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By Dipesh Ghimire

Life Insurers Increase Investments by 16.56% in First Quarter Amid Declining Interest Rates

Life Insurers Increase Investments by 16.56% in First Quarter Amid Declining Interest Rates

Investment by Nepal’s life insurance companies grew significantly in the first quarter of the current fiscal year 2082/83, even as falling interest rates continue to pressure their earnings. According to regulatory data, the total investment of 14 life insurers reached Rs 7 Kharba 89 Arba 82 Crore 82 Lakh, marking a 16.56% rise compared to the same period last fiscal year. In the first quarter of 2081/82, the sector’s investment stood at Rs 6 Kharba 77 Arba 59 Crore 23 Lakh.

Deposit Concentration Remains High, Raising Questions on Diversification

Despite the robust growth, the structure of the investments reveals a heavy concentration in bank deposits. As of Ashoj, 76.68% of the total industry investment is parked in fixed and savings deposits with banks and financial institutions.

Insurance companies are legally required to maintain at least 45% of their investment in deposits—minimum 30% in commercial banks and infrastructure development banks, 10% in development banks, and 5% in finance companies. However, insurers have significantly exceeded this threshold, indicating a conservative investment approach largely driven by liquidity needs and market uncertainties.

Regulators and experts argue that life insurers—whose primary business involves managing long-term liabilities and settling high-value claims—prefer deposits because they provide safety and immediate liquidity. However, the prolonged trend of excessive concentration also exposes insurers to interest rate volatility, limiting returns when deposit rates fall.

Declining Interest Rates Hurt Insurers’ Profitability

The life insurance sector’s main source of income is the return earned on investments. As a major portion of their portfolio is tied up in fixed deposits, insurers’ profitability directly depends on bank interest rates. With liquidity remaining abundant in the banking system, commercial banks have been steadily reducing deposit rates, which has adversely impacted the earnings of insurance companies.

Industry insiders say insurers had enjoyed higher profits during periods of elevated interest rates, but the present low-rate environment has compressed margins across the sector. Although Nepal Rastra Bank recently removed the rule mandating that institutional deposits must earn one percentage point lower interest rate than individual deposits—a change expected to provide some relief—the overall impact remains limited as market rates continue to soften.

Breakdown: Where Are Life Insurers Investing?

The first quarter saw significant sectoral shifts in investment allocation:

1. Government Securities Surge

Life insurers increased their holdings in government bonds and treasury bills to
Rs 9 Arba 73 Crore 48 Lakh, up sharply from Rs 2 Arba 80 Crore 39 Lakh at the end of Ashar.
This indicates growing confidence in secure, long-term government instruments amid fluctuating private-sector returns.

2. Real Estate and Equity Holdings

  • Real estate investment: Rs 75 Crore 81 Lakh

  • Listed company ordinary shares: Rs 37 Arba 71 Crore 4 Lakh

Insurance companies continue to maintain strong exposure to the equity market, balancing the safety of deposits with the growth potential of the stock market.

3. Bond, Debenture and Preference Share Investments

  • Bank-issued instruments (preference shares, bonds, debentures): Rs 71 Arba 1 Crore 6 Lakh

  • Listed companies’ bonds/debentures: Rs 11 Arba 27 Crore 87 Lakh

These investments offer relatively stable returns and contribute to diversification away from pure deposits.

4. Sectoral and Institutional Investments

  • Agriculture & hydropower listed firms: Rs 11 Arba 69 Crore 30 Lakh

  • Investment companies’ shares: Rs 2 Arba 73 Crore 70 Lakh

  • Citizen Investment Trust & mutual funds: Rs 8 Arba 32 Crore 66 Lakh

  • Founder shares (other promoters): Rs 16 Arba 32 Crore 50 Lakh

  • Unlisted public companies: Rs 1 Arba 67 Crore 4 Lakh

  • Other miscellaneous investments: Rs 12 Arba 86 Crore 52 Lakh

These varied allocations reflect insurers' attempts to counter declining deposit returns by gradually exploring alternative avenues.

Interpretation: Investment Growth Amid Pressure on Returns

The data shows a sector expanding its investment base but struggling to diversify its portfolio in a meaningful way. With over three-fourths of assets tied to deposits, insurers remain highly sensitive to interest rate changes. The rapid expansion in government securities indicates insurers' desire for stable returns, but this shift alone may not be enough to offset the earnings impact of falling deposit rates.

Analysts note that the industry’s long-term sustainability depends on effective risk balancing—between safe, liquid assets and higher-yielding but riskier instruments. As Nepal's financial markets evolve, life insurers may face increasing pressure to innovate their investment strategies, strengthen asset-liability management, and reduce overreliance on bank deposits.

The first quarter of fiscal year 2082/83 paints a mixed picture for Nepal's life insurance sector—strong investment growth, but limited diversification and declining profitability due to falling interest rates. With regulatory changes offering some breathing room and government securities gaining prominence as a safe haven, the sector is now at a crossroads. The coming quarters will reveal whether insurers adapt to changing market dynamics or continue operating within the comfort zone of traditional deposit-heavy portfolios.

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