TH1018CD

FINANCIAL PERFORMANCE OF NEPALESE INSURANCE
COMPANIES
(With reference to Nepal Life Insurance Company Limited and Life Insurance Corporation Nepal
Limited, Himalayan General Insurance Company Limited and Neco Insurance Company Limited)
By:
Shanker Dev Campus Library

SRIJANA DHAKAL
Shanker Dev Campus
T.U. Reg. No: 7-1-3-1296-96
Campus Roll No: 1198/2060
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Submitted to:
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Office of the Dean
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Faculty of Management
Tribhuvan University
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In partial fulfillment of the requirements for the Degree of

Master of Business Studies (M.B.S.)
Kathmandu, Nepal
December, 2007
Property of Shanker Dev Campus Library, Kathmandu 1

RECOMMENDATION
This is to certify that the Thesis
Submitted by
SRIJANA DHAKAL

Entitled
COMPANIES
(With reference to Nepal Life Insurance Company Limited and Life Insurance
Corporation Nepal Limited, Himalayan General Insurance Company Limited and
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Neco Insurance Company Limited)
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has been prepared as approved by this department in the prescribed format of faculty of
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management. This thesis is forwarded for examination.
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(Supervisors)
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…....…………………………… ……………………
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Dr. Geeta Pradhan, Associate Professor Dr. Kamal Das Manandhar

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(Campus Chief)
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…....……………………………
Rishi Raj Gautam, Lecturer
Date:……………………………

VIVA VOCE SHEET
We have conducted the viva-voce examination of the thesis presented by
SRIJANA DHAKAL
Entitled

COMPANIES
(With reference to Nepal Life Insurance Company Limited and Life Insurance
Corporation Nepal Limited, Himalayan General Insurance Company Limited and
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Neco Insurance Company Limited)
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and found the thesis to be the original work of the student and written according to the
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prescribed format. We recommend the thesis to be accepted as partial fulfillment of the
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requirement for Master of Business Studies (M.B.S)
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Viva-Voce Committee
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Head of Research Department : ………………………………………

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Member (Thesis Supervisor) : ………………………………………

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Member (Thesis Supervisor) : ………………………………………
Member (External Expert) : ………………………………………
Date: ………………………

DECLARATION
I hereby, declare that the work reported in this thesis entitled “FINANCIAL
PERFORMANCE OF NEPALESE INSURANCE COMPANIES (With
reference to Nepal Life Insurance Company Limited and Life Insurance
Corporation Nepal Limited, Himalayan General Insurance Company Limited

and Neco Insurance Company Limited)” submitted to Shanker Dev Campus,
faculty of Management, Tribhuvan University, is my original work done in the
form of partial fulfillment of the requirement for the Master’s Degree in Business
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Studies under the supervision of Dr. Geeta Pradhan, Associate Professor and Mr.
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Rishi Raj Gautam, Lecturer of Shanker Dev Campus.
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Srijana Dhakal
Researcher
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T.U.Regd. No: 7-1-3-1296-96

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Roll No. 1198/060

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Date: …………………….
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ACKNOWLEDGEMENTS
Every research work is made possible by many helping hands. So, I would like to express
my sincere gratitude to my esteemed teachers and thesis supervisors Dr. Geeta Pradhan,
Associate Professor, and Mr. Rishi Raj Gautam, Lecturer for their help and excellent
guidance right from the time of selection of the topic and throughout the course of the

study. Their inspiring advice and supervision were always available whenever required.
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I would like to extend my gratitude to the professors, lectures& librarians of Shanker Dev
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Campus, Nepal Commerce Campus, Central library, staff of NLIC, LIC,HGI,NECO and
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Beema Samiti.
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I specially like to thank my brother Mr. Prem Dhakal and friends Sushil Pandit, Ramesh
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Khanal, Sona Bhattarai and Kusum Rimal for their unforgettable Support for the
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accomplishment of this research work.

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I would like to express hearty thanks to my sister-in-law Mamta Sharma and my sisters
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Mamta Sitaula, Pravata Sitaula, Bandita Sharma, Baba Rimal & Sijal Dhakal for
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suggestions and kind cooperation.

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I would like to express my sincere gratitude to my family, relatives and all people who
have directly or indirectly contributed to accomplish this study. Last but not least I am
solely responsible for any error or mistake remaining in this research.
Srijana Dhakal

LIST OF FIGURES
Figure No. Title Page No.
4.1 Return on Assets Ratio 57
4.2 Return on Equity Ratio 61

4.3 Return on Investment Ratio 64
4.4 Return on Insurance Fund Ratio 67
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4.5 Interest Income to Total Income Ratio 71
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4.6 Interest Income to Total Assets Ratio 74
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4.7 Investment to Total Assets Ratio 77
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4.8 Interest Earned to Total Investment Ratio 80
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ABBREVIATIONS
A.M. :- Arithmetic Mean

B.S. :- Bikram Sambat
Co. :- Company
C.V :- Coefficient of Variation
Dec :- December
Dr. :- Doctor

e.g. :- Example
etc :- Excreta
GDP : - Gross Domestic Product
Govt. :- Government
HGI :- Himalayan General Insurance
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HMG :- His Majesty Government
i.e. :- That is
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IETI :- Interest Earned to Total Investment
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ITA :- Investment to Total Assets
IITA :- Interest Income to Total Assets
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IITI :- Interest Income to Total Income
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LIC :- Life Insurance Corporation Nepal Limited
Ltd :- Limited
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M.B.S :- Master in Business Studies

NA :- Not Available
NIC :- Nepal Insurance Company
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NLIC :- Nepal Life Insurance Company

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No. :- Number
NRB :- Nepal Rastra Bank
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Pvt. :- Private
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RBB :- Rastriya Banijaya Bank

ROA :- Return on Assets
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ROE :- Return on Equity

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ROI :- Return on Investment

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ROIF :- Return on Insurance Fund Ratio

Rs :- Rupees
& :- And

TABLE OF CONTENTS
Page No.
ACKNOWLEDGEMENTS IV
TABLE OF CONTENTS V

LIST OF TABLES VIII
LIST OF FIGURES X
ABBREVIATION XI
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CHAPTER-1: INTRODUCTION 1-6
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1.1 Background of the Study 1
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1.2 Statement of the Problem 2
1.3 Objectives of the Study 4
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1.4 Significance of the Study 4
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1.5 Limitations of the Study 5
1.6 Organization of the Study
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CHAPTER-2: REVIEW OF LITERATURE 7-45

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2.1 Conceptual Framework 7

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2.1.1 Meaning of Insurance 7

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2.1.2 Risk and Risk Management 7

2.1.3 Introduction of Insurance 8
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2.1.4 Brief Introduction of Insurance Industry of Nepal 12

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2.1.5 Types of Insurance 17

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2.2 Conceptual Review 23

2.2.1 General Concept of Profit 24
2.2.2 Profit – A Traditional Approach 29
2.2.3 Profit – A Modern Approach 31
2.2.4 Profit Theories 32
2.2.5 Factors Affecting Profit 37
2.2.6 Functions of Profit 37
2.2.7 Profit and Profitability 39
2.2.8 Stability of Profitability 40
2.3 Review of Thesis 41
2.4 Research Gap 45
CHAPTER-III: RESEARCH METHODOLOGY 46-54

3.1 Introduction 46
3.2 Research Design 46
3.3 Nature and Sources of Data 47
3.4 Data Processing Procedures 47
3.5Population and Sample Size 47
3.6 Period of the Study 48
3.7 Method of Analysis 48
3.7.1 Statistical Tools 48
3.7.1.1 Average (Mean) 48

3.7.1.2 Standard Deviation 49
3.7.1.3 Coefficient of Variation 50
3.7.1.4 t- Statistics 50
3.7.2 Financial Tools 50
3.7.2.1 Ratio Analysis 51
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CHAPTER-IV: DATA PRESENTATION AND ANALYSIS 55-84
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4.1 Introduction 55
4.2 Financial Ratio Analysis pu 55
4.2.1 Return Analysis 55
4.2.2 Income Analysis 69
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4.2.3 Investment Analysis 75

4.3 Major Findings of the Study 82
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CHAPTER-V: SUMMARY, CONCLUSION AND RECOMMENDATIONS 85-90

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5.1 Summary 85
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5.2 Conclusion 86
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5.3 Recommendations 88
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BIBLIOGRAPHY
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APPENDICES

LIST OF TABLES
Table No. Title Page No.
4.1 Return on Assets Ratio 56

4.2 T- test (Each of the Company) 58
4.3 T- test (Each of the Year) 58

4.4 Return on Equity Ratio 60
4.7 Return on Investment Ratio 63
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4.10 Return on Insurance Fund Ratio 66
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4.13 Interest Income to Total Income Ratio 70
4.14 T- test (Each of the Company)
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4.16 Interest Income to Total Assets Ratio 73
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4.19 Investment to Total Assets Ratio 76

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4.22 Interest Earned to Total Investment Ratio 79

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CHAPTER - I
INTRODUCTION
1.1 General Background
Growing number of companies in the Nepalese insurance market is the indication of

expanding scope. Liberalized economic policies have tempted profit oriented joint

venture companies. Insurance business is likely to accelerate with the speeded economic
activities. With the rise in purchase power of the people and increased in educational
level, the insurance business is expected to take upward course. There has been a growth
of premium by 15% in average in non-life insurance. The volume of premium has been
increasing. Similarly, the agent for life insurance has increased very significantly as
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compared to last fiscal year. This gives a clue that there is a growth in life insurance as
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well.
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Most of the industries and business houses have been closed down and those who have
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been operating in the present condition taking full fledge risk are not been able to
perform their daily activities and earn as they have expected to earn. So in the present
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context profitability return is one of the most important and challenging goal.
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Importance of profit is hardly required to be explained. Company should earn profits to

survive and grow over a long period of time. Profits are essential as it would be wrong to
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assume that every action initiated by management of a company should be at maximizing

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profits, irrespective of social consequences. It is unfortunate that the word profit is looked
upon as a term of abuse since some firms always want to maximize profits at the interest
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of employees, customers and society. Except such infrequent cases it is a fact that
sufficient profits must be earned to sustain the operations of the business to be able to
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obtain funds from investors for expansion and its growth and to contribute toward the
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social overhead for the welfare of the society.

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Profit is the difference between revenues and expenses over a period of time. Profit is the
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ultimate ‘output’ of a company and it will have no future if it fails to make sufficient
profits. Therefore, the financial manager should continuously evaluate the efficiency of
the company in terms of profit. Therefore, the financial manager should continuously
evaluate the efficiency of the company in terms of profit. The profitability ratios are
calculated to measure the operating efficiency of the company. Besides management of
the company, creditors and owners are also interested in the profitability of the firm.
Creditors want to get interest and repayment of principle regularly. Owners want to get a
required rate of return on their investment. This is only possible when the company earns
enough profits; profitability is an indicator of efficiency of the business organization.
Profitability ratio measures the management’s overall efficiency. This shows that higher
the profitability higher the management efficiency and vice versa.
1.2 Statement of the Problem

Nepal, like any other country has been laying emphasis on the upliftment of its economy.
The process of economic development depends upon various factors. Financial
institutions are viewed as catalyst in the process of economic growth. The mobilization of
domestic resources, capital formation and its proper utilization plays an important role in
the economic development of a country. Every financial institution, big or small, either
banks or insurance companies play an important role in the development of a country. In
other hand, these financial sectors, banking and insurance, is regarded as a profitable
sector. Insurance industry in the eyes of the layman appears as a very profitable sector.
However, unlike the general perception, the industry is plagued with immense challenges

to sustain it and outpace those within the industry, mainly due to rising competition and
week economic situation in the country. The study searches various problems like return,
investment, premium, income and other related problem.
Besides these problems the present study will intend to explore the following basic
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question:
• Whether insurance companies are improving the overall performance or not?
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• Whether curtailment of expenses of strategic importance is crucial in
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betterment of profitability or not?
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• Whether the trend of the profitability is increasing or not?
• Whether investment on assets or other utilization of resources affects the
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performance or not?
• Whether or not the external or internal environmental factors affect the overall
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performance?
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1.3 Objectives of the Study

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The study basically aims to evaluate the profitability of Nepal life Insurance Company
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Ltd. and Life Insurance Corporation Nepal Ltd. in life insurance, & Himalayan General
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Insurance Co. Ltd. and Neco Insurance Co. Ltd. in non-life insurance and suggest
recommendation based upon it. The specific objectives of this study are:
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• To evaluate the profitability of the companies.

• To analyze the relation of various factors like assets, Interest income, Managerial
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expenses and Life Insurance Fund on profitability.

• To analyze the financial position of sample insurance companies.
1.4 Significance of the Study

Profitability is regarded as the lifeblood for any enterprise because it is needed for growth
and expansion. If the business cannot maintain a satisfactory level of profitability, it is
not regarded as a good enterprise and may even close. Insurance industry is vital sector
for economic growth in a country. Insurance business is regarded as a profile sector. So
an independent study of profitability on insurance business is significant for the
stakeholders and the persons who are interest on it. Researcher believes that following
institution and individual will be benefited from the study.
• Individual who will carryout further research work in profitability of insurance
companies.
• Insurance companies whose study been made.

• Individuals who have keen interest in Nepalese economy and insurance industry.
• Investors, policy holders and other stakeholders, students, teachers, managers,
policymakers, etc.
1.5 Limitations of the study

The study and outcome of the study will be an individual effort. Therefore management
and resource mobilization will limit the in-depth study of few insurance companies
operating in the country.
• The study will be based on secondary data; therefore, the accuracy of results and

conclusions highly depends upon the reliability of these data.
• The evaluation is made through the analysis of financial statement published and
presented by the companies.
• As the title specifies the study covers about profitability subject only others factor
beside these are not studied.
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• Resource, time, money constraints and inaccessibility of sufficient information
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also limit the conclusion drawn from study.
• This study may not be precise as it is to fulfill the partial requirement of the MBS
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program.
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1.6 Organization of the study
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The whole study is divided into five main chapters:
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First chapter presents a brief introduction of the study; it includes background of the
study, focus of the study, statement of problems, objectives of the study, significance of
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the study and limitations of the study.

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Second chapter is review of literature; it includes conceptual framework, review of

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books, and review of previous study, reports, thesis and journal articles related to the
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topic of the study.

