This blog series in two parts provides a picture of the insurance sector in Nepal, where it stands, and the quick wins that would fast-track its digital transformation. In this first part, you will learn more about the sector and the initiatives that are contributing to the transformation and integration of new technologies in the delivery and expansion of the offer for a more climate-resilient agriculture in Nepal.

The insurance sector of Nepal began in 1947 with the introduction of Nepal Insurance and Transport Company Ltd (now Nepal Insurance Co. Ltd). Fast forward seven decades, the sector is estimated to be approximately NPR 460 billion (US$3.5 billion) in market capitalization, with a total premium collection of NPR 182.91 billion ($1.4 billion) in the financial year 2022-2023. The sector is regulated by the Nepal Insurance Authority (NIA) and comprises 14 life, 14 non-life, two re-insurance, three micro life and four micro non-life insurance companies. The total premium collected by non-life insurance companies in the financial year 2022-2023 is NPR 40.34 billion (US$310 million), with agricultural insurance comprising only 6 percent and growing at a compounded annual growth rate (CAGR) of 35 percent in the past five years fuelled by a 75 percent subsidy from the government. Overall, the non-life insurance penetration in Nepal stands at 0.75 percent. In comparison, life insurance penetration stands at 2.65 percent which is relatively better than neighbouring countries such as Bangladesh, Sri Lanka, Myanmar, Bhutan and Pakistan.

Nepal is considered one of the five countries most vulnerable to climate change globally (Nepal Disaster Report, 2015). Recent year occurrences such as late or pre-monsoons, unusual precipitation, shift of traditional rainfall from mid-June-July to mid-August-September (affecting paddy production), warmest last ten years, extreme fog conditions in the terai belt of Nepal, unusual snowfall in the Darchula district, survival of mosquitoes from terai to mid-hills, decreasing frost day in Kathmandu valley and retreating of glaciers evidence the adverse impacts of climate change in the country. The implication of this on the agriculture sector is even more severe. Low-income people from rural areas face higher vulnerability due to their high dependence on agriculture.

Despite the agriculture sector’s significant contribution to GDP (24 percent) and employment (66 percent of the total labour force), the industry observes multiple impediments hindering expected growth and ambitions. Despite over five decades of countless government interventions and development finance support to the sector, productivity, efficiency, and technological advancements have been limited. The sector battles with issues from value chain advancements, supply chain bottlenecks, storage and logistical facilities, human resource availability, restricted access to finance, as well as limited product offerings, services, and risk capacity from insurers. To add to the plethora of problems that stagnate the sector, battling the ambiguity and uncertainty of climate change has further exasperated policymakers and sector experts.

Amongst the many challenges the agricultural sector will need to resolve, risk management products and services serve as critical and interlocking pieces to mitigate existing challenges beyond financial access. Agricultural insurance is an important risk management tool to cope with losses from weather and agricultural risks. Based on product type, insurance can address various risks arising from climatic and non-climatic factors. Managing agricultural risks has become challenging with limited homogeneous product offerings in the sector. Despite registering a 35 percent CAGR in the last five years of premium collection for agricultural insurance, insurance companies have less than 6 percent of their insurance portfolio in agriculture and continue to grapple with bringing about efficient and technology-adaptive products and services, delivery channels and mechanisms and claim management processes. In a country where internet penetration stands at over 51 percent and 73 percent of the population owns smartphones, it is imperative that insurance companies re-think their strategy to address the opportunities technology-enabled agricultural firms offer and break self-built technological ceilings within insurance companies.

In recent years, UNCDF, along with various development financial institutions and bilateral and multi-lateral organizations, has made efforts to support Nepal's insurance sector with the following initiatives:

1. UNCDF, in partnership with a Nepali microfinance institution, Jeevan Bikas Laghubitta Bittiya Sanstha, the Insurance Board of Nepal and Swiss insurance technology (insurtech) firm Pula, completed a pilot programme in 2022, combining technical assistance, subsidies and financial education to design and deploy an index-based insurance product for Nepali smallholder farmers. The programme provided 15,000 smallholder farmers with insurance covering crops valued at $4 million. In addition, 70,000 smallholder farmers accessed education on index insurance, and 10,000 farmers received agricultural training.
2. In 2021, UNCDF, along with the Access to Insurance Initiative (A2ii), embarked on a capacity-building pilot with the Insurance Board of Nepal to expand access to inclusive and digital insurance.
3. Under the SAKSHAM programme supported by the Foreign Commonwealth and Development Office (FCDO), a leading non-life insurance company, Shikhar Insurance Company Ltd piloted a weather-based index insurance in Jumla, enabling the company to unlock and safeguard the region’s apple production potential.

Despite impediments that obstruct a paradigm shift in the insurance sector, digital transformation for insurers serves as a low-hanging fruit to expand the market, support the agriculture sector and complement the government of Nepal’s commitment to achieving Sustainable Development Goal (SDG) 13 (climate action). This commitment requires $47.4 billion for climate adaptation and $196.1 billion for climate mitigation between 2021 and 2050.

For more on the quick wins for the digital transformation of the insurance sector in Nepal go to the blog #2