Theoretical Background The underlying concept of GDP (Gross Domestic Product) is market value of all final goods and

services produced in an economy over a specified period. The role of insurance sector and its links into other financial sectors is assuming greater importance by the day. Insurance is a pooling arrangement used by a group of policyholders to accumulate a fund that pays a stated benefit in case of financial loss by covered risk or perils. Insurance companies share the risk among the large numbers of risk exposures. Modern insurance companies are typical financial institutions like banks and investments companies that manage the fund as well as absorb the risk of customers with due risk management practices. Moreover, life insurance encourages savings in the society because insured is paid back a lump sum amount with some bonus if he/she alive at the end of the period. From the economic point of view, insurance is a business through which the scattered savings are collected in the form of premium and become an important source of funds for capital investment. Furthermore, insurance companies are considered as an important part of institutional investment of any country as they invest in corporate securities as well as other collective investment schemes and in turn, they produce sufficient income to meet their obligations in the form of promised insurance benefits. In Nepal, insurance business is regulated by Insurance Board (Beema Samiti). The investment policy of the insurance fund is basically directed by twin goals: solvency and profitability. This means they must guarantee commitments but generate financial income as well. Regulations that promote only one of these objectives would not be effective. In this regard, investment regulation must be concerned with the risks inherent both in the investments themselves and in the commitments that those investments are intended to cover. It must, in particular, take into consideration the provisions which regulate these commitments and be adapted accordingly. Financial development promotes economic growth by increasing marginal productivity of capital, by helping channel saving into investment and technological innovation. Among financial intermediaries, insurance companies in particular play a vital role in economic growth. They are main risk management tools for individuals and companies. By issuing insurance policies they collect premium and transfer them to economic units for financing real investment. Therefore, the insurance sector could make a significant contribution to economic growth. Evidence suggests that insurance contributes materially to economic growth by improving investment climate and promoting a more efficient mix of activities. This contribution is magnified by the complementary development of banking and other financial systems.

The insurance industry is a fastest growing industry of Nepal. Since the liberalization of 2046, the government has taken a number of initiations in the area of financial sector reforms including insurance. It is because insurance is also an important part of the overall financial system. Insurance Board is an apex regulatory body of insurance companies in Nepal. Under the provisions of Insurance Act and Regulation, Insurance Board has adopted the policy of facilitating the insurance companies to invest in the priority sectors. Moreover, insurance companies have invested in the National Saving Certificate and Government Bonds, fixed deposit, shares and in loan to insurance policy holders.

Analysis Till date, there were altogether 25 insurance companies established under Insurance Act, 1992. Among them, 8 insurance companies offer life insurance services, 16 companies offer non-life insurance services and one provides both the life and non-life insurance services. According to the ownership structure, 3 insurance companies are operating under foreign investment and 2 insurance companies are operating as joint venture with foreign insurance companies. Likewise, 19 insurance companies belong to the private sector, whereas one is under the government ownership. The overall insurance company structure is shown in Table1 below. Table 1: Overall insurance company structure Table: Nepals overall insurance company structure Ownership Government Owned Private Sector Foreign Joint Venture Total Non-Life 0 13 2 1 16 Life 0 5 1 2 8 General 1 0 0 0 1 Total 1 18 3 3 25

The insurance policies for both life and non-life segments are progressively increasing over the period. Similarly, the premium collection and its contribution to GDP are also increasing. Likewise, the investment of both the life and non-life insurance companies is significant. The employment formation by both life and nonlife insurance is more

significant in overall growth of Nepalese economy. Insurance sector has become one of the emerging sectors in the financial system comprising 3.5 percent share in total asset and liabilities of the financial system. Insurance companies are major source of funds for any financial institution. Insurance companies can significantly impact on performance of financial institutions like banks and finances because they are huge institutional investors. Following table (Table 2) shows the overall contribution of insurance sector in Nepalese economy in term of revenue collection, investment and emplacement generation.

