Explaining disaster under-insurance in Nepal

Marking one year anniversary of the April Earthquake (Baisakh 12, 2072), Samriddhi has released a new publication on disaster insurance in Nepal.

2015 has been amongst the most challenging years for Nepal, particularly with the catastrophic earthquake in April claiming thousands of lives and the crisis that came with the economic blockade in the later months worsening the already vulnerable state of victims. With homes and buildings having mercilessly collapsed and the very expensive reconstruction that was required, disaster insurance was a natural subject of interest.

In light of this, Samriddhi Foundation has released its exploration of the plausible causes for underinsurance against such calamity in the country. The paper, ‘Disaster Under-Insurance in Nepal (A look at supply side constraints in the Insurance Industry in Nepal)’ aims to analyze underinsurance under the framework of institutional arrangements and consumer decision-making processes. Following are some key findings of the study:

Certain insurance fundamentals that are expected seem to be absent from Nepal’s insurance practice. The legal provisions for non-life sector are not at par with that of the life-insurance sector. The non-life sector in Nepal has been operating without any actuarial evaluation. Actuaries engage in designing new insurance products, forecasting expected rates of loss, and setting premium rates or calculating liabilities. It is imperative that regulators have access to actuarial evaluation to both access insurance reports and correct them if necessary.

Dinesh Karki, Co-Author, ‘Disaster Under-Insurance in Nepal’

“Economic agents are risk-averse. They will always try to minimize risks. Insurance provides a pragmatic solution to minimize losses from various risks through a risk-sharing mechanism. A solid insurance sector promotes entrepreneurship and boosts investor’s confidence.”

Nepal’s insurance protocol is also largely void of dynamic risk-based systems. Uniform risk-based systems could lead to inappropriate requirements insurers are forced to meet even when the risk of their portfolio is low. Such rigid requirements can stifle product development, innovation and competition. Current rule-based requirements on investment may suppress innovation and limit insurers from choosing assets that they believe are appropriate for meeting their demands. It may also discourage insurers from developing their own risk management strategies. Tight regulatory requirements in the reinsurance sector may further constrain the non-life insurance industry and potentially become a barrier to entry.

A serious impediment to the growth of non-life sector insurance is regulatory price setting. For instance, the tariff advisory committee sets the tariff of the premium rates for fire insurance which also covers earthquake damage in Nepal. Price-setting distorts market mechanism resulting in shortage if price is too low or in surplus if price is too high.

 

This paper marks the organization’s first foray into insurance scrutiny but Samriddhi has engaged extensively in both managing relief efforts post-earthquake and organizing multiple parallel conferences with roughly 63 experts and around 800 civil society leaders to bring together ideas for rebuilding Nepal, resulting in a publication of the same name.

In 2015, National Planning Commission estimated gross losses due to the earthquake at USD 7.065 billion out of which housing and human settlements sustained majority of the loss at USD 3.51 billion. Insurance Board Nepal (IBN)’s claims settlement data post-earthquake indicates that a mere USD 82.8 million of losses and damages was covered by insurance. This indicates that less than 1 percentage of the estimated losses was covered by insurance.

Poorer countries in particular seem to have a ‘standard’ response to catastrophes where homeowners do not feel the need to invest in non-life insurance (also exacerbated by insurers not being able to well promote insurance due to policy bottlenecks), resulting in expensive post-disaster mitigation measures to be financed by tax-payers. While states will naturally engage in costly relief work, it would make more sense to promote non-life insurance and reduce hurdles to its full realization to lessen the burden on future taxpayers.

Hemant Dabadi, Economist and Senior Fellow, Samriddhi Foundation (Former DG, FNCCI)

“Insurance instruments reduce risks in uncertain circumstances. Though the risks are very high in non-life sector, people do not adopt insurance mechanism. This is one of the reasons why the system/economy collapses when Nepal battles instability.”

Please download the publication here: 

Download “Disaster Under-Insurance in Nepal” Samriddhi-Disaster-Under-Insurance-In-Nepal.pdf – Downloaded 922 times – 2 MB