Insurance – letting others take your burden and setting yourself free!

Insurance is all maths!

There are many individuals that insure their risks with an insurance company. Very few actually face that risk. Insurance companies calculate the probability of an individual facing that risk, based on years of past data to set a trend projection for themselves; and then set a premium value for individuals to buy that insurance. You may never face that risk, but somebody who does, will receive major cuts from your insurance premium to pay up for the big loss he or she faced.

If you look at it from the service perspective, you can compare the service with what a coolie does with your luggage. He takes the burden which otherwise you would have to carry yourself, and then charges you for it. An insurance takes the burden of having lost an asset, a revenue source or even having lost your life, and provides you financial strength when you have lost it. For taking this ‘risk’ burden off your shoulder, they charge you a certain premium.

Insurance is also trust!

Most important term that insurance companies abide by is ‘Utmost Good Faith!’. Anytime you go to buy a policy, they just ask you to fill up a form. Based on various variables you fill up on the form, the guy behind the table calculates your risk factor and comes up with a premium amount. He won’t go check if your facts are straight, he won’t try and cross-verify if you were honest with them. If he did, your insurance policy premium would include that cost of verification, and probably you wouldn’t be able to afford it. So they will only cross verify the facts of the applicant when there is a claim on it. This way, insurance companies save a lot of costs.

Insurance is also investment at times, in case of Life Insurance!

A customer pays a premium top-up to cover more than the risk involved. Customer keeps paying for a long period of time, which, in an accumulated form, is invested by insurance companies in big projects, lease and other kinds of investments. This too is returned back to the customers in addition to the premium paid every year by the customer. This way, the customer receives the insurance benefits, along with good returns on the money invested in such insurance policies.

Insurance in Nepal

Insurance and Banking industry are the backbone for any economy. They provide accumulation of funds to support infrastructural investments, big projects, long term financial requirements, etc. Both banks and insurance deals in public money. That is, the general public’s hard earned money is deposited and entrusted with these institutions. So the promoters’ capital funds act as the security cushion to reflect the strength of the institution. Regulatory body (Beema Samiti, in cae of Nepal) provides necessary rules and regulations to ensure these institutions make healthy practices and also take care to foster the insurance industry to grow and prosper. However, Nepalese Insurance industry is far behind the banking industry in terms of maturity, market penetration and contribution to the national economy.

Capital Adequacy

Nepalese insurance industry is fairly undercapitalized. If you go through balance sheets of some of these insurance companies, you will see that total insurance fund collected is almost twenty times of the total capital and reserves of the company. Also, you will notice that majority funds have been placed with Banks rather than being placed in long term investments. It is a clear indication that the insurance industry cannot foster in absence of large scale and long term projects. It is also an indication that the insurance industry is simply playing safe through lump sum placements that fetch a decent return and pose marginal risks only. Projects, on the other hand, are considered risky– given the socioeconomic and political scenario of the country.

Popularity. Advocacy towards the benefits of Insurance.

It is difficult to find individuals who would ensure their vehicle or house out of sheer desire to have their assets insured. It is either because there is a regulation that demands insurance or because Financial Institutions that finance their assets require them to be insured. It is also difficult to find an individual who actually took some time to enter into an insurance company to inquire about a life insurance policy and actually buy it in the process. It is mostly the insurance agent that explores out for the customer and provides door to door service.

There have been feeble efforts from the private sector to bring about awareness towards the need and value of insurance. While each insurance company does it in its own meager ways, there is no consolidated efforts from all of them together towards educating the mass and in turn increasing the overall market size for their combined benefits. One also cannot feel any such effort from the government side to bring about such awareness.

The government has made some effort at its end to promote insurance. For example, there is a significant tax benefit a salaried individual will be awarded for having taken an insurance policy for a certain amount. That is, not only will you reap the benefits of having purchased the policy, but you will also save your tax liabilities on your insurance amount. For example, if you fall under 25% tax liability bracket as per your income, and insure yourself for Rs. 100,000, then the government will free you of Rs. 25,000 worth of tax obligations. Along with rewarding schemes such as this, the government has also imposed that your four-wheel vehicle tax will not be accepted until you show that the vehicle is insured for third-party risks on it.

While such efforts prevail, the mass still is at lack of knowledge, confidence and understanding as to why insurance is important. And for this, advocacy in part of the government and concerted effort from the private sector seems seriously lacking.

Life vs. Non-Life insurance

Life insurance also provides you returns on your money. Non-Life simply protects you against the financial risk.

This is the basic fundamental difference between the two, and this is where Life Insurance picked up a stronger appeal to the Nepalese mass, as they get their money back, along with ‘bonus’ added up to their money. So agents marketing Life Insurance policies can reach out to individuals and explain the details to curious hearing ears. But non-life agents simply pitch across business houses that need to insure their assets, or banks that have clients insuring their financed assets. While non-life insurance is mostly institution driven, life insurance has a strong retail client base.

The future

History has it around the world. Insurance is the second biggest industry after banking and forms the backbone of entrepreneurial success – both in terms of risk coverage and provision of long term investments. Nepal can be no exception. However, there is a tangible need to voice strong advocacy in favor of Insurance where both the private and the public sector have critical roles to play. The future cannot be bright for the insurance industry, without the general public’s faith and value put upon insurance and its benefits.