Low Bank Interest Rates Push Insurance Companies Toward Foreign Investment Options

Kathmandu – Nepali insurance companies are facing growing financial pressure due to persistently low interest rates on bank fixed deposits and banks’ reluctance to renew deposits even after maturity. As returns from traditional investments continue to shrink, insurers are now being forced to seek alternative investment avenues.

To address the issue, insurance companies have begun discussions on opening investment opportunities in foreign markets. The Insurance Association has formally requested Nepal Rastra Bank to allow overseas investments and is also lobbying the Insurance Authority on the matter, according to industry sources.

Chief executives of insurance companies say that banks, flush with liquidity, are refusing to accept large fixed deposits from insurers. Currently, around 93 percent of insurance companies’ investments are parked in bank fixed deposits, making the sector highly vulnerable to fluctuations in bank interest rates.

“Insurance companies are directly affected by the rise and fall of bank interest rates,” said Pravin Raman Parajuli, President of the Life Insurance Association. “Recently, banks have become reluctant to take deposits, which has further increased the stress on insurers.”

Parajuli added that insurers are now preparing to diversify their investments to reduce risk and dependency on banks. Echoing similar concerns, Birendra Baidwar, President of the Non-Life Insurance Association, said that bank interest rates have a direct impact on insurance companies, while the Insurance Act does not allow them to immediately shift investments into alternative sectors.

“This situation has made it obligatory for insurers to look for alternative investment options,” Baidwar told Beemapost, adding that the industry has reached a point where diversification is unavoidable.

Insurance companies are currently under strain as banks are offering interest rates below 3 percent on new fixed deposits and are hesitant to renew older deposits. With interest rates at historic lows, insurers’ returns have declined sharply, while profits were already affected in the previous fiscal year.

Shivnath Pandey, Chief Executive Officer of Sanima Reliance Life Insurance, said the bigger challenge is not just low interest rates but banks’ unwillingness to accept insurance funds. “The main problem is banks’ reluctance to take our deposits,” he said. “We are not in a position to immediately jump into other sectors, so we are looking for alternatives that do not directly depend on domestic bank interest rates,” Pandey told Beemapost.

As a result, insurance companies are exploring opportunities to invest in foreign bonds to shield themselves from domestic interest rate volatility. Currently, 10-year government bonds offer returns of around 11 percent in Pakistan, 10 percent in Sri Lanka and Bangladesh, and more than 6 percent in India.

Insurance companies, including Nepali reinsurance firms, have a total investable fund of approximately Rs 870 billion. Of this, only about Rs 27 billion has been invested in non-deposit sectors, while the majority remains tied up in bank deposits. As of mid-Mangsir, insurers had kept around 77 percent of their total investments in bank deposits, raising concerns over declining income and sustainability.