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May 2024

Nepal: Reinsurance challenges and solutions

Source: Asia Insurance Review | Sep 2022

Climate change has aggravated Nepal’s vulnerability due to its geographical location and Nat CAT events. Himalayan Re’s Mr Chandrasekaran Ramamurthy tells us about the challenges and solutions for the growing Nat CAT events for the Himalayan nation’s reinsurance industry.
By Anoop Khanna
Nepal is becoming a hotspot of climate-related hazards with the rapidly changing climate. The resultant Nat CAT claims are becoming a major concern for the country’s (re)insurance market.
Speaking with Asia Insurance Review, Himalayan Re CEO Chandrasekaran Ramamurthy said, “For Nepalese reinsurers, catastrophic claims due to climate change are a serious concern and the country’s non-life insurance companies are risk averse to maximise their capital leverage in view of the challenges faced by them. They largely depend on international reinsurance capacity and protection to meet the market challenges and are now seeking higher reinsurance support to protect their deployed capital.”
He said, “The Nepalese insurance industry is growing well and over the last eight years it has achieved double digit growth annually.
“The total equity capital deployed by the entire insurance market of the Himalayan nation is around $600m (for the financial year 2021-22). Life insurance takes up 50% of this and the other half is deployed for non-life and reinsurance companies. During 2020-21 the industry’s total gross written premium was around $1.3bn,” he said.
According to the Nepal Insurance Board, the net worth to premium ratio for the non-life insurance sector for the financial year 2019-20 was 0.74, which denotes sufficient capital adequacy.
“With a view to meet the regulatory directive for (enhanced) minimum equity capital limits, many mergers between several non-life insurance companies are in progress. With these mergers, the capitalisation of non-life insurance companies would get further strengthened to tap the growing insurance market potential,” said Mr Ramamurthy.
Speaking about the challenges that Nepal faces, Mr Ramamurthy said, “Availability of abundant water resources has given Nepal tremendous opportunity to earn through export of hydro power.
“With 135 operational and 244 licensed projects (assuming all licensed projects go into construction), total hydro-power production capacity would be around 9,300MW, with a total property value of approximately $13.30bn which contributes a reasonable hydro-power premium of around $53.2m, sufficient to pay the claims that might occur.”
He said, “Difficulty in getting power purchase agreement, timely financial closure and uninsured government power projects are, however, some of the issues faced by the hydro-power companies. Most of the hydro-power projects are situated in mountainous region with exposure to Nat CAT perils leading to possibility of high frequency and severe claims.”
Nepal’s hydro-power industry thus faces significant issues regarding insurance protection. Insurers are unable to provide primary protection as they find it difficult to get reinsurance capacity and support for these risks.
Mr Ramamurthy said the Nepalese aviation sector has 133 aircraft owned by different aviation companies with an estimated premium potential of $16m per annum. The sector, however, faces challenges of higher and frequent air accident probability due to mountainous terrains and sudden adverse climatic conditions. Hence, insurance companies find it hard to get reinsurance protection for the aviation risks as well.
He said to give a boost to the country’s economic progress, the government of Nepal has also drawn up several major infrastructure projects, roads and tunnels to improve the connectivity and reduce travel time to the interiors.
“These projects have, however, their own challenges when it comes to insuring them. Factors like topography, exposure to catastrophic perils, social environmental issues and more impede on efficient and timely completion of these projects, making it difficult to get them insured on affordable terms and conditions,” Mr Ramamurthy said.
The country is also prone to earthquakes, floods, torrential monsoon rains, flash floods due to glacier lake overflows and bursts and other perils like landslides. These catastrophic perils are a major constraint to obtain reinsurance capacity or to encourage continuity of reinsurance support from international reinsurers.
In addition to these catastrophic risks, poor information management, inadequate risk statistics and lack of pure verifiable data are some of the factors that are impacting reinsurance of Nepalese risks in the international market.
Absence of reliable data has made it hard for the (re)insurers to effectively analyse and evaluate the catastrophic risk accumulations.
Mr Ramamurthy said, “Nepalese insurance companies need reinsurers with long-term commitment to provide capacity, protection, knowledge and expertise to develop the market capabilities and to meet the growing volume and complexities of the country’s insurance needs.
“Establishment of (re)insurance pools involving domestic insurers and reinsurers could be an immediate solution for the requirements of hydro-power and aviation sector.”
He said, “Growing traditional retail insurance penetration would also require reinsurance capacity for protection for Nat CAT losses. Catastrophe risk mitigation efforts, with a CAT risk insurance pool and parametric (re)insurance solutions would build the necessary CAT loss absorption capacity for the Nepalese insurers.”
Nepal Insurance Board is also planning an insurance data repository for collation and analysis of insurance policy and claims data to help the industry to develop affordable protection products to tap the insurance potential and reach the benefits of insurance to citizens of Nepal. A 
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