Bank-Driven Insurance Practices Fuel Rising Under-Insurance Problem

The growing trend of insuring property only up to the value of bank loans—rather than the actual worth of asset —has led to an increase in ‘under-insurance’ cases, resulting in frequent disputes between insurers and policyholders, according to industry officials and the Nepal Insurance Authority.

A recent case involving Om Feed Industry highlights the issue. The company had insured its assets worth Rs 390 million with the then Sagarmatha Insurance Company. In June 2020, the industry filed a claim of Rs 58.2 million after maize stored in its warehouse was damaged due to a blast.

However, the insurer rejected the claim, arguing that the policy only covered maize flour, soybean flour, and bran—not raw maize. The industry then filed a complaint with the Insurance Authority.

In its ruling issued in April 2024, the Authority noted that maize is the key raw material used to produce the insured goods and directed the insurer to process the claim based on the insured sum. But the Authority also observed that the company had insured its stock when the quantity was low, while the damage occurred during a period of higher stock levels.

As a result, the Authority ordered the claim to be settled proportionately, based on stock levels at the time of insurance and the insured amount — leading to the policyholder receiving less than the claimed amount.

Officials say such disputes commonly arise because many policyholders insure only part of their assets, often limiting coverage to the value of bank loans. This practice—referred to as ‘under-insurance’—results in inadequate risk coverage and contested payouts.

Insurance Authority Executive Director Sushildev Subedi said non-life insurance in Nepal is largely driven by loan requirements. “People insure their property only up to the value of the loan they take. In many cases, assets are under-valued or not fully declared when purchasing insurance policy,” he said.

“As a result, many complaints come to the Authority claiming they did not receive full payout. Our analysis shows that assets are often not insured at their fair value, and insurers cannot be directed to pay for losses that fall outside coverage,” Subedi added.

Under current practice, insurance is mandatory mainly for compliance with government rules or to obtain loans from banks and financial institutions. Insurers say banks usually seek risk coverage equivalent to the loan amount, but policyholders seldom insure their full assets, leaving them under-protected.

Birendra Chhetri, president of the Nepal Insurers’ Association, said under-insurance stems from the public’s tendency to insure property only against loan amounts. “When insurance is done merely to match bank credit, it fails to cover actual losses,” he said. He emphasised the need for policy measures to encourage insurance based on fair asset valuation.

Subedi said the Authority alone cannot curb the practice of insuring only up to the loan amount. “We cannot issue directives to banks and financial institutions. Awareness among the public is necessary to create an environment where people insure their assets at their actual value,” he said.

Bankers argue that customers view insurance as an unnecessary expense and therefore opt for minimal coverage. “We see insurance being done simply to get a loan approved,” said a loan department staffer at a commercial bank. “We guarantee the loan risk, but customers themselves do not want to insure assets at their full value.”

The gap between actual losses and insurance coverage was evident during the Gen Z movement in early September. While the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) estimated private-sector losses at Rs 80 billion, the Insurance Authority reported that non-life insurers received claims amounting to just Rs 23.44 billion—showing that a large portion of affected businesses had inadequate or no insurance coverage.