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Third chapter is about research methodology; it includes the whole procedure of this
research work i.e. research design, sources of data, populations and sample, data
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processing, method of analysis.
Fourth chapter is about presentation and analysis of data; it includes position of current
assets, financial analysis, statistical analysis and financing current assets. Ratio analysis,
t-statistics, CV and mean have been calculated to help in the research work.
The last or fifth chapter presents a brief summary of whole research report and its
conclusion. It also includes some useful suggestions to the concerned parties and
recommendation.

CHAPTER - II
REVIEW OF LITERATURE
2.1 Conceptual Framework
2.1.1 Meaning of Insurance
Developing modern society plays various roles in a society. They bear a major character,
the inevitable uncertainty surroundings. Due to the uncertainty and competition factor the

concept of insurance and its evolution was enforced and these days it is far more
strengthening due to very competitive environment and many dropped down situation.
Thus, the insurance seems as an auxiliary for the modern society and organized business
company as well as individuals. Before familiarizing to the concept of insurance it is
essential to know about risk and risk management.
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2.1.2 Risk and Risk Management
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In general, risk can be defined as the probability of the occurrence of unfavorable
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outcomes. However risk has different context. In the context of the insurance, it takes
restricted sense and is mainly used to mean the uncertainty of the occurrence of economic
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law. It eliminates the losses other than the economic loss and the uncertainty of the
occurrence of loss and the subject matter will be basic requirement. So risk is the key
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element for making insurance desirable and possible.
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On the other hand risk management is "A general management function that seeks to
identify, assess and address the cause and effects of uncertainty and risk in an
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organization to the purpose of risk management is to enable an organization to progress

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towards its goal and objectives in the direct efficient and effective path"(Williams,
1995:27). While managing the risk there are various alternatives standing i.e. risk may be
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avoided retained, reduced and shifted to other. Such alternatives are driven by either the
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risk financing aspect or the risk control aspects. Risk controlling aspect enforce an
reducing the probability of loss by implementing the risk reduction techniques, and risk
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financing aspects enforce an being in financially secured position before the loss occur.
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Thus, insurance and its management are a past of risk management, which falls within the
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risk financing aspect rather than risk controlling aspects.
2.1.3 Introduction of Insurance

Different people have different opinion about the origin of the insurance .But everyone is
agreed that the marine insurance is the first insurance in the world. Developing modern
society plays various roles in a society. They bear a major character, the inevitable
uncertainty surroundings. Due to the uncertainty and competition factor the concept of
insurance and its evolution was enforced and these days it is far more strengthening due
to very competitive environment and many dropped down situation. Thus, the insurance
seems as an auxiliary for the modern society and organized business company as well as
individuals.
Insurance is a contract made by a company, society, or by the state, to provide a

guarantee of compensation for loss, damage, sickness, death etc in return for regular

payment. In other words, it can be said that any measure taken as a safeguard against
loss, failure etc. An insurance company means the enterprises that are involved in
insurance business. Insurance companies are integrated part of the same business. Before
knowing about insurance company's concept we need to know about concept of
insurance. It is quite hard to define insurance to satisfy every view point of insurance. It
may be defined as "A system of combining many loss exposures with the costs of the
losses being shared by all of the participants"(Crane, 1980:8).
It may be an economic system of reducing the risk through transfer and pooling of losses,

"A legal method of transferring risk is a contract of indemnity a business institution
providing many jobs in free enterprise economy a social device in which the losses of
few are paid by many or an actuarial system of applied mathematic"(Bickeinaupt,
1983:43).
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In same generic term insurance is regarded as, "Co-operative risk carrying transfer of
specializing risk carries, redistribution of actual loss etc, as a business institution
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insurance may be defined as a plan by which large number of people associated
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themselves and transfer to the shoulder of all risk that attach to an individuals".
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It is a universal fact that the outcomes of most activities are uncertain. Uncertainty
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remains in every nature of businesses. So, insurance is one of the major risk handling
method, also it is an instrument to spread the loss caused by a particular risk among
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various people who are interested to accept risk for certain return. The word for taking
risk or assuring to cover loss is known as insurance.
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There are no such devices or methods which confirm that there is no risk and no chances
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of loss occurrence in any types of business. It should not necessarily be only businesses,
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even in the houses where we live; we are unsure what is going to happen tomorrow
because we don’t know when earthquake occurs. In fact, it is similar to our lives as we
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absolutely have no idea about our exact longevity. This is a tricky situation. Until now,
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we are able to transfer the risk primarily created due to natural disaster or an accident in
the form of insurance but unable to eliminate in first hand. It is beyond our capacity to
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control natural calamites or an accident.

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Insurance is a precautionary measure that has been taken by any party’s to compensate
for the loss incurred due to any undesirable events. It is an intangible service which helps
to get rid from the painful sufferings caused by the uncertainties. Thus the insurance
provides a relief in the form of compensation packages in a period of desperate need.
In a period of deepest sorrow and need, when funds appear to drain into abyss of
creditor’s demand and estate duties, the hefty cheque brought in the form of insurance
claims provide great relief. So, insurance offers excellent financial protection.
Industrial and commercial risks are more complex. Apart from the normal trading risks,
they are exposed to various natural and man created hazards, the result of which can kick
them completely out of the business. Moreover, not all the risks are insurable which

means the careful risk management should be administered. Risk management deals with
the technique of identification, evaluation and handling of risks. After properly
identifying the risk one is exposed to, one has to evaluate the monetary consequences of
such risks before thinking of handling of the risks which may be consciously assuming
certain risks oneself and transferring others by various devices including insurance.
Insurance is one of the risk transfer mechanism.
Insurance is not a luxury; it is a necessity especially when one’s paid up assets is few.
Many people think insurance is for the rich people as they can afford but it is precisely

for those who are not financially secure.
Insurance business is broadly classified into two groups

1. General Insurance (non-life)
2. Life Insurance
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There are various types of services offered by general insurance and the most important
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services are
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1. Vehicle Insurance
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2. Marine Insurance
3. Fire Insurance pu
Similarly, Life insurance is mainly focused on the life of individual. It is related to the
health of individual or policy covering the unnatural death of an individual.
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2.1.4 Brief Introduction of Insurance Industry of Nepal

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In our society, the concept of insurance can be traced down to the, Guthi systems and
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joint family culture that has been prevalent since the ancient times. There system have
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provided security and assistance of individuals and families in the time of need with the
change in the economic and social perspectives and the increasing complexities of the
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upcoming small-scale industries an immense need for a domestic insurance company was
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felt to insure against any loss that could arise due to mishaps in industries.
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With the development of trade commerce and industry, the necessity of insurance is our
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country was felt long ago. But there was no evidence of any organized form of insurance
in Nepal until 1947. Society was organized is an agricultural basis and the socio-
economic organization took care of any problem or calamity confronted to the
community. The fire insurance in Nepal at first was started by "Mal Chalani ra Beema"
(Transport and insurance company). The "National fire insurance company" of Calcutta
is the first insurance company to open branch in Kathmandu in 1958 to transact fire
insurance business in Nepal .
With the development of trade and industry establishment of Nepal Rastra Bank (central
bank), Nepal Bank Ltd (Commercial Bank), Rastriya Banijya Bank (Commercial
Bank),Agricultural Development Bank, Co-operative Bank, Nepal Industrial
Development Corporation numerous other companies and corporations the need of fire
insurance in Nepal is growing in a manifold way. To meet ever-growing needs of fire

insurance Indian branches such as "Ruby", "Oriental", "Sterling General" and "Hindustan
General" and the domestic insurance company " Insurance and Transport Company" and
"Rastriya Beema Sasthan" are transacting fire insurance business.
Though there is no organized form of life insurance in Nepal, a kind of life which can be
better termed "death insurance" is practiced since a long time like insurance there is
"Guthee" which helps its member in facing financial burden out of death. Its policy
holders are known as "Gutheear" instead of insured. Though they have not got policies
black and white they have a kind of verbal understanding by which they can work

smoothly without facing any difficulties. Gutheear's pay certain amount money to the
"Guthee" in the same way as the insured pays premium to the insurer. Before 1951, Patna
branch of Indian Life Insurance Company was exploring life insurance business with the
nationalization of "Life Insurance Corporation of India". It is slowly and wholly
transacting life assurance business in Nepal. It established a branch office in Kathmandu
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in 1962. Thus this corporation has got a kind of monopoly in life insurance business.
However a need for an insurance company that would incorporate every type of
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insurance function was also felt at the national level. This resulted to establishment of
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Rastrya Beema Santhan on 15th Dec 1968. The company was establishment as private
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company with an authorized capital of Rs 1 crore and capital issued was Rs 25 lakh under
the Nepal company act 2011. The company started its business by insuring king
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Mahendra's car. Later, the company started operating with same name but under national
insurance corporation act 2025.
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In Nepal, there are 19 insurance companies. One of them is fully government owned
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corporation. 10 insurance companies are invested by private sector of the nation whereas
3 of them are joint venture with foreign companies and 3 are totally foreign investment
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company. Out of these 19 insurance companies, 2 companies are operating both life and
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non-life insurance business whereas other 3 are holding life insurance and other is non-
life insurance companies.
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Following are insurance companies which are operating only the life insurance business.
1. Nepal Life Insurance Co. Ltd.
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2. Life Insurance Corporation (Nepal) ltd.

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3. American Life Insurance Company (ALICO)
Similarly, following two companies operate both life and non-life insurance business.
1. Rastriya Beema sastan
2. National Life and General Insurance Co. Ltd
Following are non-life insurance companies.

1. Nepal Insurance Co. Ltd
2. The oriental Insurance Co. Ltd.
3. National Insurance Co. Ltd.
4. Himalayan General Insurance Co. Ltd.
5. United Insurance Co. (Nepal) Ltd.
6. Premier Insurance Co. Ltd.

7. Everest Insurance Co. Ltd.
8. Neco Insurance Co.
9. Sagarmatha Insurance Co. Ltd.
10. Alliance Insurance Co. Ltd.
11. NB Insurance Co. Ltd.
12. Prudential Insurance Co. Ltd.
13. Shree Shikhar Insurance Co. Ltd.
14. Lumbini General Insurance Co. Ltd.

Growing number of companies in the Nepalese insurance market is the indication of
expanding scope. Liberalized economic policies have tempted profit oriented joint
venture companies. Insurance business is likely to accelerate with the speeded economic
activities. With the rise in purchase power of the people and increased in educational
level, the insurance business is expected to take upward course. There has been a growth
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of premium by 15% in average in non-life insurance. The volume of premium has been
increasing. Similarly, the agent for life insurance has increased very significantly as
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compared to last fiscal year. This gives a clue that there is a growth in life insurance as
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well.
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The fact that premium rate is decreased but the overall premium collection in insurance
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industry has increased suggest the increase of market size.
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In this Industry, there is a profitability of 10%-15%. Because of lucrative profitability,

there have been 18 insurance companies.
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The Insurance Act 1993 has created an insurance regulatory Authority named “Insurance
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Committee” empowering to develop and regulate the insurance business, fix the priority
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area to invest the premium income, license and to facilitate administrative procedure to
enable to function the insurance companies. The act has fixed the paid up capital
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requiring Rs. 300 million to run the insurance business. No restriction is imposed
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between national and alien companies as to entering into business.

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The existence of economic and technological asymmetric between incumbent foreign

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investor has competitive advantage and the superiority of being foreign firms.
Due to low security, particularly in the context of Maoist insurgency most of the
insurance companies have increased the premium particularly in terrorism insurance,
which has discouraged the potential insured. Similarly, some insurance companies
unnecessarily delay the claim or compensate very less has created panic among insured
and compelled to think twice before purchasing policy. But in overall, the premium for
other services such as fire insurance, vehicle insurance has decreased.
As there are several insurance companies in Nepal, competition is severe. As a result,

this industry is going through innovation in its services offering for example, services are
ranged from theft insurance to mobile insurance.

The market for life insurance is tremendous and players are very few in this segment.
There are hardly more than five major players in this segment. Concept of life insurance
is still unknown to majority of Nepalese.
2.1.5 Types of Insurance

Insurance has been the most effective and strongest to save peoples property. It makes the
security of the payment of insured among those who made life and non-life insurance.
Now a days, insurance has becomes the pillar of alertness courage and eagerness to
develop life and living standard of common people, industrialist and traders of the world.

So, various types of insurance is developed, which can be classified as following:-
(A) From Risk Point View

i. Personal Insurance
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Under personal insurance, the insurance is made to the subject related to the person's life.
There is possibility of risk associated to death, accident and diseases. The insurance
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which is affected against such risks with the objectives of getting financial protection is
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called insurance. Life insurance, personal accident insurance and health insurance are the
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examples of personal insurance.
ii. Property insurance

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Under this insurance, insurance of the different nature property is affected to compensate
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the property damaged or lost. The compensation is given to the assured by the insurance
company. The insurance company gives only actual compensation to an insured on the
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basis of fact and event the examples of property insurance are fire insurance, marine
craps, cattle and burglary insurance etc.
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iii. Liability Insurance

Under this insurance, compensation is given to third person for loss or damage caused by
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negligence, or other reason of the party. The example of liability insurance is motor
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insurance, public liability insurance etc.

