Chapter 5

Insurance Companies
 Meaning of Insurance
• Insurance is a contract whereby the insured pays
premium to the insurer for covering a loss that arises due
to loss of life or damage or destruction of some property.
• The insurance company is called the insurer.
• The owner of the insurance policy, who purchases the
policy from the insurance company is called insurer.
• Insurance policies are used to hedge against the risk of
financial losses, both big and small, that may result from
damage to the insured or her property, or from liability
for damage or injury caused to a third party.
• The insured pays money to insurer to buy insurance
policies. The money paid is called the insurance
premium.
 Insurance Company
• An insurance company is a company that sells the
insurance policies.
• Insurance companies are financial intermediaries
because: they collect and invest large amount of
premiums; they provide means for accumulating savings
and channelize these funds to various sectors; they even
provide loans to the policyholders; they are non banking
financial institutions because they are not directly
involved in banking activities like deposits or other
financial services.
 Nature of Revenue and Expenses
• Insurance companies generate income from two
sources. One source include the initial insurance
premium. Another source of income is investment
return, which arises from the investment of insurance
premium collected over the years.
• Insurance companies incur two major types of
expenses. One type of expense is the payments when
insurance policies mature of when the specified
events occur. Another expense is operating expenses
of insurance companies.
 Types of Insurance
1. Life Insurance
• A contract between an insured person and insurer in
which the insurer agrees to pay a designated beneficiary a
sum of money in return of premium, upon the death of the
insured person.
• Life insurance contract provides the protection against the
possibility of untimely death, illness and retirement.
• The most common feature of life insurance is that it pays
a fixed amount of insurance at the time of death or at the
expiry of certain period.
2. Heath insurance
• An insurance contract that covers medical treatment
expenses against any disease incurred to insured.
• Health insurance is a contract between a person and
insurance company that covers medical and surgical
expenses incurred by the insured person.
3. Property and Casualty Insurance
• Property and casualty insurance protects against fire,
theft, liability and other events.
• Property insurance protects businesses and individuals
from the impact of financial risks associated with
ownership of property, such as buildings, automobiles,
and other assets.
• Casualty insurance protects policyholders from potential
liabilities for harm to others as a result of product failure
of accidents.
4. Liability Insurance
• Liability insurance is concerned with the work place and
issues arising out of working conditions. Death, accident at
work etc. The liability insurance covers the following.
a. Employee liabilities related to working conditions.
b. Liability related to injury to any employee while at work.
c. Product liabilities that arise from the sale of products to
customers and resulting damage to any customer due to
fault in the product.
5. Disability Insurance
• Disability insurance is the insurance policy that offers
income protection to individuals in the case they become
disabled during the work.
6. Long term care insurance
• The individuals who are unable to perform basic activities
of daily living such as dressing, bathing, eating, walking
require long term care. Long term care insurance offers
custodial care services to the individuals who need long
term care. It covers care assisted living, adult daycare,
nursing care and so forth.
7. Guaranteed investment contract
• According to this contract, the policy owner should pay a
single premium, the principal, at the beginning of contract
period. The contract may have the maturities ranging from
as short as one year to as long as 20 years. At the end of
maturity period, the insurance company repays the principal
plus interest earned over the period of a fixed annual rate.
8. Annuity Contract
• According to this contract, the investor should make a single
payment at the beginning or a series of payments over a
specified period. The insurance company, in turn, makes a
series of periodic payments to the investor.
 Types of Life Insurance
1. Term Insurance
• Term insurance is the life insurance policy which is
affected for shorter term.
• Under this policy, the insurance policy is used for 1 year
to 10 years. If insured person lives until the term of
insurance, the policy amount is not paid. But if the
insured person dies within the term of insurance, the
policy amount is paid to the beneficiary.
a. Straight term policy life policy
• This policy is a temporary policy and issued generally
with not more than two years of maturity.
• Under this policy, the sum assured is payable only at
the death of insured person if s/he dies during the
assured period.
• The policy owner should pay a single premium at the
outset and the medical examination fee.
b. Renewal Term Life Policy
• This term insurance is renewable. It can be renewed
for the next term after the expiry of given term.
