Banking and Insurance

FAT(Frequently used term) PRODUCTS
Insurance Products
Insurance products refer to the various types of
insurance policies or coverage options offered by
insurance companies to individuals, businesses, or
other entities. These products provide financial
protection against specific risks, and they come with
terms, conditions, and premium payments. Insurance
products are designed to help policyholders mitigate
the financial impact of unexpected events, such as
accidents, illnesses, property damage, or other covered
perils.
Letter of credit
L/C is a financial instrument used in international trade to facilitate and secure
transaction between seller and buyer. Four parties Buyer/applicant,
seller(Beneficiary), issuing bank & advisory bank. The applicant request to the
issuing bank to send notification to the seller to ship the goods through Advisory
bank. Then, Seller ships the goods with the compliance to stated terms and
conditions in the L/C. If the LC terms meets, the issuing banks made the payment
to the seller ensuring secure and trusted international trade transaction.
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SUB CODE: MGT 359
Banking & Insurance
Presented BY
References : Internet, chatGPT,

BINOD CHAND
Bard, Textbook, Udaan notes. BBS 5th SEMSETER
Course Description
• This course has two parts. The first part deals with banking and the second part with
insurance. It covers the origin of banks and the evolution of the banking system, regulation
of the banking System including major provisions of the Banking and Financial Institutions
Act (BAFIA), deposit and lending operations of commercial banks, a framework for
evaluating bank performance, introduction to risk and insurance, types of insurance and
insurance business in Nepal.
• Learning Outcomes
After completing the course, the student shall be able to:
• Understand the historical background and functioning of the banking system,
• Analyze the various regulatory aspects of bank regulation,
• Describe the deposit and lending operations of commercial banks,
• Evaluate the performance of commercial banks using different tools and techniques.
• Understand the fundamental principles insurance,
• Classify insurance into different categories including various insurance policies
• Explain the evolution and growth of the insurance business in Nepal.
Course Contents
Unit 1: Introduction to Banking
1.1 Concept and nature of bank
1.2 Origin of banks and evolution of the banking system
1.3 Features, functions and Principles of bank
1.4 Creation of money (credit creation): concept and process
1.5 Types of banks on the basis of domicile, ownership, specialized functions and structure
1.5 Classification of Banks and financial institutions in Nepal
1.6 Recent innovations in banking technology
Unit 2: Regulation of Banking System
2.1 Reasons for bank regulations
2.2 Evolution of regulatory framework
2.3 Bank regulator: objective, functions and monetary tools
2.4 Nepal Rastra Bank as a bank regulator: objectives, structure, functions, duties and power
2.5 Monetary policy: Concept and role in the operation of Nepali banks and financial
institutions
Unit 3: Commercial Banks: Managing Deposit, Lending and Liquidity
3.1 Major services provided by commercial banks.
3.2 Deposit products: Types of deposits products offered by banks, interest rates
offered on different types of deposits and composition of bank deposits, non-
deposit products.
3.3 Lending policy and products: Lending policy of banks, types of loans, lending
process, Costing of loan products, types of collateral and credit analysis.
3.4 Managing bank liquidity: The demand for and supply of bank liquidity and
estimating the banks Liquidity needs
Unit 4: Evaluating Bank Performance
4.1 Framework for evaluating bank performance
4.2 Bank financial statement: The balance sheet and income statement.
4.3 Evaluating bank performance with financial ratios: profit ratios, risk ratios
and other ratios.
Unit 5: Introduction to Insurance
5.1 Risk: Meaning of risk, basic categories of risk and methods of handling risk.
5.2 Insurance: Meaning of insurance, basic characteristics of insurance, types of insurance and Benefits of
insurance to society.
5.3 Insurance Principles: Principle of indemnity, insurable interest, subrogation, the principle of Utmost good faith,
proximate cause, contribution, mitigation.
5.4 Insurance contract: concept and legal characteristics.
Unit 6: Categories of Insurance and Insurance Company Operations
6.1 Life insurance: Economic justification for life insurance, elements of the life insurance contract, procedures
affecting life insurance, types of life insurance, determining fair premium and net benefit, measuring risk and
return of life insurance; Life Insurance contractual provisions: dividend options, no forfeiture options, settlement
options and additional life insurance benefits.
6.2 Non-life insurance/ Property and casualty insurance: concept, importance and types.
6.3 Re-insurance: concept, importance and types.
6.4 Operations of Insurance Companies: rating and rate making, underwriting, production, claims
Settlement, reinsurance and investments.
6.5 Financial Operations of Insurance Companies: Pricing (Rate making) of insurance, Financial Statements of
Insurance Companies and measuring financial performance based on underwriting performance, earnings,
solvency, efficiency, liquidity and market value ratios, Fundamentals of premium calculations (Net single premium
Unit 7: Insurance Business in Nepal
7.1 Evolution and growth of the insurance business in Nepal.
7.2 Present Structure of insurance companies in Nepal.
7.3 Role of Insurance Agents, Brokers and Surveyors.
7.4 Regulation of insurance business: Major reasons for the regulation of insurance, regulation of
Insurance business in Nepal, function, duties and powers of Nepal Insurance Authority (NIA).
Basic Text Books:
Paudel. R.B; Baral, K.J.; Joshi, P.R.; Gautam, R.R.; and Rana, S.B. (2021). Commercial Bank
Management.
Kathmandu: Asmita Books Publishers and Distributors Private Limited
Rejda. G.E. (2013). Principles of Risk Management and Insurance. Pearson India Education
Services Pvt. Ltd. Ross. Peter S. (2000). Commercial Bank Management. Irwin McGraw-Hill, New
Delhi.
Reference Books:
Kohn, M. (2012). Financial Institutions and Markets. New Delhi: Tata McGraw Hill Publishing
Company Limited. Mishkin, Frederic S.; and Eakins, S. G. (2006). "Financial Markets and
Institutions" Pearson Education.
Concept and Nature of Bank
• A bank is financial institution that Basically provides loans and accepts deposits and process the
payment.
• A bank also offers wide range of financial services to customer.
• Bank Acts as an intermediaries between savers and borrowers.
• Banks offers safe deposit box and secure storage facilities.
• Bank have ability to lent out for creating new money in the forms of loans.
• Financial services includes checking accounts, Credit cards, online banking and investment
opportunities.
• Banks are regulated by Government in order to protect the depositor’s interest.
• Safekeeping and Custody
• Currency Exchange
• Interest and profit
• Regulatory oversight
• Risk management( credit worthiness and interest rate fluctuation)
Ref. Syllabus
Origin and Evolution of Banking system
• Modern sense(Money lending and financial services rather than comprehensive banking
services) of bank emerged in Italy at 12th century
• The central bank of England 1694(Lender of the last resort & issued first widely accepted
bank notes)
• Industrial revolution led to significant increment in banking system at mid-18 th century in
Great Britain.
• Over time bank offers range of services checking and saving accounts credit card and
investment product and respectively loans(Personal, business, mortgage) wealth
management(investment advices), foreign exchange services and international banking
services
• Electronic banking, Credit cards, Automatic teller machine(ATMs) were introduced 20 th
century.
• The global financial crisis of 2008 exposed a series of risky practices within the banking and
financial industry. These practices led to a severe economic downturn. In response,
Substantial reforms and regulatory change were implemented.
Ref. Syllabus
Features and functions of Bank
• Deposit Acceptance, lending services(loan), Payment processing services, Currency exchange, investment
product(Mutual fund, stocks, bonds), convenience, safekeeping & custody, Supervision, interest and profit generation,
insurance services.
Principles of Banks
• The principles of banks are the fundamentals guidelines essential to maintaining public confidence in
the banking system.
1. Safety and soundness(Financial Risk stability)
2. Liquidity management(Cash flows balance of short-term and long-term assets and liabilities)
3. Compliance with Regulation
4. Central banking and Monetary policy
5. Transparency and Disclosure
6. Profitability
7. Liquidity
8. Diversity
Ref. Syllabus
Ref. Syllabus
Concept and Process of creation of money(Credit creation)
• The concept of credit is fundamentals concept of modern banking and monetary system
which is based on fractional reserve banking system(In which banks are required to deposit
fraction of deposit in reserve by central bank regulation). The remainder of deposit is
available for lending.
• The process begins with a initial deposit made by customer. 4% (CRR) is reserved by the
Bank as per NRB guideline. The Remaining 96% can be lend into the new borrower’s
account electronically.
• The borrower can spend(For Eg.to purchase goods, Pay to employees) or invest(For Eg.
machinery and equipment) this money through banks and the money circulate into the
market, Effectively increasing the money supply.
• When the receiver ( For Eg. Merchant or employee) receives the money from the borrower
through bank, Again bank can lend 96% of that(of Merchant) deposit to the another lender.
This process continues and applies multiplier effects.
• However, the required CRR can be adjusted by borrowing money from other banks or central
banks.
Ref. Syllabus