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iv. Guarantee Insurance

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Under this guarantee insurance the insurance company gives the guarantee of faithfulness
or the honesty of any employee or any other person and it accepts the liability of
compensation on financial loss to the insured with the cause of dishonesty and fraud. The
examples of guarantee insurance are credit right, fidelity guarantee insurance etc. If any
event is found within the policy, then the insured has right to get compensation.
(B) From Business Point View

There are following types of insurance from business point view:-
i. Life Insurance
Insurance provides protection against a wide variety of risks. However life insurance
provides sum of amount against the various risks relating to the human being body
through issuing different policies. Life insurance is a financial instrument for providing

post death resources to support survivors or pay obligations of the estate of the deceased.
Generally, life insurance as a type of insurance plan conducted by the insurers is directly
related with providing assurance against the economic part of total human life. "Life
insurance contract may be defined as the contract where by the insurer in consideration of
premium under takes, to pay a certain sum of money either on the death of the insured or
on the expiry of a fixed period" (Mishra, 1989:49).
Life insurance is particularly concerned with that aspect of human life. In which the
insurance or assurance of a person's life is impossible because of the certainty of death of

a person once born; life insurance only provides assurance against the economic aspect of
human life, not the assurance against the life itself. Life insurance provides future
benefits against unseen future accident and it helps to live comfort in retirement life. Life
insurance never fulfill losses of human life, it measures in amount of various risks and
provides sum of amount in accordance to policy. It plays vital role in the society.
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Therefore, it is also known as social insurance too. Nepal insurance act 2049 (section2-1)
has defined life insurance as the contract of insurance effected on human life on the basis
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of age to pay a fixed sum to the assured or his nominee, on death or on the happening of
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any contingency, dependent on human life in consideration of payment of fixed
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investment premium by the assumed. Insurance companies provide the life insurance
under various polices. Insurer provided various polices in accordance insured interest and
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desire. We can see following policy in life insurance commonly: Endowment policy,
whole life policy annuity, term insurance and survivorship policy. In Nepal, Rastrya
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Beema Sasthan, National Life and General Insurance Co. Ltd, Nepal Life Insurance Co.
Ltd, Life Insurance Corporation (Nepal) Ltd and American Life Insurance Co. provides
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life insurance service. The scope of life insurance business is seemed to be bright because
of its nature and popularity. So the various investors are interested to invest in life
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insurance business, although having restriction of government and challengers of other

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effecting factors.
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ii. Non-life Insurance

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It is also known as general insurance. It is a pure insurance because it measure any risk in
term of money. General insurance is the insurance of property and liabilities risk of
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insured against some specified cost i.e. the premium, it includes property insurance
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liability insurance and other forms of insurance. General insurance considers all the risk
and it provides certainty against the risk through certain some of money. This part of
insurance includes the insurance and risk transfer of the property and liability of insured
where "Property insurance against loss arising from the ownership or use of property,
includes two general classifications; The first indemnifies the insured in the event of loss
growing out of damages too, or destruction of his /her, own property and the second form
pays damages for which the insured is legally liable the consequence of negligent acts
that result in injuries to other persons or damage to their property, which is known as
"liability insurance"(Bickeinaput, 1983:80).
General insurance responsible to payment of an amount to insured. But when the accident
is held by negligent of insured where the insurer does not responsible to pay any amount
against the risk. Insurer and insured may agreed to accept every kind of risk under their

contract and the risk transfer through the assurance. But the "Coverage written by the
property and liability insurance insurers may be divided into fives types, physical damage
or loss, loss of income and extra expenses resulting from physical damage to property,
liability, health and surety"(Mehr, 1986:49). In practice the insurers provides which are
based upon there classification, among them these are the practical form:
a. Marine Insurance Policy

It is oldest form of insurance. It is written to provide the security against the perils of sea.
Usually such policies provide the assurance not only against the natural disaster but also

against piracy and other manmade disaster. Further the modified marine insurance policy
may provide protection against the inland transit loss arising in the way to seller to buyer
protection against loading and unloading or other mutually agreed risk with respect to the
marine insurance a destination is customarily made between insurance written on
shipment over land by such carrier as Rails, road, and trucks which is referred to as
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inland marine insurance and those that involve sea perils referred to as ocean marine
insurance.
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b. Fire Insurance Policy
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Fire insurance had been originated in Germany in the beginning of sixteenth century. Fire
insurance polices are issued to indemnity owners of property, whether buildings or
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content, against destruction or damage caused by the fire. Basic form of the fire insurance
offers protection to the insured against the destruction of physical property as a result of
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fire. There may be various caused to extent an accident by fire. Insurer is only
responsible to provide indemnity against risk, which was held at accordance to policy.
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The field of fire insurance can be modified or extended to include a number of peril
closely allied to fire like wind, storm, earthquake, or else . Insurance may change higher
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premium as per nature of risk and insurance policy.

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c. Aviation Insurance Policy

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Aviation insurance is related with the risk occurring due to the peril, hazard or risks
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created by the aircraft. Aviation insurance provides the indemnity against the risk which
is created on flight, landing and the time of take off an aircraft. Aviation insurance
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acquires the risk of passenger, cargo hull also. Despite the heavy charges all sends
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considerable quantities of Goods and there is a demand for insurance, more particularly
because such goods are usually of small bulk and high value. Thus aviation insurance is
essential and important in aviation field. Aviation insurance covers the Hull insurance,
Aircraft liability insurance and medical payment too.
d. Automobile Insurance Policy

It is related to the risk of vehicles. It provides certainly against the risk of accident. It is
directly related with providing the insurance against the perils or loss accruing with
respect to the vehicle and with providing financial assistance to the insured to result the
third party liability accruing due to the damage caused by the vehicle. The automobile
insurance covers the full comprehensive policy and third party liability insurance too.

e. Engineering insurance policy
Engineering insurance policy is directly related with against the risk of engineering tools
and technique. It is related with the risk transfers arrangement against perils, hazards or
risk arising within manufacturing organization or within technical job sectors. A
manufacturer has risk of break down his/her plant and may produce disqualify goods.
However an engineering insurance provides the protection against that situation. Usually
under this policy there will be basic insurance contracts.
f. Miscellaneous Insurance policy

A number of coverage's written by casualty insurer's are available that can not be
classified neatly as liability, auto or crime insurance but nevertheless are important to
those with the exposure that these forms are designed to protect. They are discussed
under the innocuous heading of miscellaneous coverage and are written by property and
liability insurance. Miscellaneous insurance policy covers the vague of insurance policy.
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However there are the practically important policies by the insurers.
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2.2 Conceptual Review
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In this section conceptual and theoretical review of profit, profit- a traditional approach
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and the modern approach, profit theories, factors affecting profit, function of profit, profit
and profitability and stability of profit. pu
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2.2.1 General Concept of Profit

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If we ask what the profit is? To the layman, the simplest answer would be the excess of
income over expenses. Actually, in the simple sense it is totally true. If we deduct
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expenses by income then the difference amount is profit and if it comes negative then we
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term it as loss.
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The simple definition of profit according to Oxford English Dictionary is, “Money gained
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in business especially the difference between amounts earned and spent” (Hornby,
1996:924). It further explains, “The financial gain in a transaction; the excess of returns
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over outlay; the surplus of a company or business after deducting wages, cost of raw
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materials, interest, and other expenses”. But in order to describe from the technical view
point, it is the surplus resulting after a defined trading period but must be regarded as the
first essential charge upon business, being a reward a fort engaging resources in
conditions of speculative risk for the satisfaction of consumer demand. It furnishes
resources to invest in future operations and consequently its absences must result in a
decline in effective capital resources and ultimately competitive extinction of the
business.
Acceding to Adam Smith, The father of Economics, “Profit is the sum remaining after the
payment of all wages in economics includes payments to officers of corporations, to
proprietors, to partners and to farmers, as well as to what we today term labour, and rent
on the unimproved value of land, as the return to capital”(Foulke, 1998:56). This is one
of the broadest definition that clearly defines what the profit is and how is it formed.

It is necessarily a residual sum. Land, labour and capital are frequently used under
contracts whereby they receive a predetermined return. A net profit is a sum over and
above the ordinary costs of business including such contractual outlay. Nobody contracts
to pay the entrepreneur the residual sum, which constitutes net profit. Business profits
are, therefore especially contingent upon successful management of risk. Business is
faced with a number of uncertainties: (1) technical uncertainties- those relating to the
physical process of production (2) cost uncertainties either due to change in the prices of
raw materials, wages, rent etc. or due to technology changes. (3) Demand uncertainties
either due to changes in consumer preferences or due to innovation of new products and

obsolesce of the existing products. (4) Market uncertainties- those relating to the future
price of the product and the volume of sales. The entrepreneur receives a reward for
combining the factors of productions to meet the economic needs of a world faced with
uncertainties. He takes a risk, which others are unwilling to bear, and if he successfully
manages the risk, he receives profits. The means that a business man, in order to earn
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profits, has to do two things: (1) select the risks which he wishes to bear, and (2) manage
them successfully. The selection of risk is made at almost every step of businessman’s
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career. His important problem is the selection of business in which he wishes to engage
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himself. But even thereafter many risks arise. Some of them he may give to bear even
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though he would rather mot: others he may transfer to people more willing to bear tem
(or unable to escape them): still others he may shift by insurance (Varshney &
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Maheshware, 1979:300).
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Some exports explain profit as a measuring rod that measures the efficiency of business
organization or corporation. According to them is just a tool in measuring the efficiency
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of the activity of the firm. If it is positive ten then activity of the organization is on the
right track else in the wrong track.
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Profit is simply, convenient and the most popular yardstick of Judging the efficiency to a
business enterprise in private as well public sector. For private enterprise, is taken to be
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the most satisfactory criterion of efficiency. Profit helps in judging the overall efficiency
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and is easy to calculate,. Even through profit maximization, unlike private enterprise, is
mot objective of public enterprises, yet profit serves as a well accepted criterion for
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judging the overall efficiency of public enterprises too (Narayan, 1980:206). He states
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that the profit is not the main object of the public firm but the question arises how would
the public firm survive? Would it be the government who would be responsible for its
survival and successful operation?
R.R. Gilchrist and Argent expresses similar view that profit is equipment for measuring
the organizations efficiency and effectiveness.
In the opinion of R.R. Gilchrist, “The profit is the ultimate measure of effectiveness. A
profitable company is likely to offer not only security of employment but also promotion
prospects job opportunities and the intense personnel motivation that comes from being
associated with success” (Argent, 1968:34).
“Profit is the Barometer of the success of business. It is indeed, a magic eye that mirrors
all aspects of entire business organization including the quality output”(Argent, 1968:68).

Apart from successful operation, there may sometimes be less from external environment
which cannot be controlled by the organizations. Let’s for instance take war or any
natural calamites or change in government and international rules and regulations. So in
this case this definition is yet to be updated.
These definitions summarize one profit i.e. profit is the main financial indicator of
business firm which is indeed a need to survive and grow the business environment.
Profit is essential to raise the market price of share and to attract additional capital
investment. Profit is outcome of good management, cost control, credit risk management,

efficiency of operation, etc. Simply station, profit is money excess of sale over money
spent but the term profits vary controversial and there are several different definitions and
its interpretations.
Usually profit does not just happen. Profits are managed before we can move an
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intelligent approach to the managerial accept of profit. There are after all, several
different interpretations of term ‘profit’. An economist will say that profit is the reward
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for entrepreneurship for risk taking. A labour leader might say that it is a measure of how
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efficiently labour has produced and that it provides a base for negotiating a wage
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increase. An investor will view it is a gauge of the return on his/her money. An interval
revenue agent might regard it as a base for determining income taxes. The accountant
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will define it simply as the excess of firm’s revenue over expenditure of producing
revenue in given fiscal period” (Lynch & Williamson, 1989:99-100). He has accumulated
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the wide view and perspective of what people in the different sector think about profit.
These people may be an economist or labor or investor or accountant or manager.
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Significance of profit to a business firm can hardly be neglected. It is equally important

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as for nutrition is required for human beings and animals to survive. To cover costs of
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staying in business such as replacement of machines, furniture, obsolescence of

machines, market or technical risks, etc, profit is necessary. It is also essential in the
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sense to ensure supply of future capital. It provides capital through retained profits.
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According to the self-financing principle, it provides access to attract outsiders’ capital.

Naturally, investors would invest their money in a firm where there is adequate profit
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formation. Hence, profit is required to ensure and satisfy the entire expectation of
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management, shareholders or investors, employees and nation as a whole.
Ronald I. Robinson rakes profit as the requirement for its existence and to survive in the
long term. He explains, “Profit is essential for every enterprise to survive in the long run
as well as to maintain capital adequacy through retain earning. It is also necessary to
accept market for both debts and equity to provide funds for increased assistance to the
productive sectors”(Robinson, 1951:21).
R. Cauvery explains profit in accounting terminology and in economic since. According

to him, “Profit in the accounting sense is the excess of revenue receipts over the costs
incurred in producing this revenue. This concept of profit is also known as residual
concept. But is economics, both implicit and explicit costs are deducted from total sales
revenue in determining profits”(Couvery, 1997:122-123).

A.H. Taylor & H. Shering has given bit different view in profit. They have described as
inspiring agents which pressurize the management to gain more efficiency by cost
reduction, greater turnover. “The profit motive remains on the main springs of an
enterprise and spur to efficiency. It is clearly the desire to make profit which inspires the
search for more efficient methods, reduced unit cost, better organization and greater
turnover”(Taylor & Shering 1966:170).
So from the above definition we can conclude that the profit is not only important for the

survival of any business firm but it is also an aspiring, motivating agent, a measuring rod
for measuring the efficiency of each and every organization which should be taken as the
major aim whose fulfillment cannot be diverted.
2.2.2 Profit- A Traditional Approach
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From the past history, we see that the primary and final objective of every business
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enterprise is to maximize profit and all its activities are directly focused in earning profit.
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This traditional approach ignores the concept of external and internal environment that
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are directly and indirectly concerned with business and its positive and negative impact
in. But this does not mean that the businessman in the past period does not spend for
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social welfare. Profit maximization approach is the most important assumption of
economic theory also proves this fact. It always assumes that a firm sets target to
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maximize the profit and is discretionary behavior of the firm. Maximize profit is taken as
the central belief. In the past the government provided their full support for the
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industrialist and the businessman for smooth operation of their activities in achieving and
maximizing their profit. The consequent in the global environment was hardly taken into
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consideration. This does not mean that the consequent in the external environment like
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society, culture and other factors like legality etc. were ignored or neglected.
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Profit is the measurement of the corporation’s overall performance. A corporation can

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claim itself to be successful it can maintain maximum profit to justify the worth of the
return on investment. This helps corporation to save from shortage of funds and provides
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best opportunities to undertake the expansion of assets to enlarge business” (Shrestha,

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1980:23-24). He explains that the profit is only measure of success and those who able to
maintain maximum profit is the most successful one. This would also help the
organization to save form the shortage of funds, which can also lead to bankruptcy of that
organization.
“It provides yardstick by which economic performance can be judged. It leads to efficient
allocation of resources. It ensures maximum social welfare (Khan & Jain, 1999:1.9). This
shows that the profit maximization is deeply rooted in the society and is taken as central
belief because success measurement of any firm is done by how much profit has been
able to acquire.
This concept was taken to be advantageous while the business structure or firms were
self-financing, single entrepreneurship and taken as private property. Obviously, profit

maximizing was entertained by the single owner to enhance his individual wealth and
personal power in the past days. So it is mow regarded or explained as a self-centered
that was single dimensional aspect.
2.2.3 Profit-A Modern Approach

Modern business environment is completely different form that of the past, whether form
the technological viewpoint or form the conceptual viewpoint. Today the activities that a
firm performs have multi-dimensional aspect. So a firm must set several schedules with
different objectives form profit maximizing the profit is not the sole objective of a firm.

