INSURANCE
SYSTEM IN
NEPAL
Yukta Amatya/Shreejan Bhandari
WHY IS RISK IMPORTANT
FOR INSURANCE ?
Risk is what makes you decide whether or not you need
insurance.
Risk is what insurance companies measure when
determining whether to offer you insurance and how much it
will cost.
HOW TO HANDLE RISK?
1. Avoidance: Choosing not to participate in an activity
because of the risk involved, e.g. not getting a driver’s
license;
2. Retention: Saving money in case of future losses, e.g.
putting Rs100,000 in a savings account in case of a car
accident;
3. Transfer: Passing the risk on to an insurance company,
e.g. paying a monthly fee for an insurance policy and
expecting the insurance company to protect your assets.
WHAT IS INSURANCE?
Insurance is a contract between two parties in which one party, the insurer,
agrees to pay the other party, the insured, a fixed amount of money after a
certain incident occurs in return for a fixed sum of money called a
premium.
Insurance is a legal contract that transfers risk from a policyholder to an
insurance provider.
Insurance company sells the insurance policy and collect the insurance
premium and invest in the various sectors like real assets and financial
assets.
Insurance company is the financial intermediaries because they collect and
invest large amount of premiums.
They provide means for accumulating savings and channelize these funds
to various sectors.
CONTD.
- They provide loans to policyholders.
- They are non banking financial institutions because they are
not directly involved in banking activities like deposits and
other services.
- They are considered as the contractual saving institution
due to their nature.
- They execute various financial functions that influence
financial market of the country.
- The regulatory authority always regulates their funds.
TERMS USED IN INSURANCE
CONTRACT
- Insurer
- Insured
- Insurance policy
- Insurance premium
- Insurance period
- Insurance policy loan
- Insured amount
FUNCTIONS OF INSURANCE
- Primary functions:
(1) Insurance provides certainty
Insurance provides certainty of payment at uncertainty of loss.
The uncertainty of loss can be reduced by better planning and
administration.
(2) Insurance provides protection
The main function of the insurance is to provide protection
against probable chances of loss.
CONTD.
- Risk sharing
The risk is sharing in ancient time was done only at the time of damage or
death but today on the basis of probability of risk, the share obtained from
each and every insured in the shape of premium without which protection is
not guaranteed by the insurer.
SECONDARY FUNCTIONS
- Prevention of loss: The insurance joins hands with those institutions
which are engaged in preventing the losses of the society.
- Improves efficiency: The insurance eliminates worries and miseries of
losses at death and destruction of property.
- It helps economic progress: By protecting the society from huge losses
of damage, destruction and death, provides an opportunity to develop
to those larger industries which have more risk in their setting up.
BANCASSURANCE
- The partnership or relationship between a bank and an insurance
company whereby the insurance company uses the bank sales channel
in order to sell insurance products.
- Also known as cross selling, is defined as the presentation and sale to
bank customers by an insurance company of its insurance products
within the premises of the banks and its branches.
BENEFITS OF INSURANCE
- Providing security
- Shifting of risk
- Provide investment
- Encouraging savings
- Capital formation
- Generating employment opportunities
- Promoting social welfare
- Helps controlling inflation
- Improving credit standard
TYPES OF INSURANCE
The insurance industry is classified into two major groups:
(1) Life: Life insurance provides protection in the event of
untimely death, illnesses, and retirement.
(2) Non life or Property – casualty. Property insurance
protects against personal injury and liability due to
accidents, theft, fire, and other catastrophes.
FUNDAMENTALS OF INSURANCE
• The fundamentals of insurance is law of large
numbers.
• Insurance companies are financial intermediaries
because:
• they collect and invest large amount of premiums;
• they provide means for accumulating savings and
channalize 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.
TYPES OF INSURANCE
PRODUCT
• Term life insurance
• Whole life insurance
• Endowment
TERM LIFE INSURANCE
- Pure life insurance
- Issued for a short period (3 month to 7 years)
- If insured dies, the policy is intact and beneficiary receives the death
benefits.
- If the insured does not die within the period, the policy is invalid and has
no value.
- There is no cash or investment value for a term insurance policy.
- Policyholder can not borrow against the policy.
- Only protection element present in the policy
CONTD.
- The objective is the family to get a lump sum assured amount in the
event of untimely death of the family head/bread winner.
- If the insured survives till the end of the selected period, nothing is
payable.
- Term insurance policy can be issued for 5, 10, 15 or 20 years.
- It is a policy with low cost (premium).
- These are required when the coverage is required for a stipulated period
like tenure of a home loan.
- The cost (premium) varies with the age of the insured and the proposed
tenure of policy coverage.
CONTD.
- It is similar to property or liability insurance.
- This provides risk coverage only for the term selected.
- If there is no provision for automatic renewal, the insured can take a
fresh policy at a fresh cost (applicable at that age level) subject to this
being permitted based on status of his/her health.
- There are two types of term policies; renewable and convertible.
CONTD.
- Renewable term policy meets a valid need of insured as it protects
his/her insurability.
- Convertible term policy offers an option to the policyholder to convert a
term policy into a whole life or endowment policy without producing
evidence of continued insurability.
WHOLE LIFE
- Also known as cash value or permanent or straight or ordinary or
investment life insurance
- Oldest and most traditional form of insurance
- Issued for the whole life of person
- Premiums are payable only once or throughout the life of assured or for
certain period of time.
- Assured amount becomes payable only on the death of policyholders to
his/her nominee
ENDOWMENT
- Combines a term insurance element and savings
- It guarantees a payout to the beneficiaries of the policy if death occurs
during some endowment period.
NON-LIFE INSURANCE
Also known as General Insurance
These Insurance Companies mostly focus on covers property, businesses
and individuals for accidental damages
Unlike life insurance which covers lives for assured benefits (as much as
covered from the insurance), non-life insurance provides coverage for
damages on indemnity basis (Only upto the cost of the damage)
These contracts are usually upto 1 years and needs renewal annually
TYPES OF NON-LIFE
INSURANCE
Fire Insurance: covers damages caused by fire and allied perils (Also includes
add-ons such as riot, storms, flood and earthquakes)
Marine Insurance: covers to goods in transit by sea/air/rail/road and also to ships
from perils of the sea voyage (Also known as Transportation Insurance)
Motor Insurance: cover is provided for the vehicle against accidental damages as
well as third-party death, injury or property damages (Also includes add-ons such
as theft insurance)
Engineering Insurance: covers the ongoing construction project, installation
project, and machines and equipment in project operation (For example
insurance of Hydropower Projects)
Aviation: covers the risk of air travel and airlines related risks
Cattle and Crop (Agriculture): covers the risk related to agricultural goods, crops
and agricultural cattle
PROBLEM AND ISSUES
1. Limited market
2. Poor economic condition
3. Lack of insurance knowledge
4. Lack of compulsory insurance
5. Low rate of return to the investors
6. Complicated procedure
7. Lack of reinsurance
8. Instability of political situation
9. Lack of insurance experts
10. Unhealthy competition
11. Unemployment
12. Lack of sufficient rules and regulation
STRUCTURE OF INSURANCE
CO.
Insurance companies are a composite of three companies.
•First there is the “home office” or actual insurance company.
• Second, there is the investment component, which invests the
premium collected in the investment portfolio. This is the investment
company.
• The third is the distribution component of the sales force. There are
different type of distribution forces. Agent of company, Agent associated
with any company, and commercial banks.
