
Supported to Nirdhan and DEPROSC

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Year 39 Volume 39 Feb 2020

1. Merger and Acquisition directives, 2019 7. Insurers registration and insurance business
2. Directives of Investments to insurers, operation related directives,2016
2019 8. Crops and Cattle Insurance Directives, 2013
3. Property Insurance Directives, 2019 9. Motor insurance Tariff related Directives, 2016
4. Anti-Money Laundering and Terrorism 10. Insurers Internal Audit Directives, 2015
activities in financial investment related 11. Solvency Margin Directives for life 2013 and
directives, 2018 nonlife insurers, 2014
5. Corporate Governance to insurers, 2018
6. Micro-insurance Directives, 2016
Some pertinent regulatory issues of Nepalese insurance industry has been discussed below:
3.1 Regulatory provision is not sufficient: Regulation of insurance is a complex functions
similar to banks and financial institutions. Nepalese banking sector is regulated by two
different acts viz. NRB Act and Bank and Financial Institution Act to address the banking
problems properly. Bangladesh has two acts to regulate insurance industry (IDRA Act,
2010 and Insurance Act, 2010). Similarly, India has two acts (i.e. Insurance Act, 1938 and
IRDA Act 1999); US has two tier regulation system. State has power to regulate the
insurance industry and NAIC15 coordinates all activities in federal level (Rogan, 2015). In
Nepal, only one act exists to regulate the insurance industry. Various issues are not
addressed by the current regulations viz. state of under insurance, cyber security insurance,
index insurance, insurance fraud, insurance academy, research and resource centre,
protection of insured, microinsurance etc.
3.2 Insurance Board has not sufficient power: Regulator should be sufficient rights to
control over the market. But, Rastriya Beema Corporation Act, 1968 confers special rights
to Board of Directors of Rastriya Beema Sansthan so that still Insurance Board does not
regulate the Sansthan similar to other private companies. The Board is not autonomous and
independent as it is controlled by Ministry of Finance in various issues like: licensing of
new life insurance companies. Insurance regulation of Nepal is not as strong as banking
regulation. Board is weak as members of the Board does not require expertise and
experience in the area of insurance.

3.3 Lack of experts in Board and Departments: The major regulatory challenges of
insurance industry is lack of experts in board and departments. Experts and qualified
human resources is prerequisite for the effective regulation of industry. Insurance Act does
not ensure the appointment and nomination of the experts in the Board. Board of Directors
are nominated among the senior officers from different ministries disregarding the
expertise in insurance sector. Even other members are appointed without considering the
experiences and expertise in insurance sector. Most of the personnel appointed in Insurance
Board has neither academic degree on insurance nor previous experience of insurance
regulation and market.
Directives issued by insurers have been frequently changed over the short period. It shows
that there is lack of proper research and expertise while framing such legal documents. The
rules once issued should have capacity to address the changes of at least couples of year.
3.4 Lack of Ancillary institutions: The importance of ancillary institutions like insurance
academy, insurance resource centre, broker firms, third party administrator and various
other organizations cannot be underestimated. Existing Insurance Act does not permit to

15
National Association of Insurance Supervisors in USA is association of 50 states

11
Year 39 Volume 39 Feb 2020

operate all these institutions. Until these institutions functions smoothly, insurance market
also not function properly.
3.5 Poor supervision and monitoring: Supervision of insurance industry is responsibility of
Insurance Board. The supervision and monitoring unit of the Board need to be equipped
with well-versed experts in the area of fraud investigation, claims, risk assessment, loss
valuation, underwriting, reinsurance, accounting, rate making, marketing and so on. The
unit need to be resourceful, access to information and have sufficient data. The supervision
team hardly disclose few of the fraudulent activities but many of them may be conceal. Due
to the lack of efficient and strong supervision of the market, negative consequences are
arisen.
3.6 Lack comprehensive policy and integrated regulation: Only two insurance policies are
became mandatory viz. third party motor liability insurance policy and term life insurance
policy for foreign migrant workers. Rest of the insurance policies are voluntary even
though some of are supported and subsidized by government. Still large number of citizens
are beyond the insurance coverage, most of the population live with the different types of
risk, and government's social security system does not cover the entire population. There is
the need of comprehensive and integrated insurance policy for the entire citizen. DCGF,
SSF and HIB are service provider institutions and guided by special acts. DCGC was
regulated by Insurance Board but currently it is directly supervised by MoF. SSF and HIB
are in infant stage but need to supervise by an independent and legal body. Common
regulating authority for social security activities is essential in Nepal since Insurance Board
regulates only commercial insurers and intermediaries.