Types of banks on the basis of domicile
• Domicile refer to the specific Geographic location and jurisdiction, Permanent home of
person even if they are temporarily reside elsewhere. Domicile is important for legal and
administrative purpose, including taxation, voting, legal jurisdiction and determination
certain rights and privileges.
1) Domestic Banks
Domestic banks are locally owned and operated within the country. They have headquarters
and registered office in the country and they are subject laws and regulation of the country.
2) Foreign/International Banks
Foreign banks are headquartered one country and having presence in the other(host) countries
where they operate branches or subsidiaries. International banks often provide global service
including foreign exchange, cross boarder lending. They are subject to laws and regulation of
the multiple countries financial authorities.
Ref. Syllabus
On the basis of Ownership
1) Public Sector Bank
Owned By government or state with the majority of stake min. 50%. Public Sector bank plays vital role
Economic development, serving public interest including agriculture and industry which ultimately fosters
financial stability and extending banking services to underserved areas.
2) Private Sector bank
Private sector bank are owned by private shareholder(Individual) or corporation. These banks aims to maximize
the profit for owner’s or shareholder’s. They tend to be customer centric and competitive in financial market.
Private sector banking are renowned for their personalized and modern advance banking services.
3) Cooperative Banks
Cooperative banks are owned by customer themselves. Cooperative banks structure emphasis on local community
involvement, aiming to provide financial services and benefit to their members. They often providing accessible
and community oriented banking services.
Ref. Syllabus
On the basis of Specialized function
1) Commercial Banks
Commercial banks provides wide range of services to the General public, business and organization. The services
including Deposit accounts loans, credit cards etc. Commercial banks aims to make profit by attracting deposit
and lending funds to the higher interest rates. The core purpose of commercial banks is to support commercial
activities for all size of Enterprises. Commercial activities like Business loans, Merchant services Trade finance(
Letter of credit, Export import financing Foreign exchange services)
2) Investment Banks
Investment Banks primarily focused on raising capital and facilitating complex transactions for corporation
government and institutional clients. Investment banks focus on capital markets, merger and acquisition, trading
in financial market and assets management. for EG. Involving underwriting/& buying securities from companies.
Investment banks also involves in risk management and strategic financial advice.
3) Development Banks
Development Banks are financial institution that provides loan or other financial support for the economic
development and social progress with the respective region or country. Development Banks are often considered
Government-sponsored institutions that play role in infrastructure projects such as Road, bridge and power plants,
Agriculture development, small-medium sized Enterprises support and poverty reduction initiatives.
Ref. Syllabus
4) Central Banks
Central banks are financial institution that serve as primary monetary authority of the country or group of country.
Central banks are responsible for issuance of currency, formulating and implementing monetary policy,
overseeing reserve requirements, lender of the last resort for commercial bank, and often acts as the government’s
banker and maintains foreign exchange reserves. Central banking regulate and oversees banking operation to
mitigate risk.
5) Saving banks
Saving Banks offers Deposit and lending services to the individual, families and communities. Saving banks
allows depositors to save money and earn interest to build wealth. Moreover, Saving banks provides Home
Mortgage lending, Local business lending, support community development initiatives and often incentives to
save money to the people.
6) Credit unions
Ref. Syllabus
CLASSIFICATION OF BFIs IN NEPAL
The Nepal Rastra Bank(NRB), Central bank of Nepal, classifies Banks and financial institution in four categories
Based on specific range of financial services and Paid up capital, and they are subject to different regulatory
requirement.
CLASS A: COMMERCIAL BANKS
Commercial banks are most common and diversified type of financial institution in Nepal. The paid up capital of
Commercial bank in Nepal is about Rs.9-36 Arab. They offer wide range of financial services to individuals, business
and organizations including checking and saving accounts, deposit accounts, loans, credit cards, advance, trade finance,
international banking services. Overall commercial bank in Nepal played vital role in Nepalese economy by providing
financial services that business need to grow and individual need to save for future. GLOBAL
IME,NIMB,NABIL,KUMARI,PRABHU,LAXMI SUNRISE banks are commercial banks of Nepal.
CLASS B :DEVELOPMENT BANKS
Development Banks are Long-term financial institution that provides loan and other financial support Economic
development. The Paid of capital is approx. 1-6 Arab. Development Banks often focus on financing infrastructure
projects, agriculture, industry, tourism and small-medium sized enterprises. MUKTINATH,GARIMA,JYOTI bikas
bank are some example of development banks in Nepal.
CLASS C:FINANCE COMPANIES
Finance companies offers limited range of financial services as compared to commercial banks. The paid up capital of
finance companies is about Rs. 0.23-1.35 arab. These services includes loans, advances and leasing typically to small
business and individual. MANJUSHREE, ICFC, RELIANCE are finance companies in Nepal.
CLASS D:MICROFINANCE FINANCIAL INSTITUTION
MFIs provides financial services to low income, marginalized groups and Micro-entrepreneurs. They typically offer
small loans, saving accounts, and other financial product to help these groups improve their lives. Aatmanirbhar,
BPW, Dhaulagiri, Global IME Laghubitta are some MFIs in Nepal.
RECENT INNOVATIONS IN BANKING TECHNOLOGY
Banking technology continues to evolve rapidly, with innovation and enhance of security, convenience, efficiency for
both banks and customers. The innovation in banking technology emerged from Mid 20 th century with the emergence
of Electronic data processing and computers enabled the automation of various banking processes including
electronic fund transfer. After that, ATM revolution, Online banking, Debit and credit cards, internet banking and
mobile banking services came into existence respectively. Here is the description of some recent innovation in
banking technology.
1) OPEN BANKING: Open Banking is a new approach to banking that allows customers to securely share their
financial data to third-party apps and services. Open Banking enables customers to make budgeting decisions,
develop personalized insurance products, take investment decisions, allows to make seemless payment, evaluate
creditworthiness to specify the loan terms and rates through developing financial product and service by TPPs.
2) AI AND MACHINE LEARNING: Banks are using Artificial intelligence and machine learning for tasks like
fraud detection, credit scoring, 24/7 chatbots support service for customer and automate tasks. AI is also being used
for developing new financial services, such as personalized investment advice and automated budgeting tools.
Ref. Syllabus
3) BIOMETRIC AUTHENTICATION: Many banks now offer biometric authentication methods such as fingerprint
recognition, facial recognition, and voice recognition for secure login and transaction authorization.
4)BLOCKCHAIN: Blockchain is a distributed ledger technology that has the potential to revolutionize the banking
industry. Blockchain can be used to create more secure and efficient payment systems, as well as to develop new financial
products and services. For example, blockchain can be used to create smart contracts that can automatically execute financial
transactions when certain conditions are met.
5)Smart ATMs: Some ATMs offer advanced features like cardless withdrawals, video conferencing with bank representatives,
and cash recycling to improve customer experience.
6)Peer-to-Peer (P2P) Lending: Banks acts as P2P lending platforms that connect borrowers directly with individual or
institutional lenders, providing an alternative to traditional bank loans.
7) Personal Financial management APPS: PFM apps help users manage their finances, set budgets, and track expenses,
providing insights into their financial health.
8) Credit Scoring and Reporting :Innovations in credit scoring use alternative data sources to assess creditworthiness,
improving access to credit for individuals with limited credit history.
9)Electronic Fund transfer(EFT) : EFT is a general term for any transfer of money that occurs electronically, without the use of
cash or checks. EFT can be used to transfer money between bank accounts, pay bills, or to purchase goods and services.
10) Online banking and internet Banking : Online banking and internet banking are two terms that are often used
interchangeably, but there is a subtle difference between the two. Online banking refers to any banking transaction that is
conducted over the internet, regardless of whether the customer is using a computer or a mobile device. Internet banking, on the
other hand, specifically refers to banking transactions that are conducted using a web browser.
11) Mobile Banking : Mobile banking is a type of online banking that is specifically designed for use on mobile devices, such as
smartphones and tablets. Mobile banking apps allow customers to check their account balances, transfer money, pay bills, and
deposit checks using their mobile devices.
2.1 REASONS FOR BANK REGULATIONS
1) CONSUMER PROTECTION
Bank regulations protects consumer’s from misleading information and unfair practices such as unfair lending, deceptive marketing,
