Kathmandu. In the last few months, the interest rate given by banks and financial institutions on fixed deposits has been steadily decreasing. Both positive and negative effects of declining interest rates have been seen in insurance companies, especially life insurance companies.
The tendency of general savers to insure by paying a single insurance fee has increased on the promise of higher returns, including risk bearing, when the interest rate of deposits decreases. For this reason, despite the slowdown in the economy, the life insurer last fiscal year 2081. There has been a significant increase of 16 percent in 82. fiscal year 2080. The growth rate was only 9.77 percent in 1981.
On the other hand, the negative impact is directly on the interest return of the insurance company. Life insurance companies, which have an investible corpus of more than Rs 600 billion, have traditionally invested more than 80 percent of the amount in fixed deposits. At present, the interest rate on deposits has been limited to 3 percent. It is not possible to give a minimum of 6 percent return to the insured by investing in deposits with 3 percent interest income.
Insurance companies are now forced to invest in fixed deposits with very low interest rate income due to limited investment options. While options for investment in other sectors have been opened up, insurers are not ready to take risks due to lack of experience and risk involved.
In view of this situation, Nepal Life Insurance has forwarded the long-term investment plan by establishing a special investment company with the involvement of investment experts. Other insurers are yet to get out of this path.
The continuation of fixed deposit interest rates, which have reached a single-digit low due to higher banking liquidity, poses a challenge for the insurance sector. Life insurance companies, which have promised at least 6 per cent return to the insured, are not able to diversify their investments.
When the bank interest rate is lower than the inflation rate, the return on the amount in the insurance fund is likely to shrink more and more than the inflation instead of increasing the insurance fund.
Insurers have been relying heavily on fixed deposits in banks to get returns to their insured’s insurance funds. Now, bank interest rates have historically been at a low. Therefore, in the current situation, this traditional strategy is no longer sufficient to meet the return expectations and needs of insurance companies.
This has prompted insurers to actively seek alternative investment avenues guided by updated directives from the Insurance Authority of Nepal.
In neighbouring India, the regulator has directed investors to invest in government debentures, preference shares, securities markets, mortgaged real estate and infrastructure. There is a provision to invest at least 25 percent of the total investment in the loan issued by the federal government and at least 50 percent of the total investment in federal, provincial and other recognized bonds.
Addressing the need for diversification, the AUTHORITY has revised the investment guidance to provide insurers with a wider range of investment options. These guidelines have opened the way for insurance companies to venture beyond traditional fixed-income tools and explore investment options in more dynamic assets.
One of the most notable changes is the accepted limit of investment added to investing in the securities market. Insurers can invest a large part of their insurance fund in the shares of companies listed on the Nepal Stock Exchange. They can invest in the shares of companies with a strong background and good financial health by analyzing the market analysis and the financial health status of the companies.
In addition, the authority has also opened the door to investment in special funds. Insurers are now allowed to allocate a portion of their capital to private equity and venture capital funds licensed by the Securities Board of Nepal. The move is believed to be a game-changer. This enables beams to participate in the promotion of innovative startups and small and medium enterprises. And thus contributes to the economic development of the country by seeking high returns.
Beyond the capital market, the revised guidelines have also paved the way for investment in tangible assets. Insurers can now invest not only in real estate, tourism, air services, but also in renewable energy projects such as hydropower and solar energy.
These sectors offer the potential for long-term capital growth and stable returns, providing adequate investment areas for much-needed alternative preparation against inflation and low interest rates.
Similarly, investments in infrastructure projects, including roads and power transmission lines, have provided an attractive opportunity for insurers to mobilize large amounts of capital for a long period of time consistent with their long-term liability structure.
The Government of Nepal has also proposed to set up a special purpose targeted company with the participation of the government, banks and financial institutions and private sector promoted equity capital companies. If the proposed bill to set up this company is passed, more investment options will be open.
While these new investment options promise high returns, there is also a large amount of risk involved. By setting clear limits on the percentage of funds that can be invested in different categories, the authority aims to prevent the possibility of over-risk taking in volatile markets.
For this, the authority has also emphasized on risk-based supervision. Risk-based capital related systems have also been implemented since the last financial year to ensure that the investment strategies of insurers are prudent and sufficient to meet their liability to the insured.
This strategic diversification is expected to not only maximize profits, but also strengthen the financial stability and resilience of Nepal’s insurance sector in a changing economic scenario.
