Kathmandu. Experts have warned that the increasing natural and insurance-related risks in the hydropower sector could now put Nepal’s financial and banking sector in crisis.
According to a study report related to Nepal’s hydropower projects published by the Nepal Insurance Authority, losses and losses in hydropower projects have increased due to the impact of climate change. However, there is not enough reinsurance to cover the damage. It has also expressed concern that the tendency of the non-life insurer to bear the risk at a lower insurance premium and cheaper than the fixed premium rate will not be able to bear the loss in case of actual loss.
The report has suggested that a specialized insurance scheme should be introduced by incorporating the risks inherent in hydropower projects. Parametric insurance scheme can be an appropriate solution for Nepal’s hydropower projects that are affected by climate change.
Nepal’s commercial banks have invested billions of rupees in loans through consortium financing of hydropower projects from the deposits of the general public. Depending on the capital structure of the project, the loan portion of the total capital is 40 to 70 percent.
If a big project is swept away by a flood and the insurance company does not pay the payment through technical or legal hurdles, then that project will not be able to pay the principal and interest of the bank. This will increase bad loans in the banks and the entire economy will be in crisis.
The private sector has already invested Rs 450 billion in 9,090 MW of projects that have completed construction and 36,336 MW that are under development. According to a report published by the Independent Power Producers’ Organization Nepal (IPPAN), Nepal has invested around Rs 1300 billion in hydropower projects, transmission line construction and substations.
Similarly, according to the Securities Board of Nepal (SEBON), 15 million Nepalis worth Rs 48 billion have participated in the project along with 550,000 promoter investors. Promoter shareholders and general public have shares worth Rs 2.75 billion in 99 projects listed on the stock exchange.
According to the study report related to Nepal’s hydropower projects published by the Insurance Authority, the fiscal year 2081. In 2018, risk insurance of hydropower projects amounted to Rs 428.45 billion. This amount is not enough to bear the risk of all the investments in the hydropower sector.
Parametric Insurance Scheme
The Parametric Insurance Scheme has been implemented in the Upper Trishuli-1 Hydropower Project under the aegis of Swiss Re Group. This insurance product bears the risk of a special nature of a hydropower project. Under this insurance plan, the insured is compensated immediately on the basis of predetermined weather changes, rainfall, flood, landslide and earthquake indicators. It does not use the traditional methods of domestic and foreign expert surveyors conducting on-site study of the damage, preparing the report of the damage, analyzing the report of the insurer, re-evaluating the damage and paying the amount of compensation only after completing the entire process. This insurance scheme will provide relief to the investors of the project to start the reconstruction work of the project immediately as the payment will be made immediately.