• The premium for renewable term policy increases at
every renewal period.
c. Convertible Term Life Policy
• Under this policy, the policy owner is given an option
to convert the policy into permanent life or endowment
policy.
• After the conversion, a new policy under fixed
payment whole life plan or endowment plan will be
issued and the amount of premium is fixed as per the
age attained.
2. Whole Life Insurance
• Under this policy, risk is covered for the entire life of
the policyholders.
• The insured amount and bonus are payable only to the
nominee or beneficiary upon the death of policyholder.
• Under this policy there is no survival benefit, meaning that the
policyholder does not get any benefit during his her lifetime.
• In case of ordinary whole life policy, the insured person must
go on paying premium until he/she lives. The insured amount
is paid to the beneficiary after the death of insured person.
• Under fixed payment whole life policy the premium is paid for
a fixed number of years.
• One drawbacks of whole life policy is that the insured person
may have to pay premium up to the of say 100 years because it
is not certain when the insured person dies.
a. Whole life policy with profits
• This is the whole life policy with a low rate of annual
premium.
• Under this policy, premiums are payable over the life of
insured person or up to the certain age of policyholders,
say, 80 years, whichever is earlier.
• The insured sum is paid to nominee after the death of
policyholder or it is paid to the policyholder her/himself
after certain age whichever is earlier.
b. Limited Payment Whole life Policy
• Under this policy, the premium is paid over a fixed
number of years but death benefit is given to the
nominee after the death of insured person.
• If policyholder survives until the fixed number of
payment period, no premium is required to pay after the
period is over, but the policy still remains in effect.
• If death occurs before the expiry of fixed payment
period, the further premium is nor required to pay.
c. Convertible Whole Life Policy
• the whole life policy that can be converted at the
option of insured person into endowment policy after
the expiry of certain years is called convertible whole
life policy.
• After the conversion, this policy no longer remains in
the form of whole life policy.
3. Endowment Insurance
• This policy is most common in the practice of
insurance companies, mainly, in Nepal and India.
• This policy pays the policy amount if the insured dies, but
it also pays the policy amount if the policyholder survives
until the term of policy.
a. Pure Endowment Policy
• Under this policy, the amount of policy is paid to the
insured if s/he survives to the end of policy period.
• The policy amount is not payable if the insured dies before
the policy period.
• In the event of death within the term, the premiums may or
may not be refundable depending on the scheme of life
insurance companies.
b. Double Endowment Policy
• Double endowment policy calls for payment of double
of the insured sum to the insured person if s/he lives
until policy matures.
• If the insured dies, only the insured sum is paid to the
nominee. This policy is beneficial to those persons who is
confident of living long but would like to have some
coverage for dependent in the event of early death.
c. Deferred Endowment Policy
• Under this policy, the policy amount is paid only after the
expiry of policy period regardless of whether the insured
person dies before maturity.
• The premium amount is not required to pay after the
dearth of insured person.
d. Anticipated Endowment Policy
• Under anticipated endowment policy a part of insured
sum is paid at certain intervals say at the end of fiver
years for a 15 year policy and the balance of sum is paid
at maturity.
• In the event of death of insured person, any time
during policy period, full sum assured is payable to
nominee without any deduction of previously repaid
installments.
4. Universal Life Insurance
• this policy provides premature death protection and
saving accumulation.
• Under this policy, there is greater flexibility with
respect to payments of insurance premium.
• There is no fixed schedule of premium payments with
universal life policy.
5. Fixed Period Life Annuity Policy
• a fixed period life annuity policy is that which pays
insured person equal annuity payment starting from
certain age.
• In Single payment annuity policy, the insured is
required to pay a lump sum amount of premium at the
beginning that allows her/him to receive an equal
amount of annual payment.
• In installment payment annuity, the insured has to pay
premium in several installments up to a certain
number of years. Then insured receives annual equal
payment from the insurer until s/he survives.
 Insurance Industry in Nepal
• The establishment of Nepal Transport and Insurance
company (currently named as Nepal Insurance
Company) in 1947 was the first insurance company
established in Nepal. Before that Indian Insurance
companies used to carry on insurance business in
Nepal.
