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. The transformation in the insurance sector starts with laying down the foundational digital rails. Some quick wins to kick-start the journey are highlighted below. These opportunities require technical support and concessional financial assistance from development organizations, a buy-in and accountable forward-looking approach from the regulators and an adaptive long-term perspective from insurers.

1. Policy and Regulation

The Nepal Insurance Authority’s adoption of policies and regulations has been rather reactive and slow. The insurance sector is evolving rapidly in the global landscape, mostly led by digital technologies. It implies that the regulatory authority is well equipped to facilitate a private sector-led disruption in the market.

Limitations in technical capacity and financial resources at the regulators’ end limit their ability to introduce data-driven policy changes. The government should bring forth regulations and incentivize the private sector to explore, for instance, third-party administrators (TPAs) in a country where insurers may not be able to reach geographically challenging locations. In addition, the government could overhaul legacy technologies to adopt a real-time data-centric system with technologically driven monitoring capabilities and delivery mechanisms to advance to wider geographies and verticals.

Nepal’s regulations observe a conservative narrative that limits insurers’ spending on marketing or has limited international insure-tech firms from entering. Policies to advance insurance through telecom providers seem to be a step that the regulators could adopt, given its success in many geographies. In today’s age, re-inventing the wheel is not an option; progress and innovation shall be defined by the agility, diligence and adoption of already existing models and policies. Regulatory delays need to be expedited to adopt risk-based capital and transition to a paperless delivery mechanism. Digital distribution and access to insurance (marketplace models/marketplace aggregators) are low-hanging fruits to pick.

Globally, the sign of the insurance market’s maturity is well reflected in their investment portfolio. The regulator's restrictive approach in permitting investments by insurance firms to term deposits limits insurance firms’ understanding of industries in Nepal. Opening investments to broader real sectors could complement the insurance firm’s yield, expertise, and understanding of broader macroeconomic variables. Observing the investment portfolio of all the insurance firms in the country, hardly a handful of investments have been made in real sectors, and only two of the 14 insurance firms seem to be engaged in such investments.

2. Product Innovation

Agricultural insurance products have not observed significant innovation, which is evident from their contribution to each insurer’s portfolio. Bounded regulations, the unavailability of actuarial talent, a lack of data-centric approaches, legacy ERP systems, and short-term interest have driven the insurance market to date. Despite successful pilot programs in index and weather-based insurance, these products have not been able to scale or expand commercially.

Given how technology has advanced over the years, harnessing the strength of artificial intelligence, machine learning and the Internet of Things, customized and suitable products could be developed. In India, using radio frequency identification devices (RFID) comprising a microchip inserted into livestock resulted in fewer fraudulent claims and faster claims processing. Similarly, advances in remote sensing technologies in many geographies have produced 30-year time series of rainfall data, enabling government and private insurers to develop and calibrate more accurate predictive models for risk coverage and pricing.

The innovation capacity within the insurance sector reflects the ecosystem’s ability to capture data and formulate appropriate solutions. Such public data infrastructure needs regulatory support and private sector ingenuity. Nepal’s diverse agricultural terrain (with mountainous, remote areas) requires insurance firms to develop sector-specific expertise to formulate products and delivery mechanisms.

3. Actuarial Talent

Globally, insurance sectors are run by specialized and technically sound professionals with actuarial degrees. In Nepal, we have less than 130 individuals pursuing actuarial studies from Tribhuwan University, and most insurance companies operating in Nepal do not have requisite qualified actuaries practising (hardly any fully qualified actuaries in any of the 14 insurance firms). Actuaries from India are engaged as consultants to assist and audit books and, to a certain extent, support insurance firms to review existing products. Prospects to develop resources and talent for this sector seem a no-brainer given the growth of the insurance sector over the years. Collaboration with the Actuarial Society of Nepal, Insurance Institute Nepal and universities to develop academic bridge programs through physical and digital platforms can enable homegrown talents.

4. Technology

Most of the insurance firms in Nepal operate legacy systems vulnerable to cyber threats and core operating systems that lack a consolidated approach. Nepal’s 14 insurance firms are observed to be using two specific core operating systems that capture basic insurance functions but lack requisite APIs to connect with evolving applications and systems that could provide an edge. Such systems limit the firm’s ability to adopt new technological applications and, at the same time, erode customer experience. The 14 non-life insurance companies, if scrutinized for their tech prowess, would exhibit a lack of a well-equipped and capacitated IT department or an IT unit whose only function is to support the company for hardware-related issues. Insurance firms in Nepal have IT departments that are, for the most part, not well-positioned to understand the system's architecture and have limited access to digital plans set by management.

For most insurance firms in Nepal, digital adoption and adaptation majorly construe a digital delivery channel, usually in the form of an app and website with a limited function of premium payment and claim registration. Openings to turn a new leaf and look at technologies beyond delivery are available for the sector. Using data analytics to cross-sell, understand customer behaviour and manage retention, develop products, expand to newer geographies and reduce transaction costs are all options to be grabbed by firms in the market.

Cybersecurity is another aspect that needs a deeper understanding and commitment from insurance players. Though the Nepal Insurance Authority has put a regulatory requirement for players to conduct an infrastructure audit yearly, in practice, it is much more a tick-box exercise executed by the statutory auditors themselves.

5. Financing

The growth and uptake of agricultural insurance open up many financing options for its policyholders. Insurance could play the pivotal role of collateral to assist farmers in accessing finance. Products such as warehouse receipt financing rely on insurance in addition to infrastructure. In Uganda, using mobile technology to collect biographical information on smallholder farmers and connect them to a range of digital financial services, bundling crop insurance and production loans have increased client value.

6. Education and Awareness

Low insurance penetration exhibits the need for awareness and education. Digital learning channels, content disseminated through mobile phones, SMS nudges, agency preparation and examination are a few of the low-hanging fruits that can be consumed.

The ability to bring together the government, development partners and private sector and triangulate efforts would empower the sector to bring compounded benefits. Each party working in silos would only result in unproductive results leading to conservative approaches that would further hold back the sector. Unlocking value requires collaboration and impactful capital that cannot be lost and ensures a win-win.

For more information about the insurance sector in Nepal and where it stands today, read blog #1