Rishi Ram Pandit:
Insurance is one of the major component of financial system of Nepal. As a Nepalese financial system, the share of insurance sector is second largest behind bank and financial institutions. As a risk transfer mechanism, insurance provides financial protection from unpredictable losses. Today’s world is full of risk and uncertainty. Insurance is a way to minimize and provide
protection against those risks which are beyond human control. It is a way to indemnify to those unpredictable losses. Thus, insurance is transfer of the risk of loss from one entity to another in exchange for a premium and can be taken as a guaranteed compensation of a probable loss. The main goal of insurance is protecting life, wealth and assets of the human being. Insurance
companies play especially great role in economy. Insurance activities also help increasing the saving which helps to capital formation and ultimately leads to increasing country GDP. On the other side, insurance increases employment in economy. Improve economic and financial stability also one of the main advantages of insurance.
How Insurance Functions?
In insurance business, each policy holder buy insurance policy and pays a premium to transfer ‘risks’ to an insurer. An insurance policy is a contract between insurer and insured to protect against specific risks under agreed terms. The insurer (insurance company) calculates the premiums according to actuarial techniques using statistical data. The principle is based upon the insurer spreading its risk over different clients, some of risk will take themselves and most of risk will transfer reinsurer as per regulatory requirement. In this regard, insurance has been introduced to safeguard the interest of
people from uncertainty by providing certainty of payment at a given situation. When a person buys a policy and make regular payments, known as premiums, to the insurer then the insurance contract becomes effective. If s/he makes a claim to insurer will pay out for the loss that is covered under the policy.
Economic Value of Insurance:
For the economic growth of the country, insurance provides a strong platform to protect against loss of property and system to accumulate adequate capital for investment. A strong and healthy insurance sector is important for all sectors of economy i.e. primary, secondary and tertiary sector. From a macro-economic point of view, the insurance market could help to mobilize
savings and narrow the investment gap of developing economies. In emerging markets, domestic savings have not been fully mobilized despite huge funding needs arising from infrastructure projects. Insurance works as a bridge for the reduction gap between saving and investment, ultimately helps to the economic growth and development of the country. Insurance companies as important long-term institutional investors, therefore functioning as financial intermediaries, contribute to bringing together savers and borrowers. Life insurance promotes the development of capital markets and the financial sector as a whole by creating a demand for long-term financial assets.
Insurance has become a significant economic force in both developed and under developed countries. Insurance market activities contribute to economic growth, both as a financial intermediary and provider of risk transfer and indemnification by allowing different risks to be managed more efficiently, and by mobilizing domestic savings. Insurance companies also have a
role in the redistribution of money. They collect premiums and eventually redistribute the money as payment of the claims. Such investments help business and government to finance their operations and generate profits from those investments.
Life, Health and motor third party liability insurance enable private households to obtain a higher quality of life by satisfying their desire for security and for a guaranteed income level. Similarly, product liability and property insurance promote entrepreneurial activities and commerce. Insurances against premature death or disability in part substitute governmental social spending and save government resources for other essential social purposes. Insurance companies share the financial burden of risk of loss from people, property and business activities. So, insurance should not be luxurious goods, but as a necessary condition for sustainable economic development of any country.
The role of insurance in the economic development:
Insurance is one of the main and important fields of the economy. The main aim of the insurance is to protect people and property from risks and uncertainties. In the modern period there are too many accidents, bad events and unexpected losses. These risks can happen every time in social life. People always think about, how to escape from these risks. For this reason, insurance is considered the best tool for the risk mitigation. So, Insurance plays great role both in developed and developing countries’ economy.
The roles of insurance in Nepalese economy are as follows:
1. Employment generation:
Insurance industry provides employment opportunities in direct and indirect ways. There are lots of employees working in the life and non-life insurance companies. Similarly, there are large number of insurance agents, surveyors involve in insurance industries. In the present context, the number of individual agents has been increased tremendously. As on falgun end, 2076, there were 10,402 people direct employed in insurance industry. In addition, 401 surveyors and 2,06,000 insurance Agents working for life and non-life insurance industry.
