Navigating the Risk Rapids: Insurance, Regulation, and the Future of Nepal's 28,500 MW Hydropower Dream

Abstract: Nepal’s ambition to develop 28,500 MW of hydropower by 2035 faces a critical, often overlooked bottleneck: the capacity of its domestic insurance sector and regulator to manage the colossal risks of Himalayan projects. While essential for financial closure, insurance provision is hampered by a fundamental mismatch between the scale of geological and hydrological perils and the nascent market’s technical and financial capabilities. Dysfunctions include destructive price undercutting, inadequate risk-based capital frameworks, need for strengthening reinsurance directive, and a lack of specialized underwriting expertise. Realizing Nepal’s hydropower dream requires a paradigm shift, treating insurance as a strategic pillar. This necessitates robust regulatory reforms including a catastrophe risk pool and a centralized loss database alongside a market transition from volume-based competition to sustainable, technically-grounded risk management.

Nepal’s roaring rivers, cascading from the roof of the world, hold a promise that is both immense and tantalizing: an estimated 42,000 megawatts (MW)1 of economically viable hydropower potential. This resource forms the cornerstone of a national vision the government’s ambitious target of generating 28,500 MW by 2035. This goal transcends energy policy; it is a blueprint for economic sovereignty, poverty alleviation, and transformative regional engagement. Yet, the journey from hydrological potential to reliable megawatts is fraught with technical, financial, and regulatory torrents as formidable as the Himalayan landscape itself. At the heart of this challenge lies a critical but often underestimated nexus: the insurance sector and its regulator. Their ability to accurately underwrite, price, and cover the colossal risks of Himalayan hydropower will fundamentally determine whether this national dream is bankable or destined to remain a vision.

The Landscape: Progress Amidst a Daunting Gap

Nepal’s hydropower sector has emerged from an era of chronic darkness, achieving a landmark seasonal surplus. This progress, largely fueled by private investment since the 1990s, is quantifiable yet highlights the scale of the task ahead. As of 2024, the nations installed capacity stands at approximately 2,700 MW, a significant leap powered by projects like the 456 MW Upper Tamakoshi and a fleet of private run-of-river schemes. A robust pipeline, including the 900 MW Arun III and 679 MW Lower Arun, promises to push capacity beyond 5,000 MW in the coming years. However, the operational 2,700 MW represents a mere 9.5% of the 28,500 MW target. Bridging this chasm requires an investment exceeding USD 40 billion and an unprecedented acceleration in project development. This endeavor is not merely an engineering challenge but a complex exercise in risk management, where the role of insurance is paramount.

The Inception Challenge: Insuring Himalayan Perils

At the inception of any hydropower project, securing comprehensive insurance is the linchpin of financial closure. The insurance policy for a hydropower project is not merely a contract; it is the financial embodiment of risk assessment, a document that must balance actuarial principles with the brutal realities of Himalayan geology and hydrology. The policies must contend with a risk profile shaped by one of the world’s most volatile geologies.

Construction All-Risk (CAR) Insurance serves as the foundational policy, covering physical damage from a cocktail of endemic perils: seismic activity in a Zone V earthquake belt, catastrophic glacial lake outburst floods (GLOFs), devastating landslides, and extreme monsoonal events. Financial Safeguards like Advance Loss of Profit (ALOP) insurance are equally critical, covering debt servicing and revenue losses during delays caused by insured events a vital reassurance for lenders. Furthermore, while regulated nationally, risk is assessed locally. Projects in remote Karnali Province is likely to face different underwriting (higher premiums, stricter terms) than those in more accessible Bagmati Province, directly impacting project costs from the outset.

This insurance framework is the safety net that makes projects viable. Yet, the very system tasked with providing this net the domestic insurance industry and its regulator, the Nepal Insurance Authority (NIA) is grappling with profound structural challenges that threaten its efficacy. Crafting and underwriting these policies presents a constellation of profound challenges stemming from a fundamental mismatch: the enormity of the risks inherent in Himalayan hydropower and the limited financial, technical, and regulatory capacity of a nascent domestic insurance market tasked with supporting a multi-billion-dollar national ambition.

The Core Conundrum: Policy and Market Dysfunctions

The process of underwriting hydropower risk in Nepal is hamstrung by a fundamental mismatch: the enormity of Himalayan-scale risks versus the limited financial and technical capacity of a nascent domestic insurance market. This dysfunction manifests at both regulatory and market levels, creating a perfect storm of instability.

1. Regulatory and Policy-Level Hurdles:

The Nepal Insurance Authority operates within a framework that struggles to keep pace with the sector's complexity.