The firm should use the acquired profit from its activities in the social welfare.
Businesses have multiple goals and the need of survival, goodwill, security or growth
commonly calls for some sacrifice of short-term profits. Most businesses do, however,
rate probability consistently high among their long-term objectives and it could be argued
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that short-term goal such as security and growth are in fact, subordinate to long term
profitability (Salvage and Smell, 1967:30).
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The business firm today is financed by equity owners, creditors and professional
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management. Likewise customers, employees, government, society are connected with
firm which we them in the modern language as the stakeholders. So in order to protect
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the interest of these stakeholders’ different concepts in the protection of their rights are
developed and implemented.
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Apart from it, government also imposed different acts for preservation of the
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environment or environmental protection, consumer protection trade and merchandise

marks protection different ethics and values in business.
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Besides several other objective of a firm, shareholder’ wealth maximization is taken as a

normative goal of the firm or otherwise a firm should set a standard for reasonable profit.
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The principle of maximizing of shareholder’ wealth following timing of returns and risk
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provides a rational guide for running a business and for efficient allocation of resources
in society. “In developing countries the corporation have to determine what the outcome
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would before allocation the resource in the attempt to maximize the social benefit side by
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side in accompanying the maximizing the shareholders wealth (Shrestha, 1980:25-26).
2.2.4 Profit Theories

With the passage of time in the history of economic thought, wide range of theories are
developed and in the process to explain the exact meaning of profit. Each of the many
theories that have been offered, however, trends to focus upon just some small fraction of
the carious aspects of profit (e.g., its source, components or function). Nevertheless, most
profit theories can be classified as one of three major types (Seo, 1988:424).
• Compensatory or Functional Theories
• Frictional and Monopoly Theories
• Technology and Innovation Theories

This classification cannot be all inclusive. Furthermore it should be taken to mean that
one type of theory may not contain elements of other types. It merely points out of the
differences in orientation that have emerged historically in the course of thinking about
profit. For this reason, this classification represents a fair arrangement of the major issues
involved in profit analyzing and convenient starting point for approaching them in
managerial decision making.
a. Compensatory or Functional Theories

This group of theorist holds that economic profits (surplus) are the necessary payments to
the entrepreneur in return for coordinating and controlling production. It is the
entrepreneur who organizes the factors of production into a logical sequence, plans their
efficient combination, and establishes policies to see that production is carried out.
Profits, therefore, are the compensation for fulfilling these functions successfully.
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Functional theories were proposed in the early 19th advent of large corporations. At that
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time, the entrepreneur was regarded as a higher type of laborer, similar in certain ways to
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an individual proprietor. When attempt were made later, however, to apply functional
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theories to modern publicly owned corporations with their separation of ownership and
control, the results appeared confusing and contradictory.
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In the corporate form of business organization, the coordinative function is usually
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delegated by the owners (stockholders) to professional salaried executives. If executive

remuneration is taken to be profits, despite its contractual form, the theory still leaves
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unexplained the residual income of the enterprise that goes to stockholders who exercise
no active control. The only alternative, if functional theories are to be consistent with
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their original definition, is to allocate a share of the entrepreneurial function to

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stockholders. But attempts to do this are in accord with the reality that the corporation is
an organization of active leadership by managers and passive ownership by stockholders.
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With the growing importance of the large corporation as a dominant type of business
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organization in the American economy, functional profit theories lost much of their
usefulness. In their place, a group of friction and monopole theories emerged around the
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turn of the century.

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b. Friction and Monopoly Theories
By 1900, the theory of a stationary economy had very nearly become a complete and
unified system of thought. Against this background, the noted American economist, J.B.
Clark, constructed an economic model that was intended to be a reconciliation of static
theoretical laws and the dynamic world of fact. In modern times, this model has been
called the model of perfect competition.
Fundamental assumptions of the model of perfect competition are the complete mobility
of resources and the freedom of firms to enter and exit the market. Thus the economy is
characterized by a smooth and frictionless flow of resources, with the system
automatically slicking into equilibrium through the free play of market forces. Changes

may occur that cause a departure from equilibrium, but so long as resources are mobile
and opportunities are equally accessible to all economic entities (i.e., knowledge is
perfect), the adjustment to a new equilibrium is accomplished quickly and smoothly. In
this type of economic equilibrium all factors of production receive their opportunity
costs’ and an enterprise’s revenues exactly equal its costs (including the imputed wages
and interest of the owner). Hence no economic surplus or profit residual can result.
c. Technology and Innovation Theories

This group of theories holds that new technology gives rives rise to inventions, and

inventions adapted to business use become innovations. Many inventions, of course, do
not become innovations. But those that do, being dynamic phenomena, upset the
equilibrium of an otherwise static system. The original purpose of the innovation theory
proposed by the late professor Joseph Schumpeter was to show how business cycles
result from these technological disturbances and from successive adaptations to them by
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business. His procedure was to assume a stationary system in equilibrium in which all
economic life is repetitive and goes on smoothly, without disturbance. Into this system a
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shock an innovation is introduced by an enterprising and forward liking entrepreneur who
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foresees the possibility of extra profit. The quietude and intricate balance of the system
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are thus disrupted. The successful innovation prompts a large number of businessmen
(Followers rather than leaders) to plunge ahead and adopt the innovation. In turn such
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mass rushes create and stir up secondary waves of business activity. When the
disturbance finally subsides, the system settles into equilibrium once again only to be
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disturbed later on by another innovation. Economic development thus takes place as a

series of fits and starts (cycles) rather than as a smooth and continuous process.
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Innovation refers broadly to any purposeful change in production methods or consumer

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tastes that output that increases national output more than it increases costs. The increase
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in net output is the profit that comes from innovation. It includes not only new products
such as synthetic fibers but also new organizations, new markets, new promotion and
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new raw materials. It may also include a new way of doing old things or a different
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combination of existing methods to accomplish new things. To an important degree,

innovation has been built into the competitive system complete with research and
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advertising staff.
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The innovation theory focused on the dynamic, uncertain, ever changing nature of
capitalism. It holds that the only limits to human progress are the inherent limits of
human beings themselves.
From the stand point of managerial economics, a theory’s values is not so much
determined by how well it explains the past or even the present, but how well it predicts
the future. For this purpose, the innovation theory is somewhat inadequate because it
cannot foresee whether or when an invention will become an innovation.

2.2.5 Factors Affecting Profit
Profits vary from industry to industry and from businessman to businessman. The greater
the risk and uncertainty in business or industry, the greater are the opportunities for large
profits. Similarly, those businessmen who are temperamentally cautious and are not
willing to assume large risks get a similar margin of profit as compared to those who are
more confident and adventurous. Since risks, profit and losses appear because of changes
and uncertainties in a dynamic society, profits vary from year to year as well.
Profits are likely to be high in industries in which methods of production are constantly

changing so that there is continuous adoption of new techniques;
a. In nascent industries the prospects of which are rather uncertain.
b. In industries in which there is a large gestation period.
c. In industries, in which resources are irrevocably committed to narrowly
specialized tasks.
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Profits are also affected by the level of business activity. It business is brisk and firms are
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operation at their maximum capacity, their average costs would be reduced to the
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minimum while their sales would maximum. This would lead to higher profits. Profits
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would be reduced if the business activity is at low ebb or flow.
2.2.6 Functions of Profit

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The basic function of profit is to provide businessman with an incentive to produce what
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consumers want, and when and where they want it at the lowest feasible cost. This
includes innovation of new products and new method. In fact, the profit motive is the
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kingpin of Peter Drucker, profit serves three main purposes.

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1. Measure of performance
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It measures the met effectiveness and soundness of a business effort. A higher profit is an
indicator that the business is being run successfully and effectively. It is true that profit is
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far from being a perfect measure of business efficiency but it is probably the best
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indicator of the general efficiency of a firm. It is certainly the only one which allows
quick and easy comparison of performance of various firms.
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2. Premium to cover costs of staying in business

Profit is the premium that covers the costs of staying in business replacement,
obsolescence, market and technical risk and uncertainty. Seen from this point of view, it
may be argued that there is no such thing as profit; these are only the costs of being and
staying in business. The management of a business has to provide adequately for this
const by generation sufficient profit.
3. Ensuring supply of future capital

Profit ensures the supply of future capital from innovation and expansion, either directly
by providing the means of self financing out of retained profits, or indirectly through
providing sufficient inducement from new external capital which will optimize the
company’s capital structure and minimize its cost of capital.

The primary goal of a business firm is to ensure its own survival. From this point of view,
the firm must make a profit because profits are indispensable to remaining viable, to
remain alive. Again the firm must have growth because that is the only way it can
perpetuate itself as an institution. And profits are a natural concomitant of the growth and
development of business over time.
2.2.7 Profit and profitability

When these two words, ‘Profit and Profitability’ are presented together most people
confuse because they think these both have same meaning. Those word profitability is

derived form word profit is has bit different meaning than that of profit. Profit can be
taken as the excess of income over expenses or it is the residual valance of earning
expected to be available from total revenue of a time period. It is also taken as the reward
of entrepreneurship for taking risk.
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Whereas word profitability, is the ability or capacity of a firm or any business enterprises
or any entrepreneur to make profit. Profitability can be broken down into ‘profit and
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ability’ which means the capacity to make profit. According to Howard and Upton, “The
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word profitability may be defined as the ability of a give investment to earn return in its
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use”(Howard & Upton, 1961:186). So any instrument if earns return in its use can be
termed as the profitability of that instrument. It is a deviation of the term profit. It can
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also be termed as the basic efficiency measuring rod of success of business enterprise.
Profitability is basically an arc around which the every business revolves.
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W.M. Harper has tried to give distinct explanations between profit and profitability.
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According to him, “The Profitability is a relative measure. It indicates the most profitable
alternative. The profit, in the other hand is an absolute measure. It indicates the overall
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amount of profit earned by transactions”(Harper, 1999:4).

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K.K. Seo has expressed his distinct view on profit and profitability. “Profit in an
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economic sense is the difference between the cash value of the enterprise at the beginning
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and end of the period”(Seo, 1988:433). Like wise “True profitability of any investment or
business operation cannot be determined until the ownership of the investment or
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business has been fully terminated” (Seo, 1988:430).

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So these definitions clearly explain the relationship, similarity and difference between
profit and profitability.
2.2.8 Stability of Profitability

Acquiring profit for the company or any business organization is not a great thing.
Maintaining it or making stable in the long run is one of the most challenging thing that
we all know because there are various internal and external factors that directly and
indirectly affect the profitability of the organization. So to minimize the affect on profit
by these elements and take advantage from them long term and short term study
depending upon the nature of the institution and related field is required through which
we can accurately analyze the situation and then forecast accordingly. For acquiring
stability in the profitability of any organization pre study and research, good internal

management and external management, good plan policy making with the help of experts
and related workgroup, implementation of that policy and plans revision of the
performance of the policy and develop according to the achieved result is required. Same
phases of activities are also applied in the banking sector.
2.3 Review of Thesis

Various experts, authorities and MBA students have conducted a number of researches
relating insurance business. Among them only few are related with the performance of
the insurance business. Although there are many research conducted in insurance field

but we can't find the work in aspect of performance evaluation. Therefore this may be the
first attempt on this subject matter.
A study made on “Evaluating the Financial Performance of the NBL” by Adhikari in

(1993) has analyzed the financial performance of the bank for 10 years. During the period
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of his study he found that the average growth in total deposit to be 2.15 times. The same
for fixed, saving and current deposit were recorded to be 2.19, 2.54 and 1.76 times. The
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cost of deposit was increased by 2.55 times during the period. He also found that average
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growth in loan loss provision was higher than the growth in loans and advances. The
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increase in the income from government securities during the period was satisfactory. He
has also calculated that the bank has been concentrating more on non-banking activities
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as a result of which there are operating losses suffered by the bank 2 times during the
period. He has further recommended carrying out the activities in planned way for the
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better profitability.
Shreedhar Raj Regmi (1997), conducted a study on “Joint Venture Banks in Nepal: A
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Comparative Evaluation on the Financial Performance of NABIL, NIBL and NGBL”.

The study is undertaken to examine and evaluate the financial performance of three joint
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venture banks in Nepal. Namely, Nepal Arab Bank Ltd, Nepal Indosuez Bank Ltd. and
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Nepal Grindlays Bank Ltd. The study, which is descriptive, is conducted using each
bank’s financial statements for the last seven year. As ratios help to summarize a large
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quantity of financial data to make qualitative judgments on the banks, such has been
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used.
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It is seen that the joint venture banks are able to maintain a positive return throughout
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these seven years. Performance of NIBL is better in terms of Return on Deposits, Return
on Net Worth and Return on Assets while Return on Capital Employed needs to be
carefully monitored. The liquidity position of NGBL is very low as compared to the other
two banks. It requires using more of Loans and Advances from customers’ deposits. The
capital structures of the three joint venture banks are highly leveraged, indicating an
extensive use of debt financing.
The fluctuating trends in the customers’ deposits show that the bank needs to step some
charges in handling it. As deposits from the highest form of liabilities for each of the
banks, the more efficient the banks are in managing them, the better will be their
performance.

Another study was conducted by Shree Parsad Gelal, on: "A Comparative Financial
Analysis of Nepal Insurance Company Limited and National Life and General Insurance
Company Limited". Mr. Gelal in his study analyzed only two insurance company's
financial performance among various insurance companies. This study was descriptive
and analytical too. He analyzes the financial position, liquidity and profitability condition
and market situation of NIC and NLGI in his study. After the detailed study and analysis
he concludes that:-
● Premium collection of both life and non-life insurance shows growing
trend of this business in the recent year of the study period. But net claim

paid and investment by insurance company is not increased as increase in
premium collection during the study period.
• The net profit percentage of NIC found better then NLGI but the liquidity
position of both companies is found better.
• Current assets turnover ratio of NLGI followed decreasing trend, which is
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the indication that the efficiency of utilizing current assets deteriorated
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over the period due to negligence of management in utilizing current
assets. The average turnover on current assets of NIC was 24paisa where
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as NLGI return was 15paisa which is not satisfactory. Comparatively
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NIC's current assets turnover was found better then NLGI but the dividend
per share of NLGI is higher then NIC during the study period.
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• Change in insurance premium collection of NIC ranged about 18.04% to
34.64% where as the NLGI premium collection ranged about 17.10% to
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61.97%. So high fluctuation is found in NLGI.