• in the year 1968, government of Nepal established
Rastriya Beema sansthan to meet growing need of
insurance business and to check outflow of Nepalese
Money in the form of insurance premium.
• Initially it started only non life business and added life
business only in 1972.
• In the year 1968, the government enacted rastriya
beema sansthan act and established insurance board to
regulate insurance business in the country.
• After 1972 the government stagnation on the insurance
business. At that period, the government did not permit
new private companies to operate insurance business.
• After 1985, government relaxed its policy and allowed
new insurance company – NLICL
• In early 1990, the government became more liberal
towards insurance sector and encouraged private sector
in insurance business. It replaced rastriya beema
sansthan act of 1968 with new insurance act in 1992.
• Currently there are 19 life insurance company, 20 non life
insurance company and 1 insurance company are existed
in Nepal.
• The paid up capital of life insurance company is Rs 2
billion and non life insurance company is Rs 1 billion and
reinsurance company is Rs 10 billion,
• The amount of premiums collected by insurance
companies in Nepal is being utilized for both long term
and short term investments. The long term investment
portfolio of insurance companies consists of long term
investment in securities, policy loans and other long term
loans, while short term investment portfolio consists of
short term investment in securities and other short term
loans.
 Regulation and Supervision Mechanism of
Insurance Industry in Nepal
• Regulation and supervision of insurance industry in
Nepal comes under the core function of insurance
board (Beema Samiti). Insurance Board was created
under the insurance act of 1968. Before promulgation
of this act, there was no regulatory and supervisory
authority of insurance industry in Nepal.
• Expansion of the insurance industry in Nepal took a
greater pace during 1990s when government of Nepal
initiated financial sector reform program and adopted
economic liberalization policy.
• As mandated by insurance act of 1992, the
functions, duties and power of insurance board
are as follows:
a. To provide necessary suggestions to the government
of Nepal in formulating the policy to systematize,
regularize, develop, and regulate the insurance business.
b. To formulate the policy for the investment of the
insurance premium received by insurance companies
and to prescribe the priority sectors.
c. To register and renew the insurer, insurance agent,
surveyor and broker, and to cancel or cause to cancel
such registration.
d. To issue necessary directives to the insurer from time
to time regarding the insurance business.
e. To formulate necessary provisions for the protection
of interests of the policyholders.

• The major functions of Beema Samiti is to regulate

and supervision of Insurance Companies.
• Under regulatory activities following are the major
functions of Beema Samiti.
a. Develop and amend the insurance related directives.
b. Develop and amend investment guidelines for
insurers.
c. Approve the terms and conditions of new products.
d. Issue and renew the license of insurers, surveyors,
insurance agents.
• Under its supervisory role, the insurance board
formulates supervisory framework and conducts off-
site and on-site inspection of the insurance
companies.
• Settlement of dispute between insured and insurers.
• Takes legal action against insurers, surveyors,
insurance agents on the violation of insurance
regulation.
 Structure of Insurance Companies
• An insurance companies are seems like a composition of
three companies.

Insurance Company

Distributor of
Manufacturer Investment
Insurance
of Insurance Company
Products
Products
1. Manufacturer of Insurance Products
• Insurance company is the manufacturer that designs
several insurance products. It guarantees the buyers of
insurance contract that they will be paid off under stated
terms and conditions.
2. Distributor of Insurance Products
• Insurance company also sells the insurance products it
designed. It also employs several sales force like insurance
agents to distribute the insurance products to the buyer.
• The insurance agents charges certain commission for
selling of insurance policy.
• In Nepal, Commercial bank also work as agent of
insurance company.
3. Investment Company
• The insurance company invests the premium collected by
selling of different insurance policies or products.
• It manages its own investment portfolio, keep track of the
investment returns and revise the investment portfolio
time by time.
 Forms of Insurance Companies: Stock and Mutual
• There are two forms of insurance companies: stock
insurance company mutual insurance company.
• Stock insurance company is a publicly traded company
owned by stockholders.
• Investment from stockholders is the basic source capital
for a stock insurance company. It exists to make profit for
stockholders.