or abusive fee structures. These regulations promote transparency, fairness in the financial market which maintains depositor
confidence in the banking systems, preventing bank runs and ensuring that individual can access their funds when needed.
2) SYSTEMATIC RISK PREVENTION
Banks are integral to the financial system, and their failures can disrupt the broader economy. Regulatory measures like capital
requirement and stress tests are designed to mitigate the systematic risk.
3) MARKET INTEGRITY AND TRANSPERANCY
Regulation discourages Market manipulation, fraud, insider trading by enforcing strict rules on bank activities. The goal is to ensure
that all participants have equal opportunities and access to accurate information, which ultimately attracts more investments and
ensures smooth functioning of the capital markets.
4) PREVENTION OF FINANCIAL CRIME
Regulation mandates Know Your Customer or other authentication procedures, helping to prevent financial crimes such as money
laundering, fraud, and terrorism financing. Bank regulations enables to oversee the activities of banks to identify and report
suspicious transactions.
5) PRUDENT RISK MANAGEMENT
Regulation sets minimum capital requirements for banks to absorb losses and maintain solvency. Regulation require banks to
maintain a certain level of liquid assets to meet short term obligation and manage liquidity risk. Regulation encourages diversification
of assets and risks, reducing banks vulnerabilities during economic downturns or fluctuation in specific sectors.
Ref. Syllabus
6) ECONOMIC STABILITY
Well-regulated banks can effectively allocate capital to productive economic activities, continue to provide credit to
individuals and businesses, especially during economic downturns that supports job creation and fosters economic
stability. Overall, Bank regulation is designed to reduce the risk of bank failures and to protect the financial system as
a whole.
7) FAIR COMPETITION
Regulation prevents banks from becoming too large or powerful and encourages new entrants into the banking
market. It prohibits anti-competitive practices, such as price fixing and collusion. Ultimately, Competition in banking
sectors can lead to lower prices, better products and more innovation.
8) INTERNATIONAL COLLABORATION
As banking is often international, effective regulation is needed for cross-border transactions, capital flows, and
international cooperation among regulatory authorities.
9) ADAPTION TO TECHNOLOGICAL CHANGES
As technology evolves, so do the risks and opportunities in the financial sector. Regulations are often updated to
address new challenges, such as those posed by fintech, cryptocurrencies, and digital banking
Ref. Syllabus
EVOLUTION OF REGULATORY FRAMEWORK
Collecting raw data
EARLY BAKING REGULATION(17TH CENTURY)
•Early regulations focused on issues such as bank charters, capital requirements, and reserve ratios to ensure the stability of
individual banks. The establishment of central banks, starting with the Bank of England in 1694, marked the early stages of
regulatory efforts to provide stability to the banking system.
•The Bank of England, established in 1694, is often considered one of the earliest examples of a central bank. It was founded to
raise funds for the government during a time of war and gradually evolved into a central bank, influencing other European
countries in the development of their own central banking institutions.
• Creation of the Federal Reserve (1913): The Federal Reserve Act established the Federal Reserve System in the United States,
creating a central banking system with the mandate to stabilize the financial system, control the money supply, and regulate
banks.
• Prior to the Great Depression, which began in 1929 there were concerns about the mixing of commercial banking
(traditional banking activities like deposits and loans) and investment banking (securities trading and underwriting). Some
believed that the combination of these activities in the same institutions contributed to excessive risk-taking and speculation.
• Prior to the 20th century, there was little regulation of the banking and insurance sectors. This led to a number of financial
crisis, including the Panic of 1873 and the Great Depression of the 1930s.
• Euro system and European Central Bank (1999): The creation of the Euro system and the European Central Bank (ECB)
marked a significant step in the evolution of central banking in Europe. Established in 1999, the Euro system consists of the
ECB and the national central banks of the Eurozone countries. The ECB is responsible for monetary policy for the Eurozone.
Ref. Syllabus
The regulatory framework for banks has evolved significantly over time in response to changing economic conditions,
financial innovations, and lessons learned from crises. The evolution of bank regulatory frameworks:
• Early Regulation (19th Century): – In the United States, the early 19th century saw the establishment of state chartered
banks. However, these banks faced issues of fraud, insolvency, and inconsistent regulations. This led to the need for a more
centralized regulatory system.
• Creation of Central Banks (Late 19th - Early 20th Century): – Central banks like the Federal Reserve (1913) in the
U.S. and the Bank of England (1694, but with significant reforms in the 19th and 20th centuries) were established to
provide stability to the financial system. They played key roles in monetary policy and lender of last resort functions.
• Depression Era (1930s):– The Great Depression highlighted the need for more comprehensive and centralized
regulation. This led to the establishment of key regulations like the Glass-Steagall Act (1933) in the U.S., which separated
commercial and investment banking activities.
• Post-WWII Era (1940s - 1970s): – The period after World War II saw the emergence of regulatory bodies like the
Federal Deposit Insurance Corporation (FDIC) in the U.S. This provided deposit insurance to protect bank customers in
case of failure
• Deregulation (1980s - 1990s): – This period saw a movement towards deregulation and the loosening of restrictions on
financial institutions. The Glass-Steagall Act was partially repealed by the Gramm-Leach-Bliley Act (1999), allowing
commercial banks to engage in investment banking activities.
• Globalization and Financial Innovation (Late 20th - Early 21st Century): – Financial markets became increasingly
globalized, and innovations like securitization and derivatives grew in importance. Regulators had to adapt to these new
complexities.
Ref. Syllabus
• 2008 Financial Crisis and Regulatory Response (Late 2000s): – The global financial crisis of 2008 exposed
weaknesses in the regulatory framework. This led to substantial reforms, including the Dodd-Frank Wall Street
Reform and Consumer Protection Act (2010) in the U.S. This law aimed to enhance financial stability and consumer
protection.
• Technological Disruption (21st Century): – The rise of fintech, cryptocurrencies, and digital banking has
challenged traditional regulatory frameworks. Regulators are working to adapt and create new guidelines for these
rapidly evolving technologies.
• Basel III and Global Standards (2010s): – The Basel Committee on Banking Supervision introduced Basel III, a
set of global regulatory standards for banks. It focused on strengthening bank capital requirements, introducing new
regulatory requirements on bank liquidity, and addressing leverage.
• Sustainability and Climate Risk (2020s): There's a growing recognition of the need to incorporate sustainability
and climate-related risks into the regulatory framework. Many central banks and regulatory authorities are exploring
ways to address these emerging risks.
Ref. Syllabus
BANK REGULATOR: OBJECTIVES
Bank regulator ensures the stability, integrity, soundness and protect interest of consumer’s at banking sector. The
reason of regulation can be identical at some extend with the objectives.
Ref. Syllabus
MAJOR SERVICES PROVIDED BY COMMERCIAL BANKS
1) DEPOSIT SERVICES
Saving accounts, Deposit accounts
2) LOAN SERVICES
Personnel loan, Auto loan, Business loan
3) PAYMENT SERVICES
DEBIT CREDIT CARD,CHECKING ACCOUNTS
4) WEALTH MANAGEMENT SERVICES
Financial planning, investment management.
5) INVESTMENT SERVICES
Certificate of Deposit (CD) Accounts, Mutual funds, Retirement accounts.
6) ELECTRONIC FUND TRANSFER
Wire transfer, Automated Clearing house transactions.
7) FOREIGN EXCHANGE SERVICES
Currency exchange, international wire transfer, International trade finance.
9) TRADE FINANCE
8)SAFE DEPOSIT BOX
9) TRADE FINANCE
10) ONLINE AND MOBILE BANKING
11) GOVERNMENT SERVICES
Buying and selling of government securities on behalf of their customers
DEPOSIT PRODUCTS
Deposit Products are specific types of accounts or financial instrument that allow to customer to deposit and store
their money while earning interest. These deposit serve as a liability for the bank indicating an obligation to return
the funds to the customer upon demand or at a specified maturity date.
TYPES OF DEPOSIT PRODUCTS OFFERED BY BANKS
1) SAVING ACCOUNTS : Banks account that allow customer to deposit and withdraw money. They typically earn
lower interest rates compared to other deposit products. Saving accounts provides limited transaction comparatively.
2) CURRENT(CHECKING ACCOUNTS) ACCOUNTS : A current account is a type of bank account that is
designed for everyday transactions depositing money, withdrawing cash and making payment. These accounts do not
have any transaction limit. Not all current accounts are the same. Some accounts may have monthly fees, while
others may offer cashback or other rewards. Some accounts may have interest rates, while others may not. Moreover,
Current accounts offers debit, credit cards, checks, online and mobile banking services.
3) CERTIFICATE OF DEPOSITS(CDs) : CDs are time deposit with fixed terms, and they usually offers higher
interest rates, having fixed maturity date. CDs are good option for savers who are looking for a safe and guaranteed
return on their investment. CDs may results penalties in early payments.