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After the study and analysis Mr. Gelal recommends that;

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• Insurance premium collected should be invested in different sector other

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then HMG bond in order to enhance the life standard of people there by
increasing the insurance premium.
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• The necessity of training to agent is a must before their appointment in

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order to attract the people.

• NIC is advise to minimize the risk lend by reducing debt participation and
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increasing equity proportion even though it is risk oriented institution and

it is advised to improve it's management in controlling operating expenses.
At last he advised to all the insurance companies that they should be socially responsible
rather then premium oriented in order to develop this business and they should introduce
new policies so to make easy for the development of insurance business.
Amogh Siddhi Shakya (2000), performed his study on ‘Evaluation of Financial

Performance of Himalayan Bank Ltd.’. It tried to examine the overall performance of
HBL for five years. The main tools used for analysis purpose was ratio analysis. The
report concluded that the liquidity position of the bank was good. The bank has sufficient
liquidity to meet unanticipated calls on all deposits. The deposits should be utilized more
on productive sectors like government securities and shares of other institutions because
idle assets would do not good. The analysis of the report showed that the bank has good
rate of return through it was not able to keep up generating profit at the rate of increment

of fund. The writer concluded that the bank was managing to have quite stable mixture of
debt and equity financing. He recommended that the bank should try to increase the
utilization of assets of providing loans and advances and should mobilize the total
deposits to generate income and thus, earning the profit.
2.4 Research Gap

Although there may have been several research works on the insurance companies and
banks reviewed above, this study is especially concerned with performance appraisal of
Nepalese insurance companies. This study is different from others in that it deals with the

performance appraisal of four insurance companies comparing life and non-life insurance
companies.
In this study statistical tools like t-statistics, average and co-efficient of variation have
also been used in addition to financial tools to analyze the data.
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CHAPTER - III
RESEARCH METHODOLOGY
3.1 Introduction
In order to start any activity preplanning of way to perform that activity is not only
necessary but is also very important. It is important in the sense that it not only makes us
easy to act and perform but also helps us to obtain our desired results and objectives
within the specified time period. For analyzing the profitability in the context of
insurance companies in Nepal we do have to determine the systematic process that we are

going to use. An introduction relating to this thesis work is made in the first chapter and
relevant literatures are received in the second chapter. The research methodologies,
which are used to analyze to collected data, are mentioned in this chapter.
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3.2 Research Design
The research design is of both descriptive and prescriptive nature. Descriptive research is
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used to compare and to asses the options, behaviors of the firms and describe the situation
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and events occurring during the study period where analytical research is used to find out
the result employing financial as well as statistical tools. For the analytical purpose, the
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annual reports published by the relative banks and other publications of the related banks
published by the banks respectively and Nepal Rastra Bank, Nepal stock Exchange Ltd &
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other agencies, were collected. In this study both descriptive and analytical research
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design is used.
3.3 Nature and Sources of data

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The study is based secondary data as well as primary .The secondary data is collected
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from annual reports, profit an loss accounts, balance sheets, brochures, journals and
articles published in various magazines, newspapers and other internal reports and
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publications of the sample insurance companies and other institutions. Besides it other
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necessary information that is concerned to the topic are also gathered from different
websites, related companies and related agencies like Rastriya Beema Sansthan, Nepal
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Stock Exchange limited, Ministry of Finance, National Planning Commission etc.

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Primary data is collected in the form of interview, Questionnaire and in other forms.
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3.4 Data Processing Procedures

For the purpose of this study, the different data are obtained from different sources,
which are scanned and tabulated under different heads. After tabulation, they are
analyzed by applying both financial and statistical tools.
3.5 Population and Sample Size

According to the statistics of Rastriya Beema Samiti, there are 19 insurance companies
operating under its approval. Among them 4 Insurance company are selected for research
purpose. They are Nepal Life Insurance Company Ltd. and Life Insurance Corporation
Nepal ltd, Himalayan General Insurance Company Ltd. and Neco Insurance Company
Ltd. It covers 21.05% of the total population.

3.6 Period of the study
The study is based on five years financial data of insurance companies i.e. Nepal Life
Insurance Company Ltd. and Life Insurance Corporation Nepal Ltd, Himalayan General
Insurance Company Ltd. and Neco Insurance Company Ltd. starting from 2057/58
BS(year ending mid July 2001) to 2061/62 BS(year ending mid July 2005).
3.7 Method of Analysis

Financial tools and empirical models are to be used in the process of research and study.
Main focus is given to ratio analysis as it is taken as the powerful tool of financial

analysis to pint out the economic and financial position of business unit through which it
can be x-rayed.
3.7.1 Statistical Tools

Statistical tools are the measures or the instruments to analyze the collected data from
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different sources. In statistics, there are numerous statistical tools to analyze data of
various natures. In this study, the researcher has used the following statistical tools to
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analyze the data.
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3.7.1.1 Average (Mean)
An average is a single value related from a group of values to represent them in
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someway, a value, which is supposed to stand for whole group of which it is part, as
typical of all the values in the group (Gupta: 1990; E7-2). There are various types of
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averages. Arithmetic mean (A.M. simple and weighted), median, mode, geometric mean,
harmonic mean, are the major types of averages. The most popular and widely used
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measure representing the entire data by one value is the A.M. The value of the A.M. is
obtained by adding together all the items and by dividing this total by the number of
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items or observations.
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Mathematically, (Gupta; 1992:238)

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Arithmetic Mean (A.M.) is given by, ( X ) =

∑X
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n
Where,
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X = Arithmetic Mean
ΣX =Sum of all the values of the variable X.
n = Number of observations
3.7.1.2 Standard Deviation
The standard deviation ( σ ) measures the absolute dispersion. The greater the standard
deviation, greater will be the magnitude of the deviation of the values from their mean. A
small standard deviation means a high degree of uniformity of the observations as well as
homogeneity of a series and vice versa.

∑X ⎛ ∑X ⎞
2 2
Standard Deviation ( σ ) = −⎜ ⎟
n ⎜ n ⎟
⎝ ⎠
3.7.1.3 Coefficient of Variation

The standard deviation is absolute measures of dispersion: where as the coefficient of
variation (CV) is a relative measure. To compare the variability between two or more
series, CV is more appropriate statistical tool.

σ
Coefficient of Variation (CV) = X ×100
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3.7.1.4. t-Statistics
It is used to test the validity of assumption if the sample size is less than 30. The
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computed value of ‘t’ is compared with the table value of ‘t’ at certain level of
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significance for given degree of freedom. If the calculated value of ‘t’ is greater than its
table(critical) value, the difference is treated as significant at the level but if the
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calculated ‘t’ value is less than its table value, we infer the difference is not significant. In
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this study, ‘t’ values are computed to identify whether difference between life and non
life insurance companies is significant or not in terms of their performance and returns.
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The computed ‘t’ values are compared with its table values at 5 percent and 1 percent
level of significance.
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3.7.2. Financial Tools

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In the research different financial tools are used to find, examine not only the financial
strength but also the weakness of the company. In the study financial tools like ratio
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analysis has been used. These tools are very helpful to find symptoms of the firm.
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3.7.2.1 Ratio Analysis

Ratio analysis is one of the most powerful tools for analyzing the financial performance
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of any firm. Since many diverse groups of people are interested in analyzing the financial
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information to indicate the operating and financial efficiency and growth of the firm.
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These people use ratio to determine those financial characteristics of the firm in which
they are interested. “In the financial analysis, ratio analysis is used for evaluating the
financial position and performance of the firm”(Pandey; 1993; 104).
In this analysis detail analysis on return, expenses, income related ratios have been made
in order to find out the true picture of profitability of the sample banks. Profitability
analysis would be incomplete if these above aspects are not taken into consideration.
1. Return Analysis
a. Return on Assets Ratio
Return on Assets ratio measures the percentage of net profit on total assets employed to
the firm. This ratio is obtained by dividing the net profit by total assets.
Return on Assets

Net Pro it
100
Total Assets
b. Return on Equity Ratio

Return on Equity Ratio shows the percentage of net profit on total Equity. This ratio is
measured by dividing the net profit by total equity amount.
Return on equity ratio =
Net pro it
100
Total Equity

c. Return on Investment Ratio
Return on investment ratio measures the performance of the investment and it indicates
the whole investment portfolio performance. This ratio is obtained by dividing the net
profit by total investment.
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Return on Investment Ratio =
Net Pro it
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100
Total Investment
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d. Return on Insurance Fund Ratio pu
Return on Insurance Fund Ratio measures the percentage of net profit on insurance fund
employed to the firm. This ratio is obtained by dividing the net profit by insurance fund.
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Return on Investment Ratio =

Net Pro it
100
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Total Investment
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2. Income Analysis
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a. Interest Income to total Income Ratio

Interest Income to total Income Ratio measures the percentage of Interest income on total
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income earned to the firm. This ratio is obtained by dividing the interest income by total
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income.
Interest Income to Total Income Ratio =
a
Interest Income
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100
Insurance Fund
b. Interest Income to total Assets Ratio

Interest Income to Total Assets Ratio measures the percentage of Interest income on total
assets employed to the firm. This ratio is obtained by dividing the interest income by total
assets.
Interest Income to Total Assets Ratio =

Interest Income
100
Total Assets
3 Investment Analysis
a. Investment to Total Assets Ratio

Investment to total assets ratio is calculated to know the percentage of investment in
assets. It is calculated as;
Investment to total assets ratio =
100
Total Assets
b. Interest Earned to Total Investment Ratio

This ratio actually reveals the earning capacity of insurance company by investing its all
collected premium and other capital funds. The higher the ratio, higher will be the income

as interest. This ratio is calculated by using the following equation:
Interest earned to total investment ratio =

100
Total Investment
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CHAPTER - IV
DATA PRESENTATION AND ANALYSIS
4.1 Introduction
This chapter deals with the presentation, analysis and interpretation of statistical data to
carry out the research work. Here the study presents the collected data for various
purpose of analysis. The data are analyzed by using various financial and statistical tools.
The analyzed data and results are presented clearly by using tables and graphs. Each of
the results is interpreted in each topic.

4.2 Financial Ratio Analysis
Financial ratio analysis is a tool through which economic and financial position of
organization can be fully X- rayed. It is the indicated quotient of two mathematical
expressions, and as such the relationship between two or more things. Therefore, to find
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out the position of investment in government securities of sample commercial banks, the
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following ratios are examined.
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4.2.1 Return Analysis
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Under this topic, an attempt has been made to analyze the ratio of return on total assets,
total investment and life insurance fund.
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A. Return on Assets Ratio
Return on assets ratio measures the percentage of net profit on total assets employed in
the firm. This ratio is obtained by dividing the net profit by total assets.
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Return on Assets =
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Net Pro it
100
Total Assets
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Comparative analysis of return on assets ratio of the companies under study is shown in
the following table.
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Table No: 4.1

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Return on Assets Ratio

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Life Insurance Non Life Insurance

Rs in Lakhs
Name of 2001 2002 2003 2004 2005 X Name 2001 2002 2003 2004 2005 X
Co. of Co
NLIC - 2.45 2.39 2.93 3.14 2.73 HGI 7.16 6.90 8.83 8.12 4.87 7.18
LIC - 0 0.21 0.87 1.02 0.52 NECO 6.55 5.54 3.45 2.31 0.76 3.72
X - 1.23 1.3 1.9 2.08 X 6.86 6.22 6.14 5.22 2.82
X = 1.63, CV=44.79, SD=0.73 X = 5.45, CV=26.06, SD=1.42
From the Table: 4.1, it is depicted that the return on assets ratio of non-life insurance
companies is more because its average return percentage is higher compared to life
insurance companies. So, it implies that non-life insurance companies were able to utilize
assets more effectively than life insurance companies. Among the life insurance
companies, NLIC is 2.73 percent on average ROA. The maximum ratio is 3.14 percent in

2005 and minimum ratio is 2.39 percent in the year 2003, average ROA of LIC is 0.52
percent. The highest ratio is 1.02 percent in the year 2005 and minimum ratio is 0.21
percent in 2003. Similarly, a non-life insurance company, HGI is 7.18 percent on average
ROA. The maximum ratio is 8.83 in 2003 and minimum ratio is 4.87 percent in 2005,
average ROA of NECO is 3.72 percent and the highest ratio is 6.55 percent in the year
2001 and minimum ratio is 0.76 percent in the year 2005. Higher coefficient of variation
(CV) of life insurance companies show that the ratios are more scattered than non-life
insurance companies in the study period.

With the help of chart: 1, it is seen more clearly.
Figure 4.1
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8
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6 Non Life
Average ROA 4
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2 Life
0
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2001 2002 2003 2004 2005
Year
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Test of Significance
In order to test whether the difference in the average return on assets ratios of each of the
life and non-life insurance companies is significant, t-value is calculated and the results
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of significance test are shown below.

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Table 4.2
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T- test (Each of the Company)

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Variable T. Value D.F Result 5% level of Result 5% level of

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Significance Significance
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ROA 1.86 2 Not Significant Not Significant

The significance test revealed that the result is not significant at both 1 percent and 5
percent levels. In other words, the average ROA of life and non-life insurance companies
do not differ significantly.
Similarly, in order to test whether the difference in the average return on assets ratios of
life and non-life insurance companies for each of the years is significant, t-value is
calculated and the results of significance test are shown below:
Table 4.3
T- test (Each of the Year)
ROA 4.79 8 Significant Significant

The significance test carried out revealed that the result is significant at both 1 percent
and 5 percent levels. In other words, the average return on assets ratios computed for the
two groups (i.e. life and non-life insurance) in each of the years differ significantly.
The performance of listed companies measured in terms of ROA shows that the average
ROA of non-life insurance companies are higher than that of life insurance companies.
The differences in average ratios of ROA computed for each of the life and non-life
insurance companies are not significant but the differences are significant when average

ratios are computed for each of the years. The performance of non-life insurance
companies thus can be considered as better than that of life insurance companies.
B. Return on Equity Ratio

Return on equity ratio shows the percentage of net profit on total equity. This ratio is
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measured by dividing the net profit by total equity amount.
Net profit
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Return on equity ratio= ×100
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Total Equity
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Comparative analysis of Return on Equity ratio of the companies is presented in the
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following table: 4.4.
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Table 4.4
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Return on Equity Ratio

Life Insurance Non Life Insurance Rs in Lakhs
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Name 2001 2002 2003 2004 2005 X Name 2001 2002 2003 2004 2005 X
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of of Co
Co.
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NLIC 0 3.65 5.68

11.44 15.68 7.29 HGI 30.33 25.33 38.33 39.67 37 34.13
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LIC - 0 0.32
2.12 3.88 1.58 NECO 23.22 19.2 12 8.8 3 13.24
- 1.83 3.00
6.78 9.78 26.77 22.27 25.17 24.24 20
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X X
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X = 4.28, CV=82.48, SD=3.53 X = 23.69, CV=9.92, SD=2.35
From the Table: 4.4, it is found that the return on equity ratio of non-life insurance
companies is 23.69 percent which is higher than the life insurance companies’ ratio of
4.28 percent. The maximum ratio of life insurance companies is 9.78 percent in 2005 and
the minimum is 1.83 percent in 2002. Out of life insurance companies, average ROE of
NLIC is 7.29 percent. The maximum and minimum ratios of NLIC are 15.68 in 2005 and
3.65 in 2002 respectively. Similarly, the maximum ratio of non-life insurance companies
is 26.77 percent in 2001 and minimum is 20 in 2005. Average ROE of HGI is 34.13
percent. The maximum and minimum ratios of HGI are 39.67 percent in 2004 and 30.33
percent in 2001, and average ROE of NECO is 13.24 percent. This is less in comparison
to HGI. The maximum and minimum ratios of NECO are 23.22 percent in 2001 and 3
percent in 2005. The higher standard deviation and CV shows the greater variability in
the ratios of life insurance companies.

