Low Interest Rates Squeeze Insurers, Fuel Push for Overseas Investment

Kathmandu. Nepal’s insurance companies are increasingly calling for permission to invest a portion of their funds in international markets, as persistently low bank interest rates at home continue to erode returns and pressure profitability. With limited domestic investment instruments and the absence of large-scale infrastructure bonds, insurers argue that overseas exposure has become a necessity rather than a choice.

For years, insurers have parked the bulk of their investments—nearly 80 percent on average—in banks and financial institutions. However, historically low deposit rates have sharply reduced income from fixed deposits, the sector’s primary source of steady returns. Compounding the problem, excess liquidity in the banking system has made banks reluctant to absorb large deposits from insurers, even at lower rates, leaving companies struggling to place funds efficiently.

This pressure is already visible in financial performance. Compared to fiscal year 2080/81, profits of 14 non-life insurance companies declined by nearly 29 percent in 2081/82. Their combined net profit fell from NPR 5.85 billion to just NPR 4.16 billion. Life insurers were not spared either: profits of 14 life insurance companies dropped by 16.24 percent, from NPR 6.51 billion to NPR 5.45 billion over the same period.

While life insurers posted a modest rebound in the first quarter of the current fiscal year 2082/83, the picture remains mixed. According to first-quarter financial statements, 14 life insurers together earned NPR 1.97 billion in profit, a 2.51 percent increase year-on-year. Non-life insurers, however, slipped deeper into trouble, with almost all reporting losses except Prabhu Insurance and National Insurance. Prabhu Insurance posted a 12 percent rise in profit to NPR 63.1 million, while National Insurance swung back into profit with NPR 38.1 million after a loss in the previous year’s first quarter.

Industry officials say the non-life segment is facing a double blow. On one hand, low deposit yields have squeezed investment income; on the other, insurers have had to pay large volumes of claims related to Gen-Z protests, floods, landslides, and other disasters. The combination has significantly weakened balance sheets, intensifying calls for diversification of investment portfolios.

Data from Nepal Insurance Authority underline how concentrated insurers’ investments remain. By the end of the first quarter of 2082/83, non-life insurers had invested NPR 64.87 billion across various sectors, of which NPR 47.48 billion—nearly three-quarters—was locked in fixed deposits at banks and financial institutions. Class ‘A’ commercial banks alone accounted for NPR 41.56 billion, followed by development banks and finance companies.

Non-life insurers have also invested smaller amounts in government securities, listed company shares, bonds, debentures, mutual funds, and infrastructure-related sectors such as hydropower, renewable energy, tourism, roads, transmission lines, education, and health. However, these alternative investments remain marginal compared to bank deposits, limiting their ability to offset falling interest income.

The concentration is even more pronounced among life insurers, whose total investments reached NPR 789.82 billion in the first quarter. Of this, more than NPR 544.87 billion was placed in commercial bank fixed deposits, with additional exposure to development banks, finance companies, and infrastructure banks. Life insurers have also expanded investments in government securities, listed equities, bonds, mutual funds, and real estate, but fixed deposits still dominate their portfolios.

A striking trend is the continued growth of insurers’ deposits in banks despite declining returns. In the first four months of the current fiscal year alone, insurers invested NPR 684.63 billion in bank fixed deposits, up from NPR 623.53 billion during the same period last year. This reflects not confidence in returns, but rather the lack of viable alternatives within Nepal’s financial system.

Insurers argue that allowing limited overseas investment—under clear regulatory caps and safeguards—would help improve returns, spread risk, and expose the sector to global best practices. They say such diversification would ultimately strengthen insurers’ financial health, benefiting policyholders and the broader economy.

Regulators, however, remain cautious, citing concerns over capital flight, foreign exchange risks, and supervisory capacity. Yet with profits under strain and domestic options exhausted, pressure is mounting on policymakers to revisit the rules.

As low interest rates show little sign of reversing in the near term, the debate over international investment is set to intensify. For Nepal’s insurers, the question is no longer whether diversification is desirable, but whether the system can afford to delay it any longer.