• Inadequate Risk-Based Capital (RBC) and Solvency Frameworks: While progress has been made, existing solvency requirements may not be fully risk-sensitive to the concentrated exposure a single large hydropower project presents. A major loss event could threaten the solvency of a domestic insurer, jeopardizing the entire system. The regulator faces the challenge of strengthening RBC norms to ensure insurers can absorb hydropower-related shocks without stifling market growth.

• Weaknesses in Reinsurance Directives and the "Right to Refusal" Clause: A critical regulatory challenge lies in the provisions governing reinsurance. Key issues include the "Right to Refusal" and Automatic Facultative Offers (AFOs), where current directives may allow the local reinsurers to refuse certain high-risk components or impose restrictive conditions late in the underwriting process. The lack of a stable, predictable reinsurance framework for "Himalayan Perils" (GLOFs, mega-landslides) creates crippling uncertainty for developers. The regulator is challenged to facilitate structures like "obligatory treaties" or pooled solutions that guarantee automatic coverage for a defined portfolio of risks. Furthermore, the NIA faces the dilemma of encouraging domestic premium retention for forex savings while ensuring insurers can access robust global reinsurance backstops striking this balance is a persistent policy dilemma.

• Standardization vs. Flexibility: The regulator promotes standard policy wordings for simplicity, but hydropower projects are unique a tunnel-heavy project in the Middle Hills has a different risk profile than a dam-based project in the High Himalayas. Enforcing excessive standardization can lead to coverage gaps or inappropriate terms. The regulator must foster a framework that ensures core protections are standard while allowing expert-led customization for specific risks.

• Lack of Specialized Expertise within the Regulator: Effectively regulating the underwriting of highly technical engineering risks requires in-house expertise in civil, geotechnical, and hydrological engineering. The NIA often relies on external consultants or the insurers' own assessments, which can create an information asymmetry and limit proactive regulatory oversight.

2. Market-Level Failures and Destructive Competition:

The domestic non-life insurance market, comprising around two dozen companies, operates in a highly competitive but technically deficient environment.

• Cut-Throat Competition and Irrational Pricing (Low Premium Rates): This is the most acute market failure. In the race to capture premium volume, insurers engage in destructive undercutting, offering CAR insurance at rates as low as 0.4% to 0.75% of the insured value, which are internationally non-viable for such high-risk projects. However A rated reinsurance market domiciled in Europe usually asks for 1% and above rate for Hydro-Construction related risks. These "low premium rates" do not reflect the true risk cost. They are driven by a volume-first mentality where insurers prioritize immediate premium income over long-term underwriting profit; a dangerous reinsurance backstop misconception that any large loss will ultimately be borne by foreign reinsurers; and a lack of historical data due to the absence of a credible, centralized loss database, which makes scientific pricing nearly impossible.

• Inadequate Deductibles (Low Excess): To win business, insurers often agree to very low deductibles (e.g., USD 50,000 on a USD 200 million project). There is practice of using differential deductibles for the separate segment such as debris removal, third party liability etc. under CAR policies. This removes the fundamental principle of risk-sharing, eliminates the hydro project developer’s financial incentive for superior risk mitigation and safety protocols, and fosters moral hazard.

• Technical Underwriting Capacity Deficit: Most domestic insurers lack specialized hydropower underwriting units. They often cannot independently assess critical documents like Geological and Geotechnical Investigation Reports, Hydrological and Sediment Studies, Tunnel and Dam Design Specifications, and Slope Stability Analyses. This leads to an over-reliance on the hydro project developer’s consultants or a blind faith in reinsurers’ wordings, undermining their own underwriting authority and risk assessment.

• Reinsurance Dependency and Negotiation Weakness: For large projects, domestic insurers act essentially as fronting companies, ceding over 90% of the risk. Their weak technical underwriting translates into weak negotiation power with international reinsurers in London, Singapore, or India. They often must accept restrictive terms, high reinsurance costs (which are not passed on in the low primary premium), and exclusions dictated by the reinsurer, eroding the quality of the final cover offered to the hydro project developer.

• Bilateral Business Swap: Some of the high-end promotors of insurance company are also the promotors of hydropower. Due to the strict regulation of conflict of interest, alternative way-out has been practicing in insurance sector. Promotors are swapping the hydro businesses between insurance companies with much liberal terms and concession rates, which are ultimately borne by all silent promotors and  public shareholders, jeopardizing the net absorbable risks. 