With the help of Figure: 2, it is seen more clearly.
Figure: 2
Average REA 40

30 Non Life
20
10 Life
0
2001 2002 2003 2004 2005
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Year
ra
ib
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In order to test whether the difference in average ROE ratios of each of the life and non
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life insurance companies is significant, t-value is calculated and the results of
significance test are shown below.
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Table 4.5
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ROE 1.79 2 Not Significant Not Significant

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percent levels. In other words, the average return on equity ratio of life and non-life
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insurance companies does not differ significantly.

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Similarly, in order to test whether the difference in average ROE ratios of life and non-
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life insurance companies for each of the years is significant, t-value is calculated and the
results of significance test are shown below:
Table 4.6
ROE 9.16 8 Significant Significant
The significance test revealed that the result is significant at both 1 percent and 5 percent
levels. In other words, the average return on assets ratios computed for the life and non-
life insurance companies in each of the years differ significantly.

The performance of listed companies measured in terms of ROE shows that the average
ROE of non-life insurance companies are higher than that of life insurance companies.
The difference in average ratios of ROE computed for each of the life and non-life
insurance companies are not significant but the difference are significant when average
ratios are computed for each of the years. All of these indicate that the performance of
non-life insurance companies, on an average, is better than the performance of life
insurance companies.
C. Return on Investment Ratio

It is the rate of average investment income. It shows the proportion of return with respect
to investment. It is just the calculation of average rate of return on investment of insurers,
for a particular year in aggregate. This ratio shows the performance of the investment and
it indicates the whole investment portfolio performance. Here the total investment
consists of all the investment in optional and compulsory sectors and the net income
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carried from profit and loss account. This ratio is obtained by dividing the net profit by
total investment.
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Return on Investment Ratio
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Net Profit
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= ×100
Total Investment pu
Comparative analysis of Return on Investment Ratio of the companies under study are
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shown in the following table: 4.7

Table 4.7
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Name 2001 2002 2003 2004 2005 X Name 2001 2002 2003 2004 2005 X
D
of of Co
Co.
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NLIC 0 2.64 2.93 3.69 4.20 2.69 HGI 11.09 11.37 15.85 13.08 10.01 12.17
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LIC - 0 0.22 0.94 1.11 0.57 NECO 12.51 9.57 6.05 4.41 1.49 7.53
0 1.32 1.58 2.32 2.66 11.8 10.47 10.95 8.75 5.75
a
X X
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X = 1.58, CV=58.86, SD=0.93 X = 9.54, CV=22.43, SD=2.14
From the Table: 4.7, it is found that the average return on investment ratio of non-life
insurance companies are 9.54 percent which is higher than that of life insurance
companies which is1.58 percent. The maximum ratio of life insurance companies is 2.66
percent in 2005 and the minimum is 1.32 percent in 2002 but the maximum and
minimum ratio of non-life insurance companies are11.8 percent in 2001 and 5.75 percent
in 2005. It indicates that the non-life insurance return on investment fluctuates more
than that for life insurance. Among the life insurance companies, average return of NLIC
is 2.69 percent and LIC is 0.57 percent. Similarly, non-life insurance companies of HGI
average are 12.17 percent and NECO average is 7.53 percent. Comparatively the ratios of
life insurance are more scattered than non-life insurance companies, which are shown by
higher CV of the life insurance companies.

Figure: 3 help to show these facts more clearly.
Figure 3
15
10 Life
Average on ROI
5 Non Life
0

2001 2002 2003 2004 2005
Year
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In order to test whether the difference in the average return on investment ratios of each
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of the life and non-life insurance companies are significant, t-value is calculated and the
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results of significance test are shown below.
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Table 4.8pu
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ROI 3.12 2 Not Significant Not Significant
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percent levels. In other words, the average ROI of life and non-life insurance companies
D
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Similarly, in order to test whether the difference in the average return on investment
ratios of life and non life insurance companies for each of the year is significant, t-value
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is calculated and the results of significance test are shown below:

a
Table 4.9
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ROI 6.83 8 Significant Significant
levels. In other words, the average return on investment ratios computed in each of the
years differs significantly.
The performance of listed companies measured in terms of ROI shows that the average
ROI of non-life insurance companies is higher and the CV is less than that of life
insurance companies. The difference in average ratios of ROI computed for each of the
life and non-life insurance companies is not significant but the difference is significant
when average ratios are computed for each of the years. The performance of non-life

insurance companies thus can be considered as better than that of life insurance
companies.
D. Return on Insurance Fund Ratio

Return on insurance fund ratio measures the percentage of net profit on insurance fund
employed in the firm. Since the companies under study have not separated the profit from
their insurance fund, this ratio is very significant to understand the percentage of net
profit. This ratio is obtained by dividing the net profit by insurance fund.
Net Profit

Return on Investment Ratio = ×100
Total Investment
Comparative analysis of return on insurance fund ratio of the companies under study is
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shown in the following table:
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Table 4.10
Return on Insurance Fund Ratio
ib
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Name 2001 2002 2003 2004 2005 X Name 2001 2002 2003 2004 2005 X
of of Co
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Co.
NLIC 0 9.69 6.36 5.79 4.46 5.26 HGI 83.49 55.88 69.28 61.98 48.26 63.
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78
LIC - 0 0.64 1.57 1.44 0.73 NECO 76.82 56.14 39.73 25.88 7.04 41.
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0 4.85 3.5 3.68 2.95 80.16 56.01 54.51 43.93 27.65
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X X
X = 2.10, CV=77.14, SD=1.62 X = 52.45, CV=32.72, SD=17.16
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From the Table: 4.10, it is depicted that the return on insurance fund ratio of non-life
insurance companies is 52.45 percent on average and the maximum ratio is 80.16 percent
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in 2001 and minimum ratio is 27.65 percent in 2005.Similarly for life insurance
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companies, it is 2.10 percent on average and the maximum ratio is 4.85 percent in 2002
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and the minimum ratio is 2.95 percent in 2005. Out of life insurance companies, NLIC is
5.26 percent on average. The ratio is 0 in 2001 since it has not earned profit in that year.
The maximum ratio is 9.69 percent in 2002 and the ratios are decreasing thereafter and
the LIC is 0.73 percent on average. LIC also has not earned profit in its first operating
year 2002. The highest ratio is 1.57 percent in the year 2004, while the minimum ratio is
0.64 percent in 2003. Similarly a non-life insurance company, HGI is 63.78 percent on
average. The maximum and minimum ratios are 83.49 percent in 2001 and 48.26 percent
in 2005 respectively. NECO is 41.12 percent on average. The highest ratio is 76.82
percent in the year 2001, while the minimum ratio is 7.04 percent in 2005.
Comparatively, the ratios of life insurance companies are more scattered than non-life
insurance companies, which is shown by higher CV of the life insurance companies.
Following Figure: 4 help to show these facts more clearly.

Figure 4
100
Life
Average RIFR 50
Non Life
0
2001 2002 2003 2004 2005

Year
In order to test whether the difference in average return on insurance fund ratios of each
ry
of the life and non life insurance companies is significant, t-value is calculated and the
ra
results of significance test are shown below.
ib
Table 4.11
sL
pu
ROIF 4.36 2 Significant Not Significant
am
The significance test revealed that the result is not significant at 1 percent level but it is
significant at 5 percent level.
C
Similarly, in order to test whether the difference in average return on insurance fund
ev
ratios of life and non life insurance companies for each of the years is significant, t-value
D
Table 4.12
er

nk

a
ROIF 5.84 8 Significant Significant

Sh
levels. In other words, the average return on insurance fund ratio computed in each of the
years differs significantly.
The performance of listed companies measured in terms of return on insurance fund ratio
shows that the average return on insurance fund ratios of non-life insurance is higher than
that of life insurance companies. The difference in average ratios of return on investment
fund computed for each of the life and non-life insurance companies is significant at 5
percent level but is not significant at 1 percent level. The difference in average ratios of
return on investment fund computed for each of the years is significant at both 5 and 1
percent level.
4.2.2 Income Analysis

Income is the main factor, which affects the profitability significantly. In this section, an
attempt has been made to analyze the various ratios regarding the income of the insurance
companies under study.
A. Interest Income to Total Income Ratio
Interest income to total income ratio measures the percentage of interest income on total
income earned to the firm. This ratio is obtained by dividing the interest income by total
income.
Interest Income
Interest Income to Total Income Ratio= ×100

Insurance Fund
Comparative analysis of interest income to total income ratio of the companies under
study is shown in the following table.
Table 4.13
ry
Interest Income to Total Income Ratio
ra
Name 2001 200 200 200 200 Name 200 200 200 200 200
ib
X X
of Co. 2 3 4 5 of 1 2 3 4 5
sL
Co
NLIC 19.5 16.0 12.8 11.5 11.8 14.38 HGI 63 36.5 27.6 28.1 32.7 37.62
pu
7 3 8 6 5 4 8 6 3
LIC - 23.0 11.6 7.28 5.80 9.5 NEC 33.3 27.7 33.3 39.7 43.0 35.44
am
1 3 4 O 3 1 3 8 6
0 19.5 12.2 9.42 8.83 48.1 32.1 30.5 33.9 37.9
C
X X
2 6 7 3 1 7 0
ev
X = 10.1, CV=62.18, SD=6.28 X = 36.54, CV=17.30, SD=6.32

D
From the Table 4.13, it is depicted that interest income to total income ratio of life
er
insurance companies is 10.1 percent on average. The maximum ratio is 19.52 percent in
nk
the year 2002 and the ratio decreases thereafter. Among the life insurance companies,
NLIC is 14.3 percent on average. The maximum ratio is 19.57 percent in 2001 and the
a
minimum ratio is 11.56 percent in 2004. The ratios have decreasing trend and average of
Sh
LIC is 9.54 percent. The highest ratio is 23.01 percent in the year 2002, while the
minimum ratio is 5.80 percent in 2005. The ratio of LIC is also in decreasing order.
Similarly, interest income to total income ratio of non-life insurance companies is 36.54
percent on average. Among these, HGI is 37.62 percent on average. The maximum ratio
is 63 and the minimum is 27.68 percent in 2001 and 2003 respectively, average of NECO
is 35.44 percent. The highest ratio is 43.06 percent in 2005, while the minimum ratio is
27.71 in 2002. Comparatively, the ratios of non-life insurance companies are more
homogeneous than those of life insurance companies, which are shown by lower CV of
the non-life insurance companies. Following figure: 5 help to show these facts more
clearly.
Figure 5

60
40 Life
Average IITIR
20 Non Life
0
2001 2002 2003 2004 2005

Year
In order to test whether the difference in the mean interest income to total income ratios
ry
of each of the life and non-life insurance companies is significant, t-value is calculated
ra
and the results of significance test are shown below.
ib
Table 14
sL
pu
IITI 9.96 2 Significant Significant
am
The significant test revealed that the result is significant at both 1 percent and 5 percent
levels. In other words, the average IITI of life and non-life insurance companies do not
C
differ significantly.
ev
Similarly, in order to test whether the difference in the mean interest income to total
D
income ratios of life and non-life insurance companies for each of the year is significant,
er
t- value is calculated and the results of significance test are shown below:
nk
Table 4.15
a

Sh
IITI 5.93 8 Significant Significant
levels. In other words, the average IITI of life and non-life insurance companies for each
of the years differ significantly.
The performance of listed companies measured in terms of IITI shows that the average
IITI of non-life insurance companies is higher than that of life insurance companies. The
difference in average ratios of IITI computed for each of the life and non-life insurance
companies is significant at both 1 and 5 percent levels and the difference is also
significant when average ratios are computed for each of the years.

B. Interest Income to Total Assets Ratio
Interest income to total assets ratio measures the percentage of interest income on total
assets employed in the firm. This ratio is obtained by dividing the interest income by total
assets.
Interest Income
Interest Income to Total Assets Ratio= ×100
Total Assets

Comparative analysis of interest income to total assets ratio of the companies under study
is shown in the following Table: 16.
Table 16
Interest Income to Total Assets Ratio
ry
Name 2001 200 200 200 200 X Name 200 200 200 200 200 X
of 2 3 4 5 of Co 1 2 3 4 5
ra
Co.
ib
NLIC 1.28 5.53 4.66 4.4 4.9 4.17 HGI 4.95 5.18 4.76 4.71 3.16 4.56
sL
2 9
LIC - 5.39 5.42 5.0 4.7 4.1 NECO 4.41 3.98 4.43 3.78 3.00
pu 3.92
2 9 2
X 1.28 5.46 5.04 4.7 4.8 X 4.68 4.58 4.60 4.25 3.08
am
2 9
CV= 35.6, SD=1.52, X = 4.28 CV=14.15, SD=0.6,
C
X = 4.24
ev
From the Table: 16, it is depicted that interest income to total assets ratio of life insurance
D
companies is 4.28 percent on average. The maximum ratio is 5.46 percent in the year
er
2002 and the minimum ratio is 1.28 percent in the year 2001. Out of these companies,
average of NLIC is 4.17 percent. The maximum ratio is 5.53 percent and the minimum
nk
ratio is 1.28 percent, average of LIC percent is 4.12. The maximum ratio is 5.42 percent
a
and the minimum ratio is 4.79 percent. Similarly, interest income to total assets ratio of
Sh
non-life insurance companies is 4.24 percent on average which is less than that of the life
insurance companies. The maximum ratio is 4.68 percent in the year 2001and the
minimum ratio is 3.08 percent in the year 2005. Among these companies, average of HGI
is 4.56 percent. The maximum ratio is 5.18 percent and the minimum ratio is 3.16
percent, average of NECO is 3.92 percent. The maximum ratio is 4.43 percent and the
minimum is 3.00 percent. Comparatively the ratios of life insurance companies are more
dispersed than that of non-life insurance companies, which is shown by greater CV and
SD of the life insurance companies.
With the help of Figure: 6, these facts are seen more clearly.