Table 2: Overall insurance scenario

Gross Premium Fiscal Year Life (Rs.1 0m) 2004/0 5 2005/0 6 2006/0 7 2007/0 8 2008/0 9 2009/1 0 2010/1 1 2011/1 2P 298.9 5 378.8 9 462.3 3 548.9 9 663.5 7 876.6 1,042. 22 1,160. 00 Nonlif e (Rs.10 m) Total (Rs.10 m) Grow th in % Investment Life Nonlife (Rs.10 m) Total Cont ribu tion to GDP Employment

(Rs.10m)

(Rs.10m)

Agents 0.96 1.01 1.08 1.14 1.11 1.3 1.31 1.41 19628 30,124 34,778 46,575 48,936 66,799 79,084 98,296

Survey ors 102 123 152 146 148 138 199 425

Employ ees 1511 1,637 1,768 1,987 2,347 2,581 2,949 3200

269.29 285.49 328.89 385.19 442.04 649.67 706.39 810

568.24 664.38 791.22 934.18 1,105. 61 1,526. 27 1,748. 61 1,970. 00

17.61 16.92 19.09 18.07 18.35 38.05 14.56 12.66

1,180.02 1,520.11 1,839.76 2,034.99 2,651.62 2,993.99 4,275.11 4,760.00

303.1 321.1 344.75 418.31 500.79 592.76 747.27 870

1,483.12 1,841.21 2,184.51 2,453.30 3,152.41 3,586.75 5,022.38 5,630.00

Premium Collection and Contribution in GDP Total premium collection by the insurance companies has been gradually increasing over the years. Premium collected for life insurance contributed more than 60.0 percent of total premium collection. The premium collection was Rs. 5.7 billion in 2005 and increased on an annual average by about 22.2 percent for the next 5 years to Rs. 15.3 billion as of mid-

July 2010 comprising of Rs. 8.7 billion from life insurance and Rs.6.5 billion from non-life insurance companies. The growth of total premium collection in 2011/12 stood at 12.66 percent, compared to 14.56 percent in 2010/11. Table 3: Yearly Premium collected and its weight over GDP Fiscal Year Premium (NRs. Premium as in Millions) % of GDP

2011/12 19700.00 1.41% 2010/11 17486.10 1.31% 2009/10 15262.70 1.30% 2008/09 11056.10 1.11% 2007/08 9341.80 1.14% 2006/07 7912.20 1.08% 2005/06 6643.80 1.01% 2004/05 5682.40 0.96% In GDP, contribution of insurance sector is more than one percentage. In fiscal year 2011/12 the overall contribution was 1.41% whereas it was only 0.96% in year 2004/05. It indicates that the growth in GDP due to insurance sector is increasing with more than 0.10% in an average yearly.

Figure 1: Yearly premium collection

25000 Premium in million 20000 15000 10000 5000 0 Premium (NRs. in Millions)

Fiscal Year

Table 4: Premium volume of Insurance sector and annual growth

Life Insurance Fiscal Year 2011/12 2010/11 2009/10 2008/09 2007/08 2006/07 2005/06 2004/05 Premium (In million NRs) 11600 10422.2 8766 6635.7 5489.9 4623.3 3788.9 2989.5 Average Premium Growth Rate (in %) 11.3 19.2 32.11 20.87 18.74 22.02 26.74 20.02 22.81 Non-Life insurance Premium (In million NRs) 8100 7063.9 6496.7 4420.4 3851.9 3288.9 2854.9 2692.9 Premium Growth Rate (in %) 14.67 10.38 46.97 14.76 17.12 15.2 6.02 15.04 17.93

35 30 Growth Rate(%) 25 20 15 10 5 0 Premium Growth Rate (in %)

Figure 2: Premium growth of life insurance sector In the case of life insurance, the highest growth rate of premium collection was 32.11% in year 2009/10 whereas lowest 18.74% in year

Fiscal Year

2007/08. The average growth rate of life insurance premium is 22.81 from year 2004/05 to 2011/12. Similarly, the contribution of premium in GDP has also been continuously increasing over the period. Life insurance sector has major contribution in growth of GDP. More than 60% growth in Figure 3: Premium growth of non-life insurance sector overall insurance
50 45 40 35 30 25 20 15 10 5 0

contribution is by life insurance sector only.

Growth Rate(%)

Premium Growth Rate (in %)

Fiscal Year

The highest growth rate for non-life insurance was 46.97% in year 2009/10 whereas was lowest 6.02% in 2005/06 and there is slightly consistent growth in remaining years. Nonlife insurance sector possess average growth of 17.93%.

Investment On the investment side, it was Rs. 14.8 billion in 2005. It has been observing an increasing trend over the years. The total investment reached Rs. 56.3 billion as of mid-July 2012 comprising of Rs. 47.6 billion and Rs. 8.7 billion from life and non-life insurance respectively. The growth rate of investment up to 2011 was very high. Such growth rate had peaked to 40.0 percent in 2010. After that it declined and stood at 4.0 percent in midJuly 2012.