The Synergistic Path Forward: Reforming the Risk Ecosystem

Realizing the 28,500 MW target necessitates treating insurance not as a compliance cost, but as a strategic pillar of national infrastructure development. A multi-pronged, collaborative reform agenda is essential to align the insurance sector with the national hydropower ambition.

For the Nepal Insurance Authority (The Regulator):

• Implement Robust Risk-Based Capital Adequacy: Strengthen solvency requirements to explicitly account for peak hydropower exposures and catastrophe risks, forcing insurers to price for adequate reserves.

• Reform Reinsurance Directives and Facilitate Risk-Pooling: Move towards facilitating "Pool" mechanisms. A "Nepal Hydropower Catastrophe Risk Pool", potentially seeded with government or donor funds, could provide primary coverage for defined catastrophic perils (e.g., earthquake > 7.0 magnitude, GLOF). A separate pegged pricing system on hydro risks is recommended for scientific segregation of premium into the pool and the rest unabsorbed risks could be disseminated into reinsurance market abroad. This would provide stability, limit forex outflow, and give the domestic market a stronger base to negotiate with international reinsurers for excess layers, directly addressing the "right to refusal" challenge.

• Establish a Centralized Loss Data Repository: Mandate the reporting of all hydropower claims and near-misses. This data, analyzed over time, will be the foundation for scientific, evidence-based pricing and risk modelling.

• Promote Standardized Clauses with Flexibility: Issue guidelines for minimum coverages (e.g., mandatory inclusion of ALOP, IAR (industrial all risk policy), minimum deductible slabs based on project cost) while allowing flexibility for engineering-led enhancements.

• Build In-House Technical Capacity: Hire or develop in-house engineering expertise to effectively audit insurer underwriting files and assess policy wordings and clauses, conducting informed oversight.

For the Insurance Industry:

• Shift from Volume to Value: Embrace sustainable underwriting. The industry association should champion sensible minimum premium guidelines for hydropower based on project type and location.

• Invest in Specialized Talent: Create specialized underwriting desks, hiring or training engineers to read and interpret project reports. This builds internal knowledge and negotiation power.

• Advocate for Rational Deductibles: Educate developers and lenders that a meaningful and flexible deductible (e.g., 0.5% - 1% of insured value) is a sign of a robust, financially responsible project and leads to more sustainable premium pricing.

• Pursue Collaborative Reinsurance Negotiation: Insurers should collectively approach international reinsurance markets for portfolio treaties, leveraging the entire Nepali hydropower book to secure better terms, rather than competing against each other on a project-by-project basis.

• Public-Private Partnership:

The government and Nepal Rastra Bank must recognize that a dysfunctional insurance market is a direct threat to hydropower investment. Policy should incentivize good practice for instance, requiring evidence of adequate insurance with reasonable deductibles as a precondition for loan disbursement from commercial banks. The private sector, as the primary developer, must also champion higher risk-sharing standards, understanding that a robust insurance market is in its long-term interest.

Conclusion: From Bottleneck to Bedrock

Nepal’s 28,500 MW ambition is a testament to national aspiration. The challenges financial, infrastructural, and regulatory are daunting but not insurmountable. The insurance conundrum, with its issues of low premiums, low excess, and reinsurance fragility, is a microcosm of the broader systemic reforms needed. The challenges in writing hydropower insurance policies are symptomatic of a market and regulatory system straining under the weight of a national dream, highlighting a market failing to price Himalayan reality and a regulatory framework under pressure.

Addressing this requires a paradigm shift: from seeing insurance as a mere compliance cost to recognizing it as a critical strategic risk management pillar for the entire 28,500 MW enterprise. By strengthening the regulator, professionalizing the industry, and fostering collaborative risk-sharing mechanisms like a national catastrophe pool, Nepal can build an insurance sector that is not a bottleneck, but a resilient foundation for its hydropower ambitions. The goal must be to create a mature market where premiums are fair, coverage is robust, and claims are paid reliably; a market that signals to the world that the formidable risks of Himalayan hydropower are not only understood but are decisively manageable and insurable. Only then can the relentless torrent of Nepal’s rivers be fully harnessed, powering not just homes, but the nation's sustainable and prosperous future

[1] Bhatt, P., & Joshi, K. R. (2024). Hydropower development in Nepal: Status, opportunities and challenges. Journal of UTEC Engineering Management, 2(1), 124–135. doi:10.36344/utecem.2024.v02i01.011

“The writer, Rajendra Maharjan, is Deputy Director of Nepal Insurance Authority. The views expressed are his personal opinions and do not reflect those of Nepal Insurance Authority.”

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