Life Insurance Companies Scale Back on Single Premium Policies, Amid Rising Risks

Life insurance companies in Nepal have significantly reduced their issuance of single premium policies, citing rising risks and unsustainable business practices. This reduction comes after a noticeable shift in policyholder behavior, with many individuals surrendering their policies prematurely or using them as collateral for loans, which has amplified risks for insurers.

Decline in Single Premium Policies

In the first six months of the current fiscal year 2082/83, life insurance companies issued only 7,946 single premium life insurance policies, representing a 23% decline compared to the same period last year when 10,309 such policies were issued. According to data from the Nepal Insurance Authority, the share of single premium policies within total policies issued has also decreased significantly. As of the end of Poush (December), single premium policies accounted for just 0.22% of the total policies issued, a notable drop from the 0.36% share in the previous fiscal year.

A single premium life insurance policy is a type of insurance where the policyholder pays the full premium in a lump sum at the time of purchase. This policy had previously been promoted by insurance companies, offering a one-time commission of 6% to agents. However, this practice has been phased out due to the rising number of policy surrenders or the use of policies as collateral for loans, which have contributed to increasing risk for the insurers.

Changing Insurance Market Landscape

The reduction in the sale of single premium policies is part of a broader trend in the life insurance market, where companies are becoming more cautious in their approach to policy sales. The risk associated with such policies prompted the Nepal Insurance Authority to impose limits on the number of policies an agent or company could issue. Keshav Dahal, the Deputy Director of the Insurance Division at the Authority, explained, “A few years ago, companies aggressively sold single premium policies. However, as irregularities began to appear, the Authority set limits. Now, companies have become more cautious.”

Despite this drop in single premium policy sales, the overall life insurance market has experienced growth. A total of 36,88,055 life insurance policies were issued in the first half of the fiscal year, a 29% increase from the same period last year. This signifies a growing interest in life insurance, especially in short-term and regular life insurance categories, while the share of traditional life insurance policies remains low.

Shift Towards Short-Term and Regular Life Insurance

According to the data, the highest share of issued life insurance policies belongs to short-term life insurance, which makes up 68.47% of the total market. Conversely, lifetime life insurance policies make up only 0.07% of the total market, reflecting a sharp decrease of 10.17% from the previous year. Other types of life insurance, including child-related life policies, advance premium policies, and term life insurance policies, also show varying degrees of growth.

Term life insurance policies, including those linked to foreign employment and child insurance, have seen consistent growth, with foreign employment life insurance contributing 10.88% and term life insurance contributing 13.57% of the total policies issued. Notably, foreign employment-related life insurance policies have grown by 3.11% compared to the previous year, while child-related policies saw a 23.66% increase.

Increased Activity in Certain Regions

Regionally, Bagmati Province holds the largest share of active insurance policies, with 63.43% of the total policies in Nepal. Other regions like Koshi and Madhesh Provinces have seen noticeable increases in insurance activity, with growth rates of 66% and 14.93%, respectively. Karnali Province, which has historically seen lower insurance activity, witnessed a staggering 121% increase in active insurance policies compared to the previous year, demonstrating a significant shift in the region’s participation in the insurance market.

Premium Collection and Market Growth

In terms of premium collection, term life insurance premiums have increased by 32%, with insurance companies collecting NPR 39.29 billion in premiums by the end of Poush. Similarly, advance premium term life insurance has contributed NPR 18.34 billion, reflecting a 3.95% growth from the previous year. The total collection from life insurance premiums stands at NPR 162.5 billion, a 15.73% increase from the previous year, underscoring the overall growth in the sector.

Single premium policies, despite their decline in issuance, still contribute a significant portion to premium collections. Insurance companies collected NPR 3.97 billion from single premium policies, marking a 30.13% increase from the previous year. Other categories, such as foreign employment term life insurance and lifetime insurance, have also shown positive growth, indicating a broader trend of increasing participation in life insurance.

Challenges and the Road Ahead

While the market has seen growth in premiums and policy issuance, challenges remain. Life insurance companies face rising risks, especially with the continued trend of policyholders surrendering their policies prematurely. The increasing number of short-term policies also poses a challenge in terms of profitability for insurers, as these policies generally generate lower returns over the long term.

Nevertheless, with the growth in policy issuance and premium collection, the life insurance sector in Nepal is moving toward a more diversified and resilient model. Insurance companies are expected to continue focusing on safer, more sustainable policy types while ensuring that their risk management practices are robust enough to handle future market fluctuations.

In conclusion, the life insurance industry in Nepal is experiencing a shift towards more sustainable and diversified policy offerings. The reduction in the sale of single premium policies reflects the industry's response to rising risks, while growth in short-term and regular life insurance policies signals a growing interest in these more flexible and accessible options. As the market matures, insurance companies must continue to adapt to changing consumer behavior and ensure that their offerings remain aligned with the needs of a growing and dynamic economy.