• A stock insurance company is governed by a board of
directors that is accountable to the shareholders of the
company.
• The company’s policyholders doesn’t have any voting
rights to elect board of directors.
• Mutual Insurance Company
• A mutual insurance company is an insurance company
owned by the policyholders. The policyholders are its
owners.
• The mutual insurance company offers insurance coverage
for its owners.
• The policyholders are given the right to select
management team for the company.
• The stocks of mutual insurance company are not traded
on stock exchanges.
 Participating Policies
• A participating policy is an insurance contract that pays
dividends to the policy holder. Dividends are generated from
the profits of the insurance company that sold the policy and
are typically paid out on an annual basis over the life of the
policy. Most policies also include a final or terminal payment
that is paid out when the contract matures. 
• The dividends on a participating policy are generally not
guaranteed. Therefore, insurance company may not pay the
dividend every year.
• Non participating policy does not give holders the right to
share surplus earnings, and therefore does not receive a
dividend payment.
• Non participating policies only pay holders the guaranteed
maturity benefits at the maturity of insurance contract or pay
death benefits to beneficiary upon the death of insured person.
 Insurance Company Investment strategies
• The insurance premiums collected by an insurance
company are invested in the portfolio of different assets.
• The portfolio composition should appropriately match
assets to liabilities and take into consideration relative
duration, liquidity risk, and tax considerations.
• Life insurance companies have longer term liabilities than
property and casualty insurance companies.
• Life insurance companies used to invest more heavily in
longer term assets, such as bonds and other securities.
• Property and casualty insurance companies tend to have
their largest exposure to municipal bonds primarily tax
reasons.
• The majority of property and casualty insurance
companies implement a bond heavy strategy.
• The investment strategies also vary between the stock and
mutual insurance companies.
• Mutual insurance companies exhibit large eagerness for
risk than stock companies. While bonds represent both
stock and mutual companies’ largest investment types,
they are larger proportion of asset for stock companies
than mutual companies.
• Mutual companies tend to have higher investment
exposure to common stocks than stock companies.
 Changes in Insurance Industry
• Insurance industry has undergone significant changes
over the past two decades. The major changes that
have taken place in insurance industry are below.
a. Deregulation of insurance Industry
• Deregulation refers to the process of liberalizing state
regulations in economic activities.
• Deregulation is initiated to ensure consumer welfare
by reducing costs and prices of economic activities,
improving quality and variety of services, providing
incentives for firm to adopt new technologies and
improving competition and productivity.
b. Globalization of insurance industry
• Globalization refers to the process of economic
integration among the nations.
• With globalization, insurance sector has gained the
international character of risk sharing through cross-
border relations with respect to many other lines of
business.
• Increasingly, insurance cover for households or
companies is granted beyond national borders. Moreover,
many insurance companies offer their products in foreign
insurance markets or have become part of multinational
insurance group.
c. Demutualization of insurance Company
• Demutualization is the process of converting a privately
held insurance company by policyholders to the publicly
traded insurance company whose stock trade in the stock
market. These two forms of Insurance companies are
primarily called mutual companies and stock companies.
• Demutualization is the process of converting a mutual
company into stock company.
 Evolutions of Insurance, investment and retirement
products
a. 401 (k) plans
• A 401 (k) plan is a retirement savings plan sponsored by
employers for their employees.
• Employees can make retirement savings in this plan on a
tax deferred basis.
b. Individual Retirement Accounts(IRAs)
• An Individual Retirement Account is a type of personal
tax deferred retirement savings plan that allows
individuals to save for retirement and offers many tax
advantages.
• There are two variations of IRAs: Traditional IRA and
Roth IRA
• With traditional IRA, individuals get a tax deduction for
the savings they contribute to the account. This deduction
reduces taxable income.
• Any interest, dividends or capital gains from IRA are tax
exempted.
• At the time of retirement, the distribution from IRA is
included in taxable income.
• However for early withdrawal before the age 59 and half,
individuals have to pay additional 10 percent taxes on the
early distribution.
• In a Roth IRA plan, unlike traditional IRA, contributions
are not tax deductible. The distribution from ROTH IRA
are totally tax free.