Figure 6
6
4 Life
Average IITAR 2 Non Life
0
2001 2002 2003 2004 2005

Year
Test of significance
In order to test whether the difference in the average return on interest income to total
ry
assets ratios of each of the life and non-life insurance companies is significant, t-value is
ra
calculated and the results of significance test are shown below.
ib
Table 17
sL
pu
IITA 0.09 2 Not Significant Not Significant
am
The significant test revealed that the result is not significant at both 1 percent and 5
percent levels. In other words, the average IITA of life and non-life insurance companies
C

ev
Similarly, in order to test whether the difference in the average return on interest income
D
to total assets ratios of life and non-life insurance companies for each of the years is
er
significant, t-value is calculated and the results of significance test are shown below:
nk
Table 18
a
Variable T. Value D.F Result 5% level of Significance Result 1% level of

Sh
Significance
IITA 0.04 8 Not Significant Not Significant
percent levels. In other words, the average return on interest income to total assets ratios
computed for the two companies in each of the years differ significantly.
The analysis of performance of listed companies in terms of IITA shows that the average
IITA of life insurance companies are higher than that of non-life insurance companies.
The differences in average ratios of IITA computed for each of the life and non-life
insurance companies are not significant and the differences are also not significant when
average ratios are computed for each of the years. The performance of life insurance
companies can be considered as better than that of non-life insurance companies, which is
shown by greater mean values of life insurance companies. Although non-life insurance

company HGI has higher percent the non-life insurance company NECO has lower
percent of mean value than that of life insurance companies.
4.2.3 Investment Analysis

Investment operations are important in business operation. Insurers are required to
generate reserves for claims that may arise. It is essential that insurance companies invest
these funds rationally with the combined objectives of liquidity, maximization of yields
and safety.

A. Investment to Total Assets Ratio
Investment of insurance companies include investment made in HMG securities &
debentures, bank fixed deposit account, fixed deposit on finance companies, shares, real
estate, short term investments, mutual funds and others. Total assets of insurance
company include current assets, fixed assets and others. Investment to total assets ratio is
ry
calculated to know the percentage of investment in assets. It is calculated as;
ra
Total Investment
ib
Investment to total assets ratio= ×100
sL
Total Assets
pu
Comparative analysis of total investment to total assets ratio of the companies under
study is shown in the following Table: 19
am
Table 19
C
Investment to Total Assets Ratio

ev
Name 2001 200 200 200 200 X Name 2001 200 200 200 200 X
D
of 2 3 4 5 of Co 2 3 4 5
Co.
er
NLIC 85.2 92.8 81.5 79. 74. 82.8 HGI 64.5 61.0 55.8 62.3 48.6 58.5
nk
7 7 5 8 9 9 8 6 7
LIC - 84.0 93.3 92. 92. 90. NEC 52.6 57.7 57.6 52.9 51.4 54.4
a
4 7 1 1 4 O 5
Sh
X 85.2 88.4 87.4 85. 83. X 58.5 59.3 56.7 57.6 50.0
7 2 7 8 3 6 6 4 5
X = 86.07, SD=1.75, CV=2.03 X =56.47, SD=3.33, CV=5.90
From the Table 19, it is depicted that the investment to total assets ratio of life insurance
companies is 86.07 percent on average. The maximum ratio is 88.42 percent in the year
2002 and the minimum ratio is 83.30 percent in the year 2005. Among the life insurance
companies, average of NLIC is 82.80 percent. The maximum and minimum ratios are
92.80 and 74.80 percent respectively while the average of LIC is 90.40 percent. The
maximum and minimum ratios are 93.37 and 84.04 percent respectively. Similarly,
average ITAR of non-life insurance companies are 56.47 percent. The maximum ratio is
59.36 percent in the year 2002 and the minimum ratio is 50.05 percent in the year 2005.
Among the non-life insurance companies, average of HGI is 58.57 percent. The

maximum and minimum ratios are 64.50 and 48.66 percent respectively while the
average of NECO is 54.45 percent. The maximum and minimum ratios are 57.70 and
51.40 percent respectively.
With the help of the Figure 7, this can be shown more clearly.
Figure 7
Investment in Total Assets Ratio
100

80
Average 60 Life
40 Non Life
20
0
ry
2001 2002 2003 2004 2005
ra
Year
ib
In order to test whether the difference in the average investment to total assets ratios of
sL
each of the life and non-life insurance companies is significant, t-value is calculated and
the results of significance test are shown below:
pu
Table 20
am

C
ITAR 6.88 2 Significant Not Significant

ev
D

er
Similarly, in order to test whether the difference in the mean investment to total assets
nk
ratios of life and non-life insurance companies for each of the year is significant, t-value
a

Sh
Table 21
ITAR 15.74 8 Significant Significant
levels. In other words, the average ITAR computed for the two companies in each of the
years differ significantly.
B. Interest Earned to Total Investment Ratio

It is an average of interest earned on total investment. This ratio represents the return
from interest in total investment. Total interest earned to total investment ratio reflects the
extent to which insurer is successful in earning interest as major income on total

investment. This ratio actually reveals the earning capacity of insurance company by
investing its all collected premium and other capital funds. The higher the ratio, higher
will be the income as interest. This ratio is calculated by using the following equation:
Total Interest Earned

Interest earned to total investment ratio = ×100
Total Investment
From this ratio particular company’s interest earned on total investment can be known. It

is shown in the following Table: 22
Table 22
Interest Earned to Total Investment Ratio
Name 2001 200 200 200 200 X Name 200 200 200 200 200 X
ry
of 2 3 4 5 of Co 1 2 3 4 5
Co.
ra
NLIC 1.5 5.96 5.71 5.5 6.6 5.08 HGI 7.66 8.5 8.48 7.56 6.52 7.74
ib
6 7
sL
LIC - 6.41 5.80 5.4 5.2 4.5 NECO 8.4 6.94 7.69 7.13 5.81 7.19
5 1 8 pu
X 1.5 6.19 5.76 5.5 5.9 X 8.03 7.72 8.09 7.35 6.17
1 4
am
X = 4.98, SD=1.75, CV=35.14 X = 7.47, SD=0.7, CV=9.37

C
According to Table: 22, it is found that interest earned to total investment ratio of non-life
ev
insurance companies is higher because its mean interest earned is higher in comparison
to that of life insurance companies. Average IETIR of life insurance companies are 4.98
D
percent. The maximum ratio is 6.19 percent in the year 2002 and the minimum ratio is
er
1.5 percent in the year 2001. Among the life insurance companies, IETIR of NLIC is 5.08
percent on average. The maximum ratio is 6.67 percent and minimum ratio is 1.50
nk
percent, IETIR of LIC is 4.58 percent on average. The highest ratio is 6.41 percent, while
a
the minimum ratio is 5.21 percent. Similarly, average IETIR of non-life insurance
Sh
companies is 7.47 percent. The maximum ratio is 8.09 percent in the year 2003 and the
minimum ratio is 6.17 percent in the year 2005. Among the non-life insurance
companies, IETIR of HGI is 7.74 percent on average. The maximum ratio is 8.5 percent
and the minimum ratio is 6.52 percent, IETIR of NECO is 7.19 percent on average. The
highest ratio is 8.4 percent, while the minimum ratio is 5.81 percent. Comparatively, the
ratios of life insurance companies are more dispersed than that of non-life insurance
companies, which are shown by greater CV and SD of the life insurance companies.
With the help of the Fugure: 8, these facts can be seemed more clearly.

Figure 8
16
14
12
10
8 LIC
6 NLIC

4
2
0
2001 2002 2003 2004 2005
ry
ra
In order to test whether the difference in the mean interest earned to total investment
ib
ratios of each of the life and non-life insurance companies is significant, t-value is
calculated and the results of significance test are shown below:
sL
Table 23
pu
am
IETIR 6.45 2 Significant Not Significant
C
ev

D
Similarly, in order to test whether the difference in the mean interest earned to total
er
investment ratios of life and non-life insurance companies for each of the years is
nk
significant, t-value is calculated and the results of significance test are shown below:
Table 24
a

Sh

IETIR 2.64 8 Significant Not Significant
significant at 5 percent level. In other words, the mean values of IETIR of two groups
differ significantly at 5 percent level, but the difference is not significant while it is tested
at 1 percent level.
The performance of listed companies measured in terms of interest earned to total

investment ratio shows that the average IETIR of non-life insurance companies is higher
than that of life insurance companies and the SD and CV are less than that of the life
insurance companies which indicates that the non-life insurance companies are

performing better than the life insurance companies. The mean values of IETIR
computed for each of the life and non-life insurance companies differ significantly at 5
percent level but they do not differ significantly at 1 percent level. The difference in the
mean values of IETIR is also significant at 5 percent level and it is not significant at 1
percent level when the mean values are computed for each of the years. All of these
indicate that the performance of non-life insurance companies is better than the
performance of life insurance companies.
4.3 Major Findings of the Study

It is depicted that the return on assets ratio of life insurance companies are 1.63 and non-
life insurance companies are 5.45 percent on average. The ratios of life insurance
companies are more scattered than that of non-life insurance companies in the study
period.
ry
It is depicted that the return on equity ratio of life insurance companies are 4.28 and non-
ra
life insurance companies are 23.69 percent on average. Comparatively, the ratios of life
ib
insurance companies are more scattered than that of non-life insurance companies.
sL
It is found that the average return on investment ratio of life insurance companies are
pu
1.58 and that of the non-life insurance companies are 9.45 percent. The higher CV shows
the greater variability in the ratios of life insurance companies.
am
It is found that return on insurance fund ratio of life insurance companies are 2.10 and
C
non-life insurance companies are 52.45 percent on average. Comparatively, the ratios of
life insurance are more scattered than that of the non-life insurance companies.
ev
It is depicted that interest income to total income ratio of life insurance companies are
D
10.1 percent on average. Similarly, that ratio for non life insurance companies is 36.54
percent. The ratios of non-life insurance companies are more homogeneous than that of
er
life insurance companies.

nk
It is depicted that interest income to total assets ratio of life and non-life insurance
a
companies are 4.27 and 4.24 percent on average respectively. Comparatively, the ratios
Sh
of life insurance are more dispersed than that of the non-life insurance companies.
It is depicted that investment to total assets ratio of life and non-life insurance companies
are 86.07 and 56.47 percent on average respectively. Comparatively, the ratios of life
insurance are more dispersed than that of the non-life insurance companies.
It is found that interest earned to total investment ratio of life insurance companies are
4.98 percent on average. Similarly, that of the non-life insurance companies is 7.47
percent. Comparatively, the ratios of non-life insurance companies are more dispersed
than that of the life insurance companies.

CHAPTER - V
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary
Insurance has been introduced to safeguard the interest of people from uncertainties by
providing certainty of payment at a given contingency. According to nature,
characteristic and objective of the insurance company, they are also refereed to as
financial intermediaries. In the modern society and 21st century's business age it plays

vital role through risk bearing and providing certainty. Therefore insurance is an assist of
a world's economy. It is a contract by which one party for a compensation called
premium, assumes particular risk of the other party and promises to pay him or his
nominee a certain sum of money on a specified contingency. The terminology used for
taking risk or assuring to cover loss is known as insurance. There are two types of
ry
insurance business i.e. life and non-life insurance business.
ra
ib
Life insurance is a method by which a group of people may cooperate to ease the loss
resulting from the premature death of members of the group. In general life insurance is
sL
the contract under which the insurer undertakes the responsibility to pay a certain sum of
money either on the death of the insured or on the expiry of fixed period in consideration
pu
of premium. Life insurance is means of securing and investment.
am
The other insurance, other then life insurance is called Non-life or general insurance,
which is means of economic security, for e.g. marine insurance, fire insurance, aviation
C
insurance etc.
ev
Basically, the entire research work has focused on the performance evaluation of
D
insurance companies. For the study, two life and two non life insurance companies are
er
taken as sample and analyzed their performance. Five years secondary data are taken for
the study. The general objective of the study is to evaluate the performance of the
nk
insurance companies. To meet the research objectives this study is divided into five
a
chapters.
Sh
This study suffers from different limitations; it considers two life and two non life
insurance companies as sample out of total insurance companies in Nepal. Time and
resources are the constraints of the study. Therefore the study may not be generalized in
all case and accuracy depends upon the data collected and provided by the organization.
5.2. Conclusion
This study aimed at studying the performance of Nepal life insurance co. Ltd, and life
insurance corporation (Nepal) Ltd, HGI and Neco insurance. For the study purpose
financial and statistical tool were used. Based on the research findings, following
conclusions are derived.

Return on investment ratio as well as return on assets ratio of life insurance companies is
less than 3 percent, which is very minimum but the non life insurance companies are
greater than 3 percent. However, the difference in the mean values of both ratios
computed for each of the life and non life companies are not significant. Similarly, the
difference in the mean values of both ratios computed for life and non life companies in
each of the years are significant.
It is found that the return on equity ratio of non life insurance companies is 23.69 and the
life insurance companies are 4.28 percent only. The difference in the mean value of

return on equity ratio of each of the life and non life insurance companies are also not
significant but the ratio of life and non life insurance companies in each of the years are
significant.
It is found that Return on insurance fund ratio of life insurance companies is 2.10 percent
ry
on average. Similarly, the ratio of non life insurance companies is 52.45 percent.
Comparatively the ratio of life insurance companies is more scattered than non life
ra
insurance companies. However the difference in the mean value of return on insurance
ib
fund ratio of each of the life and non life insurance companies is significant at 5 percent
sL
level but insignificant at 1 percent level. Similarly, the difference in the mean value of
life and non life insurance companies in each of the years are significant at both 1 percent
pu
and 5 percent levels.
am
The proportion of interest income to total income ratio of life and non life insurance
companies is less than the non life insurance companies but the interest income to total
C
assets ratio of life insurance companies is greater than non life insurance companies.
However the difference in the average interest income to total income ratio of each of the
ev
companies and each of the years both are significant at both 1 percent and 5 percent
D
levels. But the interest income to total assets ratio of each of the companies and each of
the years both are insignificant at 1 percent and 5 percent levels.
er
nk
It is found that interest earned to total investment ratio of life insurance is less than the
non life insurance companies. But the investment to total assets ratio of life insurance is
a
greater than the non life insurance companies.