4) MONEY MARKET ACCOUNTS : Money Market accounts combines the characteristics of Saving and
checking accounts. Money market accounts offers check-writing privileges, Debit credit car access ETC. These
account provide higher interest rates and lower transaction limit specifically while withdrawing.
Ref. Syllabus
INDIVIDUAL RETIREMENT ACCOUNTS(IRAs) : Retirement accounts are designed to help savers
save for their retirement years. They offer a variety of tax advantages, such as tax-deferred or tax-free
growth. . Various investment options, such as stocks, bonds, and mutual funds, may be available within an
IRA.
RECURRIG DEPOSIT ACCOUNTS
A Recurring Deposit (RD) account is a type of savings account offered by banks and financial institutions
that allows individuals to save regularly over a fixed period for making it a predictable savings option. RD
interest rates are lower than FDs, CDs as they involve gradual monthly deposits instead of lump sums. These
accounts are often used to save for long-term goals, such as retirement or a child's education.
JOINT ACCOUNTS
Joint accounts are financial arrangements where two or more individuals share ownership and access to a
single account. Each accountholder has equal rights to deposit, withdraw, and conduct transactions within the
account, fostering a collaborative approach to financial management. Joint accounts often provide
survivorship rights, ensuring that if one accountholder passes away, the remaining individuals can retain
access to the funds without the complexities of probate. And accounts: In an and account, all of the account
holders must sign for a transaction to be approved. This means that both account holders must agree to any
deposits, withdrawals, or transfers. Or accounts: In an or account, any of the account holders can sign for a
transaction to be approved. This means that only one account holder needs to agree to a deposit, withdrawal,
or transfer.
Ref. Syllabus
HEALTH SAVINGS ACCOUNTS(HSAs):
A Health Savings Account (HSA) is a tax-advantaged savings account that allows you to set aside
money to pay for qualified medical expenses. You can contribute to an HSA if you are enrolled in
a high-deductible health plan (HDHP). Your contributions to an HSA are tax-deductible, and your
earnings in the account grow tax-free. You can withdraw money from your HSA tax-free to pay
for qualified medical expenses, such as deductibles, copayments, coinsurance, and prescription
drugs.
TRUST ACCOUNTS
A trust account is like a safe place for money or other valuable things that someone wants to share
or give to others. The person who sets up the trust (called the grantor) decides the rules, like who
gets what and when. A trustee is in charge of making sure everything follows these rules and takes
care of the assets. Trust accounts are used for different reasons, such as passing on family wealth,
planning for the future, or helping charities. They avoid certain legal processes and can be
changed or not changed, depending on what the grantor wants. Trust accounts are regulated by
laws, and it's important to set them up carefully to make sure everyone's needs are met.
Ref. Syllabus
NON-DEPOSIT PRODUCTS
Non-deposit products refer to financial instruments or services offered by banks or financial institutions that do not
merely involve traditional deposits Along with, These products involve investments or other financial services. This
means they are not insured by the government like Nepal Deposit And Credit Guarantee Corporation(NSCG). As a
result, they carry greater risk for the investor, but also potentially higher returns. HERE ARE THE SOME TYPES
(EXAMPLES) OF NON DEPOSIT PRODUCTS.
INVESTMENT PRODUCT
• Mutual Funds
• Exchange-Traded Funds
INSURANCE PRODUCT
• Life Insurance
• Health Insurance
ANNUTIES
• Fixed annuities
• Variable annuities
BROKERAGE SERVICES
• Stocks and Bonds Trading
• Operation and Derivatives trading
WEALTH MANAGEMENT
• Financial Planning
• Portfolio Management Ref. Syllabus
EXCHANGE TRADE SERVICES
Exchange-traded funds (ETFs) are a type of investment fund that tracks a particular index, sector, commodity, or
other asset. Exchange Trade Services (ETS) is that they facilitate the trading of financial instruments, such as stocks,
bonds, commodities, and other securities, in organized and regulated markets. They are traded on stock exchanges
like individual stocks, meaning you can buy and sell them throughout the day.
FIXED ANNUITIES:
• Guaranteed Returns: In a fixed annuity, the insurance company guarantees a fixed interest rate on the invested
premium for a specified period. This fixed rate provides a predictable and stable return on the investment.
VARIABLE ANNUTIES:
Investment Performance: In contrast, variable annuities allow the annuitant to invest in a variety of sub-accounts,
typically mutual fund-like investments. The returns from variable annuities are tied to the performance of these
underlying investment options, and as a result, they are not guaranteed. The value of the annuity can fluctuate based
on the market performance of the chosen investments.
DERIVATIVE TRADING
Are Financial contracts based on the future price of an underlying asset, like stocks, currencies, or commodities.
Two parties agree on a price and date for a future transaction, without actually owning the asset. Options (right to
buy/sell), futures (obligation to buy/sell), forwards (customized contracts), swaps (exchange cash flows). Derivatives
are used for risk management, speculation, and hedging, introducing both potential for higher returns and
increased risk.
Ref. Syllabus
LENDING POLICY
Lending policy is the set of guidelines or principles established by Banks and Financial institution to govern the
lending practices. A bank's lending policy is a crucial document outlining the guidelines and criteria for granting
loans to potential borrowers. Lending Policies are depends upon the Banks characteristics and it’s capabilities,
Financial and Economic Factors, Regulatory and operational factors, loan types or purpose and customer related
factors.
Apart from that, Bank lending policies guide their loan approval processes to ensure responsible lending.
Key elements include assessing creditworthiness, determining loan types and purposes, setting interest rates,
specifying loan amounts and terms, outlining collateral requirements, adhering to regulatory compliance, defining
the loan approval process, and establishing procedures for loan monitoring and collection.
OTHER KEY ASPECTS TO KNOW
Loan-to-value ratio, Risk tolerance, Loan underwriting process, Loan approval authority, Collection and
default management.
The Loan-to-Value Ratio (LTV) is a financial metric used by lenders to assess the risk of a loan by comparing the loan
amount to the determined value of the collateral.
The bank should assess the level of risk they are willing to take on different types of loan. It involves assessing how
much uncertainty or variability in returns can be tolerated. It can be influenced by institutional financial strength,
regulatory requirement and overall business strategy.
The loan underwriting is also an assessment of borrower’s creditworthiness while it is a comprehensive or detailed
evaluation. It involves a detailed analysis of the borrower's financial history, income, assets, liabilities, and other
relevant factors. The goal is to determine whether the borrower meets the criteria for loan approval and to establish
Loan approval authority refers to the level of decision-making authority granted to individuals or committees within
a financial institution. Different levels of management or departments may have varying degrees of authority to
approve loans based on their size, type, and associated risks.
Collection and default management are processes that financial institutions implement to handle situations where
borrowers fail to meet their repayment obligations. Collection involves efforts to recover overdue payments, while
default management involves strategies to address loans that are at risk of default. This may include restructuring
loan terms, negotiating with borrowers, or, in extreme cases, initiating foreclosure(freezing property or real state) or
repossession of collateral(Freezing movable assets).
Fast
TYPES OF LOAN
• Based on Purpose:
1. Personal Loans: Unsecured loans used for personal expenses.
2. Auto Loans: Specifically for purchasing vehicles.
3. Student Loans: Designed to fund education expenses.
4. Home Loans/Mortgages: Used to buy or refinance real estate.
• Based on Duration:
5. Short-Term Loans: Repaid within a short period, often within a year.
6.Medium-Term Loans: Repaid within 1 to 5 years.
7.Long-Term Loans: Repaid over an extended period, often more than 5 years.
• Based on Collateral:
8.Secured Loans: Backed by collateral (e.g., home or car). If the borrower defaults, the lender
can seize the collateral.
9.Unsecured Loans: Not backed by collateral. Approval is based on creditworthiness.
10.Revolving Loans: Allow borrowers to borrow and repay money on an ongoing basis, like credit
cards.
• Business Loans:
• Basis/Security: Can be secured by business assets, personal guarantees, or remain unsecured
based on the business's financial health.
• Lending Process
• Pre-Qualification
• Application
• Underwriting (Underwriting is the process of evaluating and assessing the risk associated with
a loan application, including the borrower's creditworthiness, financial stability, and the overall
feasibility of the loan.)
• Approval or denial
• Documentation and agreement
• Collateral Assessment(if secured)
• Closing and funding.
Costing of loan products
“Lender’s overall cost for offering loan” Expenses and financial considerations associated with offering and
maintaining loan services by a financial institution.
Interest Expense: The interest paid on funds borrowed by the bank to lend to borrowers. This is a significant
component and represents the cost of obtaining the money that is then lent out.
• Operational and Administrative Costs:
• Risk Management Costs:
• Regulatory Compliance Costs:
• Marketing and Acquisition Costs:
• Loan Servicing Costs:
• The ongoing costs of servicing the loan portfolio, including customer service, account management, and loan
administration.
• Technology Investments:
• Funding Costs:
5.1 Risk: Meaning of risk, basic categories of risk and methods of handling risk.
5.2 Insurance: Meaning of insurance, basic characteristics of insurance, types of insurance and Benefits of insurance
to society.
5.1 Risk: Meaning of risk
Risk refers to the likelihood of an event or situation occurring that may have adverse effects on objectives, goals, or
outcomes. Here are some key aspects of the meaning of risk:
• Uncertainty , Probability and Impact, Variability
In the context of insurance, risk refers to the potential for financial loss due to unexpected events. An insurance risk
is a threat or peril that the insurance company has agreed to insure against in the policy wordings . These types of
risks or perils have the potential to cause financial loss such as property damage or bodily injury if it were to occur.
If the insured event takes place and a claim is filed, the insurance company has to pay the policyholder the agreed re
imbursement amount
.
BASIC CATEGORIES OF RISK
• Pure Risk
: This type of risk refers to the situation where it is certain that the outcome will lead to loss of the person only or
maximum it could lead to the condition of the break-even to the person, but it can never cause profit to the perso
n
1
.
• Speculative Risk: This type of risk refers to the situation where the outcome can be either a profit or a loss 2.
• Fundamental Risk
: This type of risk refers to the risk that arises from the nature of the business or activity being insured 2.
• Particular Risk
• Static risk refers to the risk that is predictable and can be easily taken care of by insurance coverage.
Examples of static risks include theft, arson, assassination, and bad weather 23.
• Dynamic risk refers to the risk that arises from sudden and unpredictable changes in the economy.
For example, changes in pricing, income, brand preference, or technology can bring about sudden personal and b
usiness financial losses to those
affected
• Systematic Risk: This type of risk arises from macroeconomic factors such as inflation, recession, or political
instability.
It is the risk that the entire market will decline due to these factors, leading to a decrease in the value of the inves
tments made by the insurance company
1
.
• Credit Risk: This type of risk arises when the policyholder fails to pay the premium on time or defaults on a loan.
It is the risk that the insurance company will not be able to recover the amount owed to them
Methods of handling risk
• Avoidance: This method involves avoiding activities that could lead to a loss.
For example, if you want to avoid the risk of a car accident, you could avoid driving altogether 1.
• Transferring: This method involves transferring the risk to another party.
For example, if you purchase an insurance policy, you are transferring the risk to the insurance company 1.
• Loss prevention and reduction/ Mitigation : This method involves taking steps to prevent or reduce the risk of
loss. For example, installing a security system in your home can help prevent theft
Risk Retention
Risk retention refers to the decision to bear the financial consequences of a risk without transferring it to an
external party. In other words, the organization or individual chooses not to purchase insurance or use other risk
transfer mechanisms.("risk handling" does not necessarily imply avoiding or managing risks in a way that eliminates
them entirely. Instead, risk handling involves a broader set of strategies that organizations or individuals can employ
to deal with risks.)
Diversification:
Spreading investments or activities across different areas to reduce the impact of a negative event in any one area.An
investor diversifies their investment portfolio by allocating funds to various industries and asset classes to minimize
the impact of a market downturn in one sector.
Hedging:
Using financial instruments or strategies to offset potential losses. Example: A commodity producer may use futures
contracts to hedge against price fluctuations, ensuring a stable income despite market volatility. By entering into a
futures contract, you are "locking in" a future price for the purchase of a specific quantity of the same asset (wheat,
in this case). This strategy allows you to manage the risk of price fluctuations and maintain cost predictability.
Sharing
This method involves sharing the risk with others. Sharing health insurance through your employer means you and
your employer both contribute to the cost, and you become part of a group (risk pool) covered by the same health
insurance plan. This way, you have access to health coverage and share the associated costs with your employer.
Meaning of Insurance
Insurance is a financial safety net you put in place to protect yourself from unexpected losses.
Insurance is a financial arrangement that provides protection against financial loss or risk.
An entity which provides insurance is known as an insurer, insurance company, insurance carrier, or underwriter. A
person or entity who buys insurance is known as a policyholder, while a person or entity covered under the policy is
called an insured.
Characteristics of insurance Characteristics of insurance
Risk Transfer Payment of Fortuitous/Accidental losses
Pooling of Risk/losses Legal Contract
Premium Regulated industry
Contractual Agreement Variety of insurance
Indemnity/Reimbursement/Compensation Indemnity/Reimbursement/Compensation
Risk assessment
Subrogation/Third party Replacement of
loss/Legal Recover
Types of Insurance Types of Insurance
Life insurance Homeowner’s Insurance
Health insurance Renter’s insurance
Business Insurance Travel Insurance
Auto(Vehicle) Insurance Disability
Benefits of insurance to Society
A deductible is the amount of money
Financial Protection you have to pay out of your own
pocket before your insurance kicks
Promotes Safety in. it's the portion of the loss that
you're responsible for before your
Promotes Commerce and investment insurance company starts helping
out.
Community Resilience and Disaster Preparedness
Economic Growth and Stability
Job Creation
 Psychological Well-being
Insurance Principle refers to the fundamental concept and basic principles that govern the insurance industry. These
principles serve as the essential guidelines for the creation, execution, and interpretation of insurance contracts,
ensuring fairness, transparency, and the proper functioning of the insurance system.
Principle of indemnity
The principle of indemnity states that the purpose of insurance is to compensate the insured for the actual financial
loss suffered, and not to provide a means for the insured to profit from the loss. The insured should be restored to the
same financial position as before the loss, but not in a better position.
Insurable Interest
The insured must have a legitimate interest in the preservation of the life or property insured. The insured must stand
to suffer a financial loss if the event covered by the insurance occurs. Insurance is not a way to make money through
gambling. You should only get insurance for things that genuinely matter to you financially. Example: You can't buy
insurance on someone's life just to make money if they die. You can only insure someone's life if their death would
cause you financial hardship (e.g., you depend on them for income).
Sub-ro-gation
Subrogation typically involves the insurance company paying a claim to the insured and then seeking reimbursement
from the responsible third party. This principle helps prevent the insured from being paid twice for the same loss and
allows the insurer to recover its costs.
Principle of utmost good faith
This principle requires both the insured and the insurer to act honestly and transparently in all dealings related to the
insurance contract. The insured must provide complete and accurate information, and the insurer must provide clear
and truthful terms.
Proximate cause
Proximate cause is a legal concept used to determine which event or series of events is directly responsible for a
particular loss or injury. it's about figuring out what the closest, most significant reason Resulted something bad
happened. Insurance policies merely may have specific coverage for damage resulting from specific causes. The goal
is to accurately assess whether a loss or damage is covered under the insurance policy. It also helps to evaluating
risks and setting appropriate premiums during underwriting. Insurers need to understand the potential causes of loss
to estimate the likelihood and severity of future claims.
Contribution
Contribution is a way to ensure a fair distribution of the financial responsibility among multiple insurers when they
cover the same risk for an insured item or property. This ensures that you, as the insured, do not receive more money
than the actual loss you suffered. Each insurance company contributes proportionally based on the coverage they
provide.
Mitigation
Mitigation refers to the principle that the insured party has a duty to take reasonable steps to minimize or reduce the
extent of a loss or damage once an insured event occurs. If the insured fails to take reasonable actions to mitigate the
loss, it might affect the amount of compensation they receive from the insurer.
Concept of Insurance Contract
An insurance contract is a legally binding agreement between two parties: the insurer (the insurance company) and
the insured (the policyholder). In this contract, the insurer promises to compensate the insured for any future loss
suffered by him, in exchange for a premium. The main purposes of an insurance contract Protection against uncertain
events Better management of finances. The contract outlines the terms and conditions under which the insurer agrees
to provide financial protection to the insured in the event of a covered loss.
Characteristics of insurance Contract Legal characteristics of Insurance

