While a pool has been established to share RSMDST risks, insurers are still expected to retain more exposure than anticipated.
Singapore: Insured losses from the recent rioting in Kathmandu are expected to be material given that even modest claims can weigh heavily on Nepal’s relatively small non-life insurance market, according to a new AM Best commentary.
The agency cites preliminary estimates from industry sources indicating that hotel operators alone have suffered losses exceeding NPR 25 billion (USD 177 million), with retail chains and auto dealers also reporting substantial damage.
The riots, widely referred to as the “Gen Z” protest, have underscored the vulnerability of Nepal’s insurers and reinsurers to socio-political instability.
The Best’s Commentary,“Riots Impose Financial Strain on Nepal’s Insurers and Reinsurers,” states that while many damaged assets are expected to be uninsured, policy extensions typically cover private properties for riots, strikes, malicious damage, sabotage and terrorism (RSMDST) risks. There is limited visibility around the full extent of insured and economic claims, but gross insured losses reported by the Nepal Insurance Authority have already reached a magnitude like that of the deadly 2015 Nepal earthquake.
“The outsized proportion of losses arising from widespread riots highlights the likelihood of earnings and capital impacts on the market, especially if claims continue to escalate,” said Susan Tan, senior financial analyst, AM Best.
According to AM Best, insured losses reported so far by the Nepal Insurance Authority have already reached a scale similar to that of the 2015 earthquake.
AM Best said that Nepal’s non-life sector, at around NPR 45 billion, is especially vulnerable due to its modest size.
While a pool has been established to share RSMDST risks, insurers are still expected to retain more exposure than anticipated.
For companies with thin capital buffers, the rating agency warned this could erode solvency levels and weaken their ability to withstand further shocks.
“The outsized proportion of losses arising from widespread riots highlights the likelihood of earnings and capital impacts on the market, especially if claims continue to escalate,” added Susan Tan, Senior Financial Analyst, AM Best.
Capital pressure on Nepal’s domestic reinsurers is also likely, though retrocession may partially alleviate financial stress. Notwithstanding, elevated retention of RSMDST exposures may still erode their capital buffers, reducing their ability to withstand subsequent shocks over the near term.
Meanwhile Fitch Ratings has said recent social unrest in Nepal (BB-/Stable) has raised risks to the economic and fiscal outlook and could weigh on the sovereign’s credit metrics, says Fitch Ratings. We believe the country’s strong external liquidity, and modest and highly concessional government and external debt burdens are likely to help to contain the impact on the sovereign rating. However, rating pressures would build if we perceived an increasing likelihood of continued political gridlock, complicating economic policy making.
Calm has returned, but we believe the violence has dampened near-term growth prospects by curbing normal economic activity, and hurting consumer and business confidence. We also expect additional tourist cancellations ahead of the high season in October-December.
Still, the scale of the medium-term economic impact may be modest, assuming unrest does not flare up again and tourist confidence recovers. We are not aware of any significant disruptions in major development projects due to the protests, including in the hydropower sector, which should limit the economic fallout.
Remittances could play a role in cushioning the unrest’s effects. For example, Bangladesh’s remittance inflows surged by around 80% yoy in September 2024 after the fall of its government amid popular protests in August. However, this partly reflected a slowing of inflows during the country’s unrest and remittance growth in 4Q24 was in line with the average for the year. Moreover, it is unclear whether remittance dynamics in Nepal will follow a similar pattern.
Significant uncertainty remains around Nepal’s near-term political outlook. It is unclear whether the de-escalation of violence will prove durable, whether the interim government that took office on 12 September can restore political stability and hold elections scheduled for 5 March 2026, and how stable any post-election government will be.
A period of extended political stress, such as delays in fully resuming government operations or problems with the transition to a new government, would have a greater impact on Nepal’s credit metrics, increasing risks to the sovereign credit profile. This could raise challenges to policy-making effectiveness and aggravate the impact on governance from the recent deterioration in political stability.
Nepal’s governance metrics are already weaker than the median for ‘BB’ category sovereigns. Prolonged political disruption could also weigh on medium-term growth prospects, widening the gap between Nepal’s GDP per capita and that of ‘BB’ category peers, said Fitch.
“We see potential revenue shortfalls due to the unrest, along with spending pressures from reconstruction and the elections, posing near-term fiscal risk, despite the new finance minister’s pledge to address additional spending through budget controls and reallocations,” Fitch pointed out.