4 Development Issues
Insurance industry is one of the most dynamic industry where products are changed more
frequently, marketing channels and approach becoming more advanced, products are sold online,
and claims is also screening by artificial intelligence. Digitization makes insurance industry able
to predict the future and manage the risk prior to its happening through the big data and artificial
intelligence. The development of insurance industry largely depend on the policy level supports
from government and regulating authority.
The growth of the life insurance industry prior to 2001 was sluggish while the growth was very
impressive aftermath of the establishment of new companies in 2001 and 201716. Large number
of companies enter into the market at a time brought both positive and negative impact. Foremost
impact can be seen in the market that unhealthy competition among the insurance carriers,
scarcity of middle and high level managers and huge amount of spending in promotional
activities. Increase in insurance awareness towards the society and more market coverage, sales
of more policies, and mobilization of large amount of savings vibrant the economy, mitigate the
risk of families are some positive indication in the economy.
Only premium based market growth is not sustainable and does not portrait true picture of
performance of companies. Major indicators of market development and growth are per unit
acquisition cost, claims ratio, administrative and operating cost, persistency ratio, surrender and
lapse ratio, underwriting profit, coverage ratio, return on investment, Net income ratio, solvency
and liquidity ratio, duration of claims settlements, claim rejection ratio, renewal ratio, bonus rate,
market value of company. Some industry performance indicators are satisfaction of

16
In 2001 four and 2017 nine new companies were entered in the market.

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policyholders, full coverage of the risk, and trust of the society. Nepalese insurance industry
need to improve product value, product awareness and satisfaction, service quality and financial
prudence.

5 Prospects
The future of the Nepalese insurance industry is in crossroads. Large population is still beyond
the coverage of insurance so that there is an ample opportunity of growth for the insurers but in
other hand there are various challenges to tap the untapped market. Insurers are facing
unprecedented competition, scarcity of the human resources and poor regulatory framework. The
future of insurance depends on the government's plans and program towards the insurance and
social security. Some of the challenges and shortcomings of the insurance industry can be sort
out as : a) low attention of government authority towards the development of entire insurance
industry, b) poor promotional activities by Insurance Board, c) Distrust by public towards the
insurance, d) Lack of awareness among the public even though they are academically sound, e)
Low saving capacity of big chunk of population, f) Lack of risk management practices, g) huge
protection gap, h) Absence of insurance academy, training institute, research institute and
resources centre.
Considering a saying "dark cloud with silver lining", we can predict the bright future of the
Nepalese insurance industry since the number of educated population and per capita income
gradually increasing, awareness on risk management and social security also has been increased.

6. Conclusion
Nepalese insurance industry experienced slow growth over the long period. After 2001, it got
momentum. There is the domination of commercial insurers in insurance industry but the domain
of social insurance and social security programs also growing immensely. The regulatory issues
in insurance sector is crucial as the industry has been faced poor corporate governance practices,
poor quality of services, rising of fraudulent activities, low insurance coverage and penetration,
under insurance, misselling and force selling, lack of qualified insurance personnel etc.
Concluding the paper, the scope of commercial insurance is broader and social insurance is
essential, government should be serious to frame the comprehensive insurance and social
security policy of the country and need to be regulated under the integrated framework.
Insurance Board also need to pay proper attention on production of the qualified human resource,
research based regulations, and promotion activities with close collaboration to academic
institutions. Insurance is a pillar of the financial system, permanent sources of fund to banking
sector and capital market. For the financial stability and sustainable economic growth, there
should be sound coordination among the regulatory authorities and market players. The ultimate
goal of these organizations should be to ensure the protection of rights of the customers.

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References

NRB (2018). Annual Report, 2017/18, Nepal Rastra Bank: Kathmandu

DCGF (2018). Annual Report 2074/75. Deposit and Credit Guarantee Fund: Kathmandu
FDIC (1988). A brief history of deposit insurance in the United States. Insurance Corporation.
Washington D C.
HIB (2018). Annual Report, Health Insurance Board: Kathmandu
IAIS (2007). Issues in regulation and supervision of microinsurance, International Association
of Insurance Supervisors
IB (2013). Agriculture and livestock insurance directive, 2013. Insurance Board.
IB (2013). Foreign employment term life insurance directives, 2013. Insurance Board.
IB (2017). Annual Report, Insurance Board of Nepal
Rogan, P. (2015). The Insurance and reinsurance Law Review, Editorial Preface, Vol. 7.
Vaughan, E. J. (1996). Risk Management. New York: Wiley. ISBN 978-0471107590.
Wright, J. Virginia, W., Janice, A. (1994). The History of the National Association of Mutual
Insurance Companies, A Century of Commitment, 1895-1995. Indianapolis, IN: National
Association of Mutual Insurance Companies. p. 21

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