Contract
Legal Agreement
Contract Formation
Terms and condition
Offer and acceptance & Meeting of
Consideration minds(Terms)
Policy premiums and Period Legal Purpose & Capacity
#Refer Insurance Principles Consideration
Legal characteristics of Disclosure and warranties
Insurance Contract Misrepresentation
Statutory compliance Interpretation
Insurable Interest Termination
#Refer Insurance Principles
Unit 4: Evaluating Bank Performance
4.2 Bank financial statement: The balance sheet and income statement.
4.3 Evaluating bank performance with financial ratios: profit ratios, risk ratios and other ratios.
Evaluating bank performance is crucial for various stakeholders, including investors, depositors, borrowers, and
regulatory bodies. A comprehensive framework is necessary to assess a bank's financial health, operational
efficiency, and overall contribution to the economy
Framework refers to a structured and systematic approach or set of guidelines used to assess various aspects of a
bank's operations, financial health, and overall effectiveness. A framework typically includes a range of criteria,
models, and ratios that are used to evaluate specific aspects of the bank, such as financial stability, operational
efficiency, risk management, customer focus, compliance, innovation, and strategic planning.
The CAMELS rating system is a regulatory framework used by supervisory authorities, such as central banks and
financial regulators, to assess the overall health and risk profile of financial institutions, particularly banks. The
acronym "CAMELS" stands for six critical components that are evaluated:
Capital Adequacy
Evaluates the sufficiency of a bank's capital in relation to its risk profile. It Measures a bank's ability to absorb
potential financial losses. Adequate capital is crucial for maintaining the confidence of depositors, investors, and
regulators, Financial metrics Tier 1 capital adequacy ratio , Tier 2 capital adequacy ratio , and Capital
Adequacy ratio are used to measure the capital at adequate level to cover the potential risks.
Tier 1 Capital Adequacy Ratio
Risk-weighted assets are financial assets held by banks that are adjusted for the level of risk associated with each
asset. Different types of assets carry varying degrees of risk, and regulators assign specific risk weights to reflect this.
For example, loans to governments may have lower risk weights compared to loans to private corporations.
Tier 1 Capital is core capital of bank. representing the most stable and permanent forms of capital. It includes
common equity, which consists of common shares and retained earnings. Tier 1 capital is the highest-quality capital
because it can absorb losses without requiring a bank to cease operations. The Tier 1 Capital Ratio is a critical
measure that assesses a bank's core financial strength and its ability to absorb losses in relation to its risk-weighted
assets.
Tier 2 capital is considered supplementary capital and is less permanent than Tier 1 capital that provides an additional
layer of protection against losses. Financial instruments that combine features of both debt and equity(Such as
preferred Stock), providing flexibility to absorb losses.
Such types of preferred stock, or bond holder’s having agreed to the Hierarchy of repayment in case
of financial distress are known as subordinated debts holder. These holder’s knowingly accept this additional risk in
exchange for potentially higher returns.
So Tier 2 capital ratio represents the proportion of supplementary nature of capital within the bank’s overall
capital structure. A higher Tier 2 Capital Ratio indicates that the bank has a greater amount of supplementary capital,
such as subordinated debt and hybrid instruments, in proportion to its risk-weighted assets.
Sensitivity to Market Risk
This component assesses how well a financial institution manages and controls its exposure to market risks,
including interest rate risk, foreign exchange risk, commodity price risk, and equity price risk. The assessment
focuses on risk management practices, hedging practices, stress testing, and compliance with regulations.
In the context of evaluating bank performance, the bank's financial statements, particularly the balance sheet
and income statement, are foundational tools that provide valuable insights into the institution's financial health,
profitability, and overall stability.
Balance Sheet:
The balance sheet offers a snapshot of the bank's financial position at a specific point in time. Key components
include:
Assets: Representing what the bank owns, including cash, loans, investments, and other resources.
Liabilities: Reflecting what the bank owes, such as deposits, borrowings, and other obligations.
Equity: Showing the residual interest of the bank's owners in its assets after deducting liabilities.
Relevance for Performance Evaluation:
The composition of assets reflects the nature of the bank's business and its risk exposure.
Liability structure informs about the bank's funding sources and obligations.
Equity indicates the owners' stake and serves as a buffer against potential losses.
Assets Quality
It Assesses the quality of a bank's assets, focusing on the level of risk associated with its loan portfolio and other
investments. Metrics like the Non-Performing Loan (NPL) ratio, loan loss reserves, and the overall asset quality are
considered. Adequate loan loss reserves are essential for absorbing losses without severely impacting the bank's
financial stability. Non-performing loans are loans where the borrower has failed to make interest or principal
payments for a specified period. High levels of NPLs can indicate financial stress, credit risk, and potential losses for
the bank.
Management
In the CAMELS model, "Management" is a critical component assessing the overall effectiveness of a bank's
leadership and governance. It encompasses various dimensions, including corporate governance, strategic planning,
risk management, financial management, operational management, and compliance management. It also includes
evaluating the experience, skills, and decision-making processes of the management.
Earnings
Analyzes the bank's profitability and earnings performance. This includes assessing the stability and sustainability of
earnings over time. Key metrics include return on assets (ROA), return on equity (ROE), and net interest margin
(NIM).
Liquidity
Evaluates a bank's ability to meet its short-term obligations and manage liquidity risk. Liquidity is crucial for a bank's
daily operations and to withstand unexpected cash outflows. Liquidity ratios and stress testing are common tools
used for this assessment.
• The income statement provides a summary of the bank's revenues, expenses, and net income over a
specific period. Key elements include:
• Interest Income: Revenue generated from interest-earning assets.
• Interest Expenses: Costs associated with interest-bearing liabilities.
• Non-Interest Income: Revenue from non-interest activities, such as fees and commissions.
• Non-Interest Expenses: Operational costs, provisions for loan losses, and other expenses.
• Net Income: The bottom line, indicating the bank's profit or loss.
• Relevance for Performance Evaluation:
• Net income reflects the bank's overall profitability.
• Interest income and expenses provide insights into the bank's core banking activities.
• Non-interest income diversification contributes to revenue stability.
• Operating expenses impact cost efficiency.
Unit 6: Categories of Insurance and Insurance Company Operations LH 12
6.1 Life insurance: Economic justification for life insurance, elements of the life insurance
contract, procedures affecting life insurance, types of life insurance, determining fair premium
and net benefit, measuring risk and return of life insurance; Life Insurance contractual provisions:
dividend options, no forfeiture options, settlement options and additional life insurance benefits.
6.5 Financial Operations of Insurance Companies: Pricing (Rate making) of insurance, Financial
Statements of Insurance Companies and measuring financial performance based on underwriting
performance, earnings, solvency, efficiency, liquidity and market value ratios, Fundamentals of
premium calculations (Net single premium and Net annual level premium).
6.1 Life insurance: Economic justification for life insurance, elements of the life insurance
contract, procedures affecting life insurance, types of life insurance, determining fair premium
and net benefit, measuring risk and return of life insurance; Life Insurance contractual provisions:
dividend options, no forfeiture options, settlement options and additional life insurance benefits.
6.5 Financial Operations of Insurance Companies: Pricing (Rate making) of insurance, Financial
Statements of Insurance Companies and measuring financial performance based on underwriting
performance, earnings, solvency, efficiency, liquidity and market value ratios, Fundamentals of
premium calculations (Net single premium and Net annual level premium).
6.1 Life insurance: Economic justification for life insurance, elements of the life insurance contract,
procedures affecting life insurance, types of life insurance, determining fair premium and net benefit,
measuring risk and return of life insurance; Life Insurance contractual
Categoriesprovisions:
of insurance dividend options, no
forfeiture options, settlement options and additional life insurance benefits.
Life insurance Non-life insurance Re-insurance
Life insurance: Economic justification for life insurance