Figure 3: Yearly investment

6000 5000 Investment in 10m 4000 3000 Nonlife (NRs.10m) 2000 1000 0 Life (NRs.10m)

Fiscal Year

As institutional investors, insurance companies may act as principal for their own account, and thereby invest the assets of the insurance company in a wide array of financial instruments i.e. share, debenture, etc. in order to produce sufficient income to meet their obligations in the form of promised insurance benefits. They basically invest in corporate securities, government bonds and in commercial and development banks as fixed deposit. The growth trend of investment and corresponding years premium collection for overall insurance industry has been shown in following figure 6.

Figure 4: Relationship of investment with premium collection

6000 5000 Amount(10 million) 4000 3000 2000 1000 0 Gross Premium Investment

Fiscal Year

More than 60% of the total insurance sectors investment is contributed by life insurance companies only. The highest growth in total invest was in fiscal year 2010/11. The relationship curve of premium collection and investment shows that volume of investment increased with increased premium collection.

Figure 5: Yearly employment formation

Employement formation
120000 Number of employement 100000 80000 60000 40000 20000 0 Surveyors Agents Employees Total 2004/05 102 19628 1511 21241 2005/06 123 30,124 1,637 31884 2006/07 152 34,778 1,768 36698 2007/08 146 46,575 1,987 48708 2008/09 148 48,936 2,347 51431 2009/10 138 66,799 2,581 69518 2010/11 199 79,084 2,949 82232 2011/12 425 98,296 3200 101921

Employment formation by insurance sector is key interest for Nepalese economy. The fiscal year 2011/12 shows that this sector has given direct employment to about 3,200 people in different levels. There are about 425 licensed insurance surveyors in Nepal. Insurance surveyors license is issued and renewed by the Insurance Board as per the Insurance Legislation. The insurers are dependent upon these surveyors report for settlement of claim. Moreover, each surveyor office has employed minimum two people. Insurance agents are the major actors in insurance system. Till 2012 the overall insurance agents are around 98296. Most of agents are attached to life insurance sector.

Data interpretation According to National board of Nepal, only 6% of Nepalese are insured and around 1.6 million people belong to various insurance companies in Nepal. Till year 2012, 25 companies had registered where total Rs.19, 700,000,000 premium income was made which includes Rs. 8100 million of non-life insurance and Rs. 1, 1600 million of life insurance. Insurance companies are considered as the non-banking financial institutions. However, more of their presence in the economy, the higher the possibility of economic development because they are the institutional investors. As institutional investors, insurance companies may act as principal for their own account, and thereby invest the assets of the insurance company in a wide array of financial instruments i.e. share, debenture, etc. in order to produce sufficient income to meet their obligations in the form of promised insurance benefits. They basically invest in corporate securities, government bonds and in commercial and development banks as fixed deposit. The investment pattern is gradually increasing with the increased premium collection.

Issues and discussion Considering the development of insurance industry and its connection with the financial system of Nepal, it has been revealed that insurance companies have not been complying with the prudent rules and regulations as issued and directed by Insurance Board of Nepal. Similarly, the huge amount of investment made by the insurance companies in different projects and programs, including the deposits in various banks and financial institutions need to remain safe with sufficient liquidity. Similarly, the insurance companies should maintain further transparency in terms of disclosure, access to information on collection of insurance premium, investment in different areas and products as well as the recovery of

the investment. Likewise, the insurance industry also requires further consolidation by making the individual companies financially strong and offer better service quality. The lack of sufficient professionals in the Nepalese insurance companies is one of the reasons why Nepalese insurance sector is not developed in the degree of expected level. This problem equally exists in insurance supervisory body also. The existing situation shows that Nepalese insurers have not given much emphasis in order to develop their staffs capacity as reflected by their training expenditure compared to other headings of expenses.

Summary and conclusion Total premium collection and total investment of the insurance companies are in increasing trend The performance of Nepalese insurance industry on aggregate is satisfactory but requires a strong surveillance on their operation to avoid systemic risk. In this context, Nepalese insurance industry needs to be more professional, transparent, competitive, innovative and efficient in order to provide effective services. Insurance industry should also move towards IAIS Insurance Core Principles (ICP) and update insurance accounting standard following international best practices. Similarly, in the context of growing insurance business, including the companies, a solvency regime is also required to tackle with the problems that surface in insurance companies. Both the prudent regulation and strong supervision are lacking in Nepalese insurance, so the insurance sector is moving forward on a traditional way without having essential framework in place. Therefore, strengthening the rules and regulations formulated by the Insurance Board can be instrumental for this sector to withstand possible financial market shocks.