2. Generates financial resources:
Insurance is an important part of financial system and generates financial resources by collecting insurance premiums from insured. These funds are invested in government securities, fixed deposit, stock, real estate as per the regulatory requirement. These investment help to the generate the financial resources in public and private sector, increase the economic activities. Nepalese Insurance Industry, collected the premium of Rs.95,378.5 Million and total investment of Rs.2,61,856 million
during 2018/19. These funds are productively utilized for the economic development of the country.
3. Stability of financial system:
Insurance is one of the main fields of service sector, it is being part of the financial system, perform six basic functions such as pooling of financial resources, facilitate capital transformation, make efficient pricing mechanism, risk hedging, facilitate trade and commerce, and acting as an agent to deal with the asymmetric information and moral hazard issues to improve the economic well-being.
4. Promotes economic growth:
Insurance generates significant impact on the economy by mobilizing domestic savings. It also helps to develop service, agriculture and industry sector of economy. It is known that, insurance sector helps to increasing national GDP.
The contribution of insurance premium to GDP ratio will be estimated to more than 3% at the end of fiscal year 2076/77. The growth rate of Nepalese insurance sector was significantly increasing in the present era. Insurance enables to mitigate loss, financial stability and promotes trade and commerce activities, those results into economic growth and development. Thus, insurance plays a crucial role in sustainable growth and development of an economy.
5. Insurance increases savings:
One of the main roles of insurance is that, it encourages
people’s savings. We can show example life insurance to this process. Life insurance
increases people’s savings due to payment of regular premium and it facilitates
investment. It develops a habit of saving money by paying premium. So, insured get the
lump sum amount at the maturity of the contract. Thus life insurance encourages savings.
6. Fostering Investment:
Investments are the driving factor for development. The level and quality of investment will directly influence the rate of economic growth and development. The size and depth of financial system reflects the size of savings and investments. Without guarantee of insurance (including reinsurance), most of the business activities, trade and commerce cannot operate. As a risk transfer mechanism, insurance industry channelizes the savings into long term investment in different sectors.
7. Insurance provides safety and security:
Insurance always provides financial support and reduce uncertainties in business and human life. There is always a fear of sudden loss from unexpected events. Insurance provides a cover against any sudden loss. For example, in case of life insurance financial assistance guaranteed to the family of the insured on his death. In case of non-life insurance security is provided against the loss due to fire, marine, accidents etc.
8. Insurance gives medical support to society:
A medical insurance considered essential in managing risk in health. The insured gets a medical support in case of medical
insurance policy. Medical insurance always protects people from illness, and insured people can get treatment with medical insurance. With giving medical support insurance plays great role in society.
9. Capital Market development:
As institutional investors, insurance companies contribute to the development as well as functioning of a capital market. Insurance companies receive premiums and invest to the capital market, which gives more dynamic and vibrant the capital market. Insurance sector provides capital market more productive.
10. Risk management:
Insurance facilitates spreading of risk from the insured to the insurer through application of different models and techniques. Insurance companies are well understanding to how to escape from the probable risk, how to reduce the physical risk,
how to reduce risk from asymmetric information and moral hazards, how to take precaution. It covers the economic risk, business risk, environmental risk, health risk, social risk, natural risk etc. However, all risks are not insurable but most of the risk can be insured. By reducing the different type of insurable risk promote the economic activities, leads to the sustainable development of the economy.
Insurance is an integral part of the economy, performing a variety of important functions for the efficient and effective development of economy. It supports the economic growth by mobilizing saving and investment, promoting financial stability, supporting trade and commerce, accumulation of capital and its efficient allocation, creation of employment activities, enhancing the entrepreneurial activities, creation harmony creation and so on. Insurance companies has contributed the economic development through capital formation and effective risk management. The Life and non-life Insurance Premium influenced in GDP growth of the country by almost 3% in 2019 and it is in increasing trend. The penetration of population density covered by insurance sector is only one-forth. Still there is a large gap of population from the reach of insurance service. So, Government of Nepal, insurance board and insurer should be focused on development of appropriate policy to expand insurance business in agriculture, industry and service sector for the economic development and prosperity.
(The author is the assistant director of Beema Samiti, insurance sector regulator of Nepal)