Life insurance is a financial product that pays a death benefit to your beneficiaries when you die. In exchange for this
guarantee, you pay premiums to the insurance company throughout your lifetime.
Economic Justification of Life insurance
Income replacement Business Continuity
Debt Protection Family & Social Stability
Final(Funeral) Expenses Risk Mitigation
Succession Planning Health consideration
Education Funding Financial security and tax Advantages
While life insurance offers valuable financial protection in many scenarios, Such as Single
individuals with no dependents Individuals with minimal debt, Individuals nearing retirement with
sufficient savings, Specific financial goals, it might not be the most justifiable option, or might even
be considered unnecessary.
Elements of the life insurance Guiding Principle of the life insurance contract
contract
 Policyholder
Offer and acceptance
Insured Utmost Good faith
Beneficiary Legal capacity
Premiums Insurable interest
Death Benefit
Indemnity(Compensation not Profit)
Policy term
Exclusion and limitations
Subrogation/Third party
Replacement of loss/Legal Recover
Disclosure
Procedures affecting life insurance
Understanding the impact of procedures becomes crucial for the coverage of the insurance in several areas such as
Services and benefits received by the beneficiaries, consenting to the policy terms and updates, Termination,
Reestablishment If a policy lapses.
In essence, these procedures outline the steps and actions that individuals, policyholders, and beneficiaries need to
take at different stages of the life insurance process. Each procedure is crucial for the proper functioning and
management of a life insurance policy.
Here are the step wise procedure of life insurance.
2. Medical
1. Application
Examination and
4. Premium 5. Policy
and Approval Underwriting Payments Modification
3. Policy 6.Claimin
issuance g process
Types of life insurance
1. Term Life Insurance
Provides coverage for a specified term, such as 10, 20, or 30 years. Pays a death benefit if the insured dies during the
term. Typically more affordable than permanent life insurance. And No cash Value Accumulation.
2. Whole Life Insurance:
Provides coverage for the insured's entire lifetime. Combines death benefit protection with a cash value component
that accumulates over time. The policyholder can access the cash value through withdrawals or loans. Higher
premiums compared to term life insurance.
3. Universal Life Insurance(ULI)
Similar with the Whole Life insurance but provides more flexibility. Such insured as can adjust the amount and
frequency of premium payments within certain limits, Policyholders can use this cash value accumulation to cover
premiums, take loans, or make withdrawals or partial withdrawals . Policyholders can allocate the cash value among
various investment accounts, such as fixed interest, equity, or bond funds.
Adjustable Death Benefits(ULI)
Let's say you initially purchased a universal life policy to cover a mortgage. Later on, you may want to increase the death benefit to also provide
financial protection for your growing family. The flexibility of an adjustable death benefit allows you to make such changes. If you get married,
you might want to increase the death benefit to ensure your spouse is adequately protected. With the birth of a child, you might choose to
increase the death benefit to provide for your child's future financial needs. If your financial situation changes, you can adjust the death benefit to
align with your current circumstances.
Types of life insurance
4. Final Expense Life Insurance(Funeral costs, Medical Bills and Outstanding debts)
5. Variable Universal Life Insurance
A type of universal life insurance where the cash value grows based on the performance of investment sub-
accounts / portfolio chosen by the policyholder. Offers potential for higher returns but also carries investment risks.
6. Group Life Insurance:
Offered through employers or organizations. Provides coverage to a group of individuals. Typically, coverage is a
multiple of the individual's salary.
Determining fair premium and net benefit
A fair premium strikes a balance between affordability for policyholders, and the insurer's need for financial viability,
ensuring that the cost of coverage aligns with the level of protection provided. For example if the insurer sets the
premium low, it might not generate sufficient revenue to cover potential claims and operational costs.
So, Premium should be likely to approx. Probability of an accident.
Premium P= p.A ( Where p is a probability of occurrence of event and A is the amount of claim in event of accident)
For example, Insurance companies often use demographic factors to determine automobile insurance premiums.
DETERMINATION OF FAIR PREMIUM
1. Actuarial(Ac-chu-real) Science
Premiums are calculated using actuarial science, which analyzes statistical data on risk factors like age, health,
location, and type of coverage. Actuaries use this data to estimate the probability of claims and the expected cost of
payouts to determine the minimum premium needed to cover those costs.
2. Underwriting guidelines
Insurers sets the guidelines to determine which risks they are willing to cover at what price. In summary,
underwriting guidelines are a set of criteria and rules that insurers use to evaluate risk and set premiums.
Determining fair premium
3.Pricing Model
Various pricing models are used, such as the pure premium model (only covers claims) or the gross premium model
(includes expenses like commissions and administration). The chosen model and its assumptions significantly impact
the premium.
4.Regulatory Compliance
Insurance companies are subject to regulations that dictate minimum capital requirements and solvency ratios,
ensuring they have enough funds to cover potential claims. This influences premium setting as companies need to
maintain financial stability. This ensures fairness and prevent discriminatory practices.
5.Market Conditions
The overall market conditions and competition in the insurance industry also impact premium pricing. Insurers
consider what competitors are offering for similar coverage while determining premiums.
6.Claims experience
Continuously monitor and analyze claims experience to refine pricing models. Adjust premiums based on the actual
claims paid out and the overall performance of the insurance portfolio.
The net benefit for the insured refers to the value they receive from the insurance policy after deducting the
premium payment made over time.
Determining net benefit
Net premium = Pv of policy Benefits - PV of future premiums
Net benefit is the expected difference between the present value of future benefits received and the present value of
future premiums paid. A positive net benefit indicates the policy is financially advantageous for the insured.
Individual vs. Group: Net benefit can vary significantly depending on individual risk factors and policy terms. Group
insurance often offers lower premiums due to shared risk and administrative efficiencies.
Policy Features: Benefits and limitations of the policy influence net benefit. Higher coverage amounts or additional
riders typically increase premiums and affect net benefit calculations.
Ultimately Premium costs, Claim payout amounts, Deductibles, Coverage limits, Policy exclusions, Insured's risk
profile, Frequency and severity of claims, Market conditions, Inflation, Investment returns impacts the determination
of net benefits. And so on.
Evaluating costs
Aligns with "Determining Fair Premium and Net Benefit." Discusses assessing the total costs, including premiums
and fees, against the benefits and returns received to determine the net return.
Measuring risk and return of life insurance
The "risk" in life insurance refers to the chance that the policy won't pay out the desired death benefit to your
beneficiaries. The "return" on life insurance comes in the form of a death benefit paid to your beneficiaries in the
event of your death.
1. Set Fair Premiums:
Mortality Risk: Actuarial science plays a crucial role in analyzing age, health, lifestyle habits, and family history to
estimate the probability of a policyholder's death and potential claim cost. This forms the basis for setting risk-
adequate premiums.
Longevity Risk: Longevity risk is the uncertainty about how long people will live and its impact on insurance
companies. It is the is the chance that people may live longer than expected.
Lapse Risk: Lapse risk is about the chance that customers might give up their insurance policies before they reach
the planned end. It might encompasses into Policy-related or surrender risk.
Financial Risk
Financial risk involves the risk of investment might affect the insurer’s ability to meet future policy obligations. And
interest rate fluctuation if the insurance product are rely upon fixed income investments.
Return on Investment (ROI):
Links to "Measuring Risk and Return of Life Insurance." Discusses the internal rate of return (IRR),
providing insight into the policy's overall return.
Performance Benchmarks:
Aligns with "Comparative Analysis" under the broader topic of "Measuring Risk and Return of Life Insurance." Discusses
evaluating the policy's returns against similar products or investment alternatives.
Risk-Adjusted Returns:
Corresponds to "Considering Risk Exposure" under the "Measuring Risk and Return of Life Insurance" topic. Discusses assessing
whether the returns justify the level of risk taken with the policy.
Life Insurance contractual provisions: dividend options, no forfeiture options, settlement options and
additional life insurance benefits.
Life Insurance Contractual Provision
Life insurance contracts contain a multitude of provisions that define the rights and responsibilities of both the
policyholder and the insurer.
Death benefit: The primary benefit, paid to beneficiaries upon the insured's death. Amount can be a lump sum,
installments, or income stream.
Additional benefits: Some policies offer riders for benefits like disability income, accelerated death benefit for
terminal illness, or long-term care.
Cash Value growth: For certain types of life insurance, like whole life or universal life, a portion of the premium is
set aside to accumulate cash value over time.
Policy Loans: Provision for policyholders to borrow against the cash value of their life insurance policy.
Dividend or Bonuses: Some life insurance policies (such as participating whole life policies) pay out dividends or
bonuses based on the insurer's profitability. These add to the policy's overall return.
Surrender Charges
: This provision outlines any fees that may be charged if the policyholder surrenders the policy for its cash value
Policy Ownership and Rights:
Ownership clause: Defines who owns the policy and has the right to make changes, such as naming beneficiaries or
borrowing against the cash value.
Beneficiary designation: Determines who receives the death benefit. It can be changed by the policy owner under
certain conditions.
Assignment clause(Loan Provisions): Specifies whether the policy can be assigned to another party, typically for
collateralizing loans.
Incontestability clause: After a specified period (usually two years), the insurer cannot contest the validity of the
policy(for example in the name of insured person does not disclose minor treatment) except for fraud.
Suicide clause: Limits or excludes death benefits if the insured commits suicide within a specific timeframe.
Cancellation clause: Circumstances under which either party can terminate the policy.
Reinstatement clause: Conditions under which a lapsed policy can be reinstated with payment of back premiums
and potential fees.
Dispute resolution: Mechanisms for resolving disagreements between the policyholder and the insurer.
War clause: Excludes death benefits for deaths related to war or military service.
Aviation clause: May exclude death benefits for deaths during certain types of air travel.
Tax Considerations:
Tax-Advantaged Growth: Some life insurance policies offer tax-deferred growth on the cash value component or tax-free
death benefits, impacting the overall return.
• Dividend Options:
• Meaning: Some life insurance policies, particularly participating whole life policies, may pay
out dividends based on the insurer's profitability.
• Significance: Policyholders have options on how they want to receive these dividends, such as
taking them in cash, using them to reduce premiums, or reinvesting them.
• No Forfeiture Options:
• Meaning: No forfeiture options prevent a complete loss of value if a policyholder decides to
surrender or terminate the policy prematurely.
• Significance: Even if the policy is surrendered, there is a cash surrender value, ensuring the
policyholder retains some financial value.
• Settlement Options:
• Meaning: Settlement options provide flexibility in how beneficiaries receive the death benefit
when the policyholder passes away.
• Significance: Beneficiaries can choose how they want to receive the payout, such as in a lump
sum, periodic payments, or as a form of annuity.
• Additional Life Insurance Benefits:
• Meaning: Beyond the basic death benefit, additional benefits, known as riders, can be
added to the policy for specific events like critical illness, disability, or long-term care.
• Significance: Enhances coverage by providing extra financial protection for events beyond
the policyholder's death.
• Property insurance is Other than those related to life or health. It primarily focuses on
protecting individuals, businesses, and organizations against financial losses resulting from
various types of property damage, liability, and other unforeseen events.
• Coverage Types:
• Property Insurance: Protects against damage or loss of physical property, including
homes, buildings, and personal belongings, due to events such as fire, theft, or natural
disasters.
• Liability Insurance: Covers the policyholder's legal responsibilities for injuries to others or
damage to their property. This includes bodily injury liability and property damage liability.
• Casualty(Means damange/Injured party) Insurance: Broad category covering various
types of liability risks, such as liability arising from accidents, legal liabilities, and other
unforeseen events. in essence, a combination of property and liability coverages, providing a
more comprehensive solution for a wide range of risks and losses.
Importance
Of Casualty Insurance
Importance Of casualty Insurance
Financial Security: Unexpected Losses
Accidents and incidents happen, and covering