Sh
5.3 Recommendations
This study has reflected that the investment pattern of HGI, NL&GI and NECO
insurance. Since the insurance directly related to premium collection and investment
aspects, there will be the ultimate bearer of the soundness and weakness of their
functioning as financial institution. They have also barrier from government rules and
regulation and through other relevant side these corrective action needs to introduced.
Some recommendations have been made for improvement of the investment portfolio of
sample insurance company. These recommendations have been summarizing below:-
The entire insurer should follow the investment policy and improve its management

Insurance companies are found investing in HMG securities & Debentures, Bank &
Finance co. fixed deposit account, Shares and Miscellaneous but, they are not found
investing in real estate, hydro power etc. so, insurance companies are suggested to search
for new area of profitable investment like hydro-power, housing companies etc.
Insurance companies are also suggested to invest in profitable sector to earn profit. All
insurance companies seem to be risk avoiding while making their investment. Therefore,
they are making secured investment with lower rate of return. Thus, they are suggested to
change their investment policy. They must introduce the portfolio management system to

increase their earning from investment without increasing the degree of risk by
diversification of risk.
ROA is found unsatisfactory so, insurance companies are suggested to improve earning
of the company by utilizing the ideal assets in profitable portfolio.
ry
Life insurance companies are poor performance in profitability ratios in comparison with
ra
non life insurance companies, so it is suggested to increase profitability by investing the
ib
fund in productive sector.
sL
From the entire analysis mentioned above findings seems that non life insurance is more
pu
fluctuation of investment and net income trend too. So, the entire insurer should try to
remove that type of fluctuation on respective aspect.
am
The insurance act and regulation should be clear enough to guide the investment-related
matter to a direction. The regulatory limits relating the investment should be promptly
C
changed according to the change in over all macro economic and money capital market
condition.
D ev
The rules and regulation relating the investment aspect of life and non-life insurance
must be differentiating according to the differentiating nature of the future use of the
er
invested funds, occurrence of the invertible funds, and the invisibility of such funds.
a nk
Sh

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ra
Shrestha, M.K. (1980 B.S). Financial management theories and
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am
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ev
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er
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nk
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Sh
Official Publication
Annual Report of NLIC Ltd. From F/Y 2057 to 2062.
Annual Report of LIC Ltd. From F/Y 2057 to 2062.
Annual Report of HGI Co. Ltd. From F/Y 2057 to 2062.
Annual Report of NECO Insurance Co. Ltd. From F/Y 2057 to 2062.

Appendix-I
(Rs in Lakh)
Year 2001 2002 2003 2004 2005 Mean SD CV

Net

Profit 73 142 286 392
Total
Assets 2111 2985 5948 9752 12491
ry
NLIC Ratio 0 2.45 2.39 2.93 3.14 2.18 1.13 0.5182
ra
Net
ib
Profit 8 53 97
sL
Total Assets 2356 3876 6115 9474
LIC Ratio 0 0
pu
0.21 0.87 1.02 0.52 0.43 0.8202
Net
am
Profit 91 76 115 119 111

C
Total
ev
Assets 1271 1101 1301 1465 2277

D
HGI Ratio 7.16 6.9 8.83 8.12 4.87 7.44 1.43 19.22
er
Net
nk
Profit 116 96 60 45 15
a
Total
Sh
Assets 1769 1734 1736 1902 1965

NECO Ratio 6.55 5.54 3.45 2.31 0.76 4.5 2.26 50.22

Appendix-II
(Rs in Lakh)
Year 2001 2002 2003 2004 2005 Mean SD CV

Net

Profit NA 73 142 286 392
Total
Equity 2000 2000 2500 2500 2500
0 3.65 5.68 11.44 15.68 7.29 5.6 0.7682
ry
NLIC Ratio
ra
Net
ib
Profit 8 53 97
sL
Total
Equity 2000
pu
2500 2500 2500
LIC Ratio 0 0 0.32 2.12 3.88 1.58 1.55 0.981
am
Net
C
Profit 91 76 115 119 111

ev
Total
D
Equity 300 300 300 300 300

er
HGI Ratio 30.33 25.33 38.33 39.67 37

nk
Net
a
Profit 116 96 60 45 15
Sh
Total
Equity 500 500 500 500 500
NECO Ratio 23.2 19.2 12 8.8 3

Appendix-III
(Rs in Lakh)
Year 2001 2002 2003 2004 2005 Mean SD CV

Net Profit 0 73 142 286 392

Total
Investment 1800 2770 4852 7754 9338
NLIC Ratio 0 2.64 2.93 3.69 4.2 2.69 1.45 0.5391
0 8 53 97
ry
Net Profit
ra
Total
ib
Investment 0 1980 3619 5628 8719
sL
LIC Ratio 0 0 0.22 0.94 1.11 0.57 0.47 0..8263
Net Profit 91 76
pu
115 119 111
Total
am
Investment 830 673 727 914 1108

C
HGI Ratio 10.96 11.29 15.82 13.02 10.02 12.17 2.23 18.32
ev
Net Profit 116 96 60 44 15

D
Total
er
Investment 930 1000 1000 1006 1011

nk
NECO Ratio 12.47 9.6 6 4.37 1.48 7.53 3.65 48.47

a
Sh

Appendix-IV
(Rs in Lakh)
Year 2001 2002 2003 2004 2005 Mean SD CV

Net Profit NA 73 142 286 392

Insurance
Fund 80 753 2232 4938 8784
NLIC Ratio 0 9.69 6.36 5.79 4.46 5.26 3.14 0.5967
8 53 97
ry
Net Profit
ra
Insurance Fund 323 1254 3384 6731
ib
LIC Ratio 0 0 0.64 1.57 1.44 0.73 0.66 0.9053
sL
Net Profit 91 76 115 119 111
Insurance
pu
Fund 109 136 166 192 230
am
HGI Ratio 83.49 55.88 69.28 61.98 48.26

C
Net Profit 116 96 60 45 15

ev
Insurance
D
Fund 151 171 151 170 215

er
NECO Ratio 76.82 56.14 39.73 25.88 7.04

a nk
Sh

Appendix-V
(Rs in Lakh)
Year 2001 2002 2003 2004 2005 Mean SD CV

Interest
Income 27 165 277 431 623
Total
Income 138 1029 2151 3729 5259
ry
NLIC Ratio 19.57 16.03 12.88 11.56 11.85 14.38 3.12 0.217
ra
Interest
ib
Income 127 210 307 454
sL
Total pu
Income 552 1806 4215 7834
am
LIC Ratio 0 23.01 11.63 7.28 5.8 9.54 7.16 0.7503

C
Interest
ev
Income 63 57 62 69 72
D
Total
100 156 224 245 220
er
Income
63 36.54 27.68 28.16 32.73
nk
HGI Ratio
Interest
a
Sh
Income 78 69 77 72 59
Total
Income 234 249 231 181 137
NECO Ratio 33.33 27.71 33.33 39.78 43.06

Appendix-VI
(Rs in Lakh)
Year 2001 2002 2003 2004 2005 Mean SD CV

Interest
Income 27 165 277 431 623
Total Assets 2111 2985 5948 9752 124941
NLIC Ratio 1.28 5.53 4.66 4.42 4.99 4.17 1.5 0.3594
ry
Interest
ra
Income 127 210 307 454
ib
Total Assets 2356 3876 6115 9474
sL
LIC Ratio 0 5.39 5.42
pu 5.02 4.79 4.12 1.07 0.2594
Interest
am
Income 63 57 62 69 72
1271 1101 1301 1465 2277
C
Total Assets
ev
HGI Ratio 4.95 5.18 4.76 4.71 3.16

D
Interest
78 69 77 72 59
er
Income
nk
Total Assets 1769 1734 1736 1902 1965

4.41 3.98 4.43 3.78 3
a
NECO Ratio
Sh

Appendix-VII
Investment to Total Assets Ratio
(Rs in Lakh)
Year 2001 2002 2003 20004 2005 Mean SD CV

Total
Investment 1800 2770 4852 7754 9338
Total Assets 2111 2985 5948 9752 12491
ry
85.27 92.8 81.57 79.51 74.76
ra
NLIC Ratio
ib
Total
sL
Investment 0 1980 3619
pu 5628 8719
Total Assets 2356 3876 6115 9474

am
LIC Ratio 0 84.04 93.37 92.03 92.03

C
ev
Total
D
Investment 830 673 727 914 1108

er
Total Assets 1270 1101 1301 1465 2277

nk
HGI Ratio 65.35 61.13 55.88 62.39 48.66

a
Sh
Total
Investment 930 1000 1000 1006 1011
Total Assets 1769 1734 1736 1902 1965
NECO Ratio 52.57 57.67 57.6 52.89 51.45

Appendix-VIII
(Rs in Lakh)
Year 2001 2002 2003 20004 2005 Mean SD CV

Interest 27 165 277 431 623
Investment 1800 2770 4852 7754 9338
NLIC Ratio 1.5 5.96 5.71 5.56 6.67 5.08 1.83 0.3603
ry
127 210 307 454
ra
Interest
ib
Investment 0 1980 3619 5628 8719
sL
LIC Ratio 0 6.41 5.8
pu 5.45 5.21 4.58 1.22 0.2666
Interest 63 57 62 69 72
am
Investment 830 673 727 914 1108

C
ev
HGI Ratio 7.59 8.47 8.53 7.55 6.5 8.53 1.41 16.53
D
Interest 78 69 77 72 59
er
Investment 930 1000 1000 1006 1011

nk
8.39 6.9 7.7 7.16 5.84 7.96 1.43 17.96

a
NECO Ratio
Sh

Appendix-IX
Sample Calculation of Mean ( X ) Standard Deviation
( σ ) and Co-Efficient of Variation (C.V.) of Return on
Assets Ratio of HGI

X X2
ry
7.16 51.27
ra
ib
6.90 47.61
sL
8.83 pu 77.97
8.12 65.93
am
4.87 23.72
C
ΣX =35.88 ΣX2 = 266.5

D ev
er
∑X ⎛∑X
2
2
⎞
nk
−⎜ ⎟ σ
n ⎜ n ⎟
σ = ⎝ ⎠ C.V. = X ×100
a
Sh
σ =1.35 C.V. = 18.80
∑X
Mean ( X ) = n

( X ) =7.18

ry
ra
ib
sL
pu
C am
D ev
er
a nk
Sh

Appendix – X
Name of the Insurance Company Established Year
Nepal Life Insurance Co. Ltd. 2044
Life Insurance Corporation (Nepal) ltd. 2058

American Life Insurance Company (ALICO) 2058
Rastriya Beema Sanstan 2025
ry
National Life and General Insurance Co. Ltd 2044
ra
Nepal Insurance Co. Ltd 2004
ib
sL
The Oriental Insurance Co. Ltd. 2024
pu
National Insurance Co. Ltd. 2030
am
Himalayan General Insurance Co. Ltd. 2050

C
United Insurance Co. (Nepal) Ltd. 2050

D ev
Premier Insurance Co. Ltd. 2051

er
Everest Insurance Co. Ltd. 2051

nk
Neco Insurance Co. 2053

a
Sh
Sagarmatha Insurance Co. Ltd. 2053
Alliance Insurance Co. Ltd. 2053
NB Insurance Co. Ltd. 2057
Prudential Insurance Co. Ltd. 2059
Shree Shikhar Insurance Co. Ltd. 2061
Lumbini General Insurance Co. Ltd. 2062

ry
ra
ib
sL
pu
C am
D ev
er
ank
Sh

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FINANCIAL PERFORMANCE OF NEPALESE INSURANCE

Shanker Dev Campus Library

In partial fulfillment of the requirements for the Degree of

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This is to certify that the Thesis

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Dr. Geeta Pradhan, Associate Professor Dr. Kamal Das Manandhar

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Shanker Dev Campus Library

Head of Research Department : ………………………………………

Member (Thesis Supervisor) : ………………………………………

Member (Thesis Supervisor) : ………………………………………

Member (External Expert) : ………………………………………

Property of Shanker Dev Campus Library, Kathmandu 3

Shanker Dev Campus Library

T.U.Regd. No: 7-1-3-1296-96

Roll No. 1198/060

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Shanker Dev Campus Library

accomplishment of this research work.

suggestions and kind cooperation.

solely responsible for any error or mistake remaining in this research.

Property of Shanker Dev Campus Library, Kathmandu 5

Figure No. Title Page No.

4.1 Return on Assets Ratio 57

4.2 Return on Equity Ratio 61

Shanker Dev Campus Library

4.4 Return on Insurance Fund Ratio 67

Property of Shanker Dev Campus Library, Kathmandu 6

A.M. :- Arithmetic Mean

Shanker Dev Campus Library

M.B.S :- Master in Business Studies

NLIC :- Nepal Life Insurance Company

RBB :- Rastriya Banijaya Bank

ROE :- Return on Equity

ROI :- Return on Investment

ROIF :- Return on Insurance Fund Ratio

Property of Shanker Dev Campus Library, Kathmandu 7

Shanker Dev Campus Library

CHAPTER-2: REVIEW OF LITERATURE 7-45

2.1 Conceptual Framework 7

2.1.1 Meaning of Insurance 7

2.1.2 Risk and Risk Management 7

2.1.4 Brief Introduction of Insurance Industry of Nepal 12

2.1.5 Types of Insurance 17

2.2 Conceptual Review 23

CHAPTER-III: RESEARCH METHODOLOGY 46-54

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Shanker Dev Campus Library

4.2.3 Investment Analysis 75

CHAPTER-V: SUMMARY, CONCLUSION AND RECOMMENDATIONS 85-90

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Table No. Title Page No.

4.1 Return on Assets Ratio 56

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4.17 T- test (Each of the Company) 74

4.19 Investment to Total Assets Ratio 76

4.21 T- test (Each of the Year) 78

4.22 Interest Earned to Total Investment Ratio 79

4.24 T- test (Each of the Year) 81

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1.1 General Background

Growing number of companies in the Nepalese insurance market is the indication of

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