Nepal Hydropower Development Project (NHDP) Role of Insurance in Hydropower Development

Since FY2008-09, there have been marginal capital additions to the sector. Many small and large hydropower projects are under license and/or development, with approximately 5,730 MW of new capacity in various stages of development, 2,500 of which is in the hands of the private sector. Two large projects, comprising more than 1,100 MW of capacity, are expected to reach financial close this year and be in commercial operations within 5 years. The nation's insurance sector has a crucial role to play in hydropower development, but it has only bit parts in the current market. There are twenty-seven companies operating in the insurance sector, including the National Insurance Company (Rastriya Beema Sansthan--RBS), but the non-life insurance market in general, and the market for HPP-specific products in particular, is relatively underdeveloped. Of those twenty-seven companies, only seventeen provide non-life insurance services. The lack of products available on the local market is a significant challenge, as many developers believe that the products currently offered are inadequate to protect developers from the wide array of risks encumbering HPP development, especially those related to natural disasters. Nepal's legal and regulatory framework also exacerbate the situation by institutionalizing conventions that limit the ability of non-life insurance providers to grow and compete in the market. Other key challenges to growing the non-life insurance sub-sector include the currently low level of risk-awareness and insurance education among society, the limited technical capacity among insurance companies and the potentially insured, and a lack of qualified insurance intermediaries in the Nepal insurance market. These challenges hinder the growth of the hydropower insurance sub-sector and limit the ability of insurance companies to provide products and services to meet the needs of HPP developers. To address these challenges, the report identifies four key actions that could greatly improve the hydropower insurance sub-sector and thereby grow markets to improve the economy and facilitate hydropower development. These actions include introducing risk-based premiums, introducing best actuarial evaluation practices, reducing regulatory restrictions where they are not required, and increasing capacity building for domestic insurance companies, financial intermediaries, and the wider public. Risk is a critical concept in hydropower development, and it is essential to understand the various types of risks that can affect HPPs. According to the report, there are as many as twenty kinds of risks that could negatively affect HPPs anywhere in the world, including geological and hydrological hazards, sudden changes in the socio-economic environment, and the immense funding required to realize a medium to large HPP. The report highlights the importance of comprehensive insurance coverage for commercial lenders and developers to mitigate these risks. The report emphasizes the need for a robust insurance sector to support hydropower development in Nepal. By introducing risk-based premiums, best actuarial evaluation practices, and reducing regulatory restrictions, the insurance sector can provide more effective products and services to meet the needs of HPP developers. Additionally, increasing capacity building for domestic insurance companies, financial intermediaries, and the wider public can help to grow the non-life insurance sub-sector and facilitate hydropower development in Nepal.