Falling Interest Rates Reshape Nepal’s Insurance Landscape

The relationship between bank interest rates and insurance uptake in Nepal has become increasingly complex, exposing structural tensions within the financial system. As bank deposit rates decline, insurance products often appear more attractive to savers seeking stable returns and long-term security. However, whether insurance companies can consistently meet customer expectations in such an environment has emerged as a central challenge.

Insurance companies in Nepal invest a significant portion of their funds in fixed deposits (FDs) with banks and financial institutions. When FD interest rates fall, insurers face pressure on their investment income, directly affecting their ability to offer competitive bonuses and returns to policyholders. This creates a paradox: while lower bank interest rates encourage people to buy insurance, the same rate environment weakens insurers’ earning capacity.

Typically, low deposit rates signal excess liquidity in the banking system. In such conditions, banks are less eager to attract additional deposits. This has direct implications for insurers, which rely on institutional fixed deposits as their primary investment vehicle. In earlier years, when lending rates were high, the interest rate gap between individual and institutional deposits stood at around 1.5 percentage points, later narrowing to 1 percent. With loan interest rates now falling to single digits, many experts argue that there should no longer be a meaningful distinction between rates offered to individual and institutional depositors.

Despite this, Nepal continues to maintain different interest rate structures for institutional deposits—where insurance companies fall—and personal savings. Industry insiders view this as an unfair practice. They argue that insurance companies play a crucial role in mobilizing scattered household savings and channeling them into the formal financial system. Penalizing insurers with lower institutional deposit rates, they say, undermines this role.

The concern is heightened by the fact that insurance products already operate under constrained margins. Life insurance bonuses in Nepal typically hover around 6 percent, leaving little room to absorb further reductions in investment income. If insurers face lower returns on deposits while being expected to maintain attractive benefits for policyholders, they risk being caught in what industry leaders describe as a “double squeeze.”

Calls are therefore growing for the Nepal Rastra Bank to revisit its policy on deposit rate differentiation. Analysts argue that treating institutional and individual deposits differently no longer reflects market realities and could weaken the insurance sector at a time when long-term savings are crucial for economic stability.

From a broader perspective, the debate highlights the interconnectedness of Nepal’s financial system. Interest rate policies designed for banks inevitably ripple through insurance, capital markets, and household savings behavior. As Nepal navigates a period of low interest rates and subdued economic confidence, aligning monetary policy with the needs of long-term institutional investors like insurance companies may prove essential.

Ultimately, experts caution that weakening insurers’ investment capacity could erode trust in insurance products themselves. In a country where insurance penetration is still evolving, ensuring that insurers are not disadvantaged by policy design is seen as critical—not only for the sector’s health, but for financial inclusion and economic resilience as a whole.