the cost of damage or injuries on your own can
be overwhelming. Casualty insurance helps
mitigate the financial burden of unpredictable
events, like a fire in your home or a car
Risk Management for Businesses

For businesses, casualty insurance is a
fundamental component of risk
management. It helps protect against a
wide range of risks, including bodily
injury, property damage, product
liability, and other potential liabilities
that could arise in the course of business
operations.
Peace of Mind for Individuals:
Individuals benefit from casualty insurance by
having peace of mind knowing that they are
financially protected against unexpected events.
This includes coverage for personal liability,
such as accidents that occur on their property or
Contractual Requirements:
Types Of Casualty
Insurance
Types of Casualty insurance
1.General Liability Insurance
Offers broad coverage for

businesses or individuals
against claims of bodily
injury, property damage, or
personal injury caused by
their operations, products,
or premises. It's
foundational coverage for
many businesses.
2.Professional Liability Insurance
(Errors & Omissions

Insurance): Specifically
designed for professionals
(e.g., doctors, lawyers,
architects, consultants) to
protect against claims of
negligence, errors, or
omissions in their services
or advice.
3.Directors and Officers Liability Insurance (D&O)

D&O Insurance protects
company leaders from lawsuits
claiming they did something
wrong in their job. It covers
legal costs and settlements,
giving directors and officers
peace of mind and helping
attract talented leaders to
businesses. Such as Employee
Lawsuit, Financial
mismanagement, Breach of
fiduciary duty, Regulatory
4.Cyber Liability Insurance:
Addresses liabilities arising

from data breaches, cyber
attacks, or privacy
violations. It covers costs
related to data recovery,
notification, legal expenses,
and damages.
5.Umbrella Insurance:
Offers additional liability

coverage that goes beyond
the limits of primary
policies like general liability
or auto insurance. It
provides an extra layer of
protection against
catastrophic losses.
6. Commercial Auto Liability Insurance
Covers liability for bodily

injury or property damage
caused by business-owned
vehicles. It includes
coverage for accidents
involving company cars,
trucks, or other vehicles
used for business purposes.
Concept of Re-insurance
Reinsurance is a financial arrangement where an insurance company transfers a portion of its risk
to another insurance company, known as the reinsurer. The primary purpose of reinsurance is to
help insurance companies manage their exposure to large or catastrophic losses and to ensure
their financial stability.
Concepts Associated With Re-insurance
Risk Transfer
Risk Sharing
Capital Management
RISK TRANSFER
Reinsurance: Assumes risk from other insurers (ceding companies). Reinsurers do not deal
directly with policyholders but rather with other insurance companies, helping them manage
and spread their risks.
RISK ASSUMPTION
Reinsurance: Involves the transfer of risk from the ceding company to the reinsurer. Reinsurers
agree to indemnify the ceding company for a portion of its losses, helping the ceding company
Scale and Volume:
Operates on a larger scale, often dealing with catastrophic or large-scale risks. Reinsurers can
provide coverage for multiple insurance companies, allowing for the pooling and diversification
of risks.
Policyholders Interaction:
Typically does not interact directly with policyholders. Its focus is on working with primary
insurers to manage their overall risk portfolio.
Underwriting Expertise:
Focuses on underwriting portfolios of risks. Reinsurers often have specialized knowledge in
assessing and managing the aggregated risks of multiple insurers.
Contract Types
Involves treaties or facultative agreements between the ceding company and the reinsurer,
specifying the terms under which the reinsurer will assume a portion of the risk.
Premiums and Payments:
Receives premiums from the ceding company and pays out claims to the ceding company based
on the terms of the reinsurance agreement.
Capital and Solvency
Reinsurance helps insurance companies by providing extra financial support. This allows the insurance
companies to take on more policies without worrying too much about the risk of large losses. Essentially,
reinsurance acts as a safety net, enabling insurers to expand their business without taking on too much risk
themselves.
Importance of Re-insurance
Risk Management
Risk Sharing
Capital Expansion
Business Growth
Market Stability
Global Risk Diversification
Catastrophic Protection
Market Confidence
Types Of
Re-Insurance
Types of Re-insurance
1. Treaty reinsurance
Treaty reinsurance is like a
subscription plan between an
insurance company and a reinsurer.
They have a standing agreement
where the reinsurer automatically
covers a certain type of risk for the
insurance company over a set period.
It's a long-term partnership that helps
the insurance company manage risks
without negotiating each policy
separately. Treaty reinsurance comes
in three types: quota share, where
risks are split between the insurer and
reinsurer; surplus share, offering
Types of Re-insurance
2. Facultative reinsurance
Facultative reinsurance is a specialized
form of risk transfer wherein the
primary insurer engages in
individualized negotiations with a
reinsurer for coverage on a case-by-
case basis. This approach provides a
tailored solution for unique and often
high-value risks, allowing the primary
insurer to exercise greater control over
the terms and conditions of each
agreement. Unlike treaty reinsurance,
which offers automatic coverage for
predefined categories of risks,
facultative reinsurance offers a more
selective and customized approach to
Operation of
Insurance Company
6.4 Operations of Insurance Companies
1. Rating and rate making
Rating involves evaluating the risk of

an insurance policy, determining the
appropriate premium, and classifying
the insured based on various factors.
Meanwhile, rate making encompasses
the broader task of establishing the
overall pricing structure for different
policies. Actuaries, through statistical
analyses, play a crucial role in this
process, ensuring that premiums are
set at a level that balances
competitiveness with the financial
2. Underwriting
In insurance, underwriting serves as a

critical evaluative process.
Comparable to a gatekeeper role, it
involves a thorough assessment of the
associated risks of a policy, guiding
the decision on whether to accept or
reject it. This method functions as a
filter, ensuring that the insurance
company aligns its portfolio with a
prudent risk appetite, thus maintaining
equilibrium between providing
coverage and mitigating potential
3. Production, Marketing and Sales
Production in insurance involves

marketing and sales activities aimed at
attracting and acquiring customers.
This includes strategies to promote
insurance products and engage with
potential policyholders. The goal is to
effectively communicate the value of
insurance offerings and drive sales
through various marketing channels.
Agents and brokers often play a vital
role in the production process by
actively participating in sales and
4. Policy Issuance
Policy issuance is the process of
formally providing insurance coverage
to customers. After underwriting and
accepting an application, the
insurance company generates and
issues an official insurance policy to
the policyholder. This document
outlines the terms, conditions, and
coverage details. Policy issuance
marks the formal commencement of
the insurance contract between the
insurer and the policyholder,
providing legal documentation of the
agreed-upon coverage. It ensures
clarity and transparency regarding the
5. Premium Collection
Premium collection refers to the

gathering of payments from
policyholders in exchange for
insurance coverage. After policy
issuance, insurers collect regular
premiums, typically on a monthly,
quarterly, or annual basis. This
process ensures a steady flow of
funds to the insurance company,
enabling it to cover operating costs
and fulfill its financial obligations,
such as settling claims
6. Claim Processing and Settlement
Claim processing involves evaluating

and verifying insurance claims,
ensuring accuracy and adherence to
policy terms. Following this, claim
settlement entails providing
policyholders with compensation for
covered losses. These crucial steps are
integral to maintaining customer trust
and satisfaction in the insurance
industry. Efficient processing and fair
settlement contribute to the overall
effectiveness of an insurance
company, fulfilling its commitment to
policyholders.
7. Reinsurance
Reinsurance is a risk management
strategy where insurance companies
transfer a portion of their risks to
other insurers (reinsurers). This
process helps insurers mitigate the
impact of large losses and maintain
financial stability. Reinsurers assume a
share of the risk in exchange for
premiums, allowing primary insurers
to underwrite more policies and
enhance their capacity. The goal of
reinsurance is to spread risk, protect
against catastrophic events, and
ensure the long-term solvency of
insurance companies. It plays a crucial
8. Investment
Investment in insurance involves managing the funds generated

from premiums to generate returns. Insurance companies
strategically invest in various financial instruments, such as stocks,
bonds, and other securities. The goal is to optimize returns while
ensuring sufficient funds are available for claim payments and
operational expenses. Effective investment management is
essential for maintaining financial stability and profitability,
contributing to the overall success of insurance companies. It
allows insurers to meet their financial obligations and enhance
their capacity to provide coverage to policyholders.
6.5 Financial Operations of Insurance Companies: Pricing (Rate making) of
insurance, Financial Statements of Insurance Companies and measuring financial
performance based on underwriting performance, earnings, solvency, efficiency,
liquidity and market value ratios, Fundamentals of premium calculations (Net
single premium and Net annual level premium).
Pricing (Rate making) of insurance
Pricing, also known as rate making, is the process of determining how much an insurance
company will charge for an insurance policy. It involves setting the price of insurance
premiums to maximize the company’s profits. The ideal pricing or premium must cover
variable costs, operating expenses, and profits.
Elements
Elements
Underwriting Assessment
Competitor Actions
Actuarial Analysis
Regulatory Compliance
Loss Ratio
Expenses And profit Policyholder
Consideration Characteristics
Underwriting is the process by which an insurance company evaluates and assess the risk
associated with insuring a particular individual, entity, property, or event. Insurers use
historical data and loss ratios to analyze the relationship between premiums collected and
claims paid out. A loss ratio is the ratio of incurred losses to earned premiums.
Process of Pricing(Rate Making)
Process of Pricing(Rate Making)
Overlapping concept with the Elements
Loss & estimation
Expense Loading (The expense loading is an additional amount added to
the pure premium to cover the insurer's operating costs.)
Rate determination ( Considering Loss estimates, Expenses loading and
profit margin)
Rate Filing(To the approval regulatory approval
Unit 7: Insurance Business in Nepal
7.2 Present Structure of insurance companies in Nepal.
7.3 Role of Insurance Agents, Brokers and Surveyors.
7.4 Regulation of insurance business: Major reasons for the regulation of
insurance, regulation of Insurance business in Nepal, function, duties and powers
of Nepal Insurance Authority (NIA).

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FAT(Frequently used term) PRODUCTS

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References : Internet, chatGPT,

Characteristics of insurance Contract Legal characteristics of Insurance

Life insurance: Economic justification for life insurance

Financial Security: Unexpected Losses

Accidents and incidents happen, and covering

Risk Management for Businesses

1.General Liability Insurance

Offers broad coverage for

2.Professional Liability Insurance

(Errors & Omissions

3.Directors and Officers Liability Insurance (D&O)

4.Cyber Liability Insurance:

Addresses liabilities arising

Offers additional liability

6. Commercial Auto Liability Insurance

Covers liability for bodily

1. Rating and rate making

Rating involves evaluating the risk of

In insurance, underwriting serves as a

3. Production, Marketing and Sales

Production in insurance involves

Premium collection refers to the

6. Claim Processing and Settlement

Claim processing involves evaluating

Investment in insurance involves managing the funds generated

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