Natural disaster insurance: How Nepal will finance its reconstruction

Nepal is facing a multibillion-dollar reconstruction bill after devastating Bhotekoshi floods on August 26. The government’s preliminary estimate puts the cost of reconstruction and rehabilitation at $4-5 billion, although the final requirement will be known only after a detailed post-disaster needs assessment. Finance Minister Swarnim Wagle has also described the estimate as preliminary.

But the two numbers—$4-5 billion for reconstruction and NPR25.87 billion in insurance claims—are not directly comparable. Insurance will cover only a portion of the overall damage, while even the claims already reported will not necessarily be paid entirely by Nepali insurers.

The financing of a disaster is spread across several layers: policyholders, insurers, reinsurers and global risk markets on one side, and government funds, emergency financing, development banks, donors and, ultimately, taxpayers on the other.

What exactly will insurance pay for?

The first point to understand is that the $4-5 billion reconstruction estimate is not an insurance bill.

An insurance policy pays only when an asset is insured, the damage is caused by a risk covered under the policy, and the claim falls within the policy’s limits. This means the entire cost of rebuilding homes, roads, bridges and other infrastructure cannot simply be transferred to insurance companies.

This matters particularly for Nepal’s hydropower sector. Private hydropower projects are generally insured, and developers are expected to seek insurance payments for at least part of the damage caused by the floods. But not every piece of public infrastructure necessarily has comprehensive insurance coverage.

The Kathmandu Post reported that the Nepal Insurance Authority would have licensed surveyors assess insured damage before claims are settled.

According to initial data from the Nepal Insurance Authority reported by The Rising Nepal, 52 engineering and contractors’ risk claims were worth NPR20.51 billion, while 113 property claims were valued at NPR2.35 billion and 313 motor claims at NPR1.55 billion.

So, if a hydropower company files a claim worth billions of rupees, does the Nepali insurer have to pay the entire amount? Not necessarily. That is where reinsurance comes in. 

How reinsurance spreads the risk

The basic chain is: Project or homeowner → insurer → reinsurer

Insurance companies also need protection against very large losses. They, therefore, transfer part of the risks they have accepted to reinsurance companies.

In simple terms, a domestic insurer keeps some of the risk on its own balance sheet and passes another portion to a reinsurer. The exact arrangement depends on the reinsurance contract. It can involve proportional sharing of premiums and losses, or catastrophe and excess-of-loss arrangements, under which the reinsurer starts paying after losses cross specified thresholds.

Nepal already has such a reinsurance system. The country has two domestic reinsurers: Nepal Reinsurance Company, established in 2014 with government equity participation and Himalayan Reinsurance, a private-sector reinsurer that began operations in 2021.

Nepal’s insurance regulator also has rules governing reinsurance. Earlier versions of its directive required adequate catastrophe reinsurance and diversification of reinsurance exposure. The Nepal Insurance Authority lists the directive as having undergone further amendments, most recently on August 27.

This means a large flood-related claim does not necessarily translate into an equivalent loss for the original insurance company. A portion can move further up the insurance chain.

But who insures a reinsurer?

The chain can extend another step: Policyholder → insurer → reinsurer → another reinsurer/global market

A reinsurer can itself transfer some of the risk it has accepted to another reinsurer. This process is known as retrocession. This mechanism is already used in Nepal. Nepal Re lists brokers for its 2026-27 retrocession programme, while Himalayan Re says it conducts both reinsurance and retrocession business.

The country’s exposure is also connected to international reinsurance markets. The Nepal Insurance Authority maintains a roster of foreign reinsurers that includes international firms and markets such as GIC Re, Hannover Re and Lloyd’s underwriters.

In effect, a catastrophe can spread its financial risk across several layers rather than leaving one insurer to absorb the full loss.

Who pays for uninsured losses and public infrastructure?

Much of the disaster damage can fall outside private insurance. Roads, bridges, government buildings and other public assets may not have the same insurance arrangements as private commercial projects. Many households and businesses may also have no insurance at all.

This brings the government and public disaster-financing system into the picture.

Nepal has a Disaster Management Fund under its disaster-management law. The fund can receive government allocations as well as grants, assistance and loans, and can be used for disaster-management and relief activities. The country also has the Prime Minister’s Disaster Relief Fund, along with disaster funds at the provincial and local levels.

These funds are already being used following the Bhotekoshi floods. The government released NPR67.5 million from the Disaster Management Fund to 15 affected local units, after earlier allocations to three badly hit districts, according to The Kathmandu Post.

The Asian Development Bank has separately provided a $5 million emergency grant for immediate relief.

But such funds are primarily meant for immediate response and relief. They are nowhere near enough on their own to finance a reconstruction programme estimated at $4-5 billion.

Nepal has a $150 million emergency financing buffer

The important point is that a Cat DDO is not insurance. It is a pre-arranged line of credit. Instead of waiting to negotiate new financing after a disaster, the government can access the facility when the relevant conditions are met. The World Bank says the facility complements Nepal’s existing mechanisms, including the National Disaster Management Fund and Prime Minister’s Disaster Relief Fund.

So, while it gives the government quicker access to cash, it remains borrowing rather than a payout from an insurance policy.

Nepal explores catastrophe bonds for future disasters

Nepal is also trying to build another layer of protection for future disasters: catastrophe bonds, or cat bonds.

In July, the World Bank disclosed a Nepal Catastrophe Bond Project. The proposed instrument is being designed to provide Nepal with parametric protection against major earthquakes through the international capital markets.

Under a parametric structure, a payout is triggered when predefined physical conditions—such as the magnitude or severity of an earthquake—cross agreed thresholds. The payment does not depend on waiting for a conventional assessment of every individual financial loss.

But this proposed catastrophe bond should not be confused with insurance for the current floods. The instrument is being designed for earthquake risk, has not yet been issued, and there is no indication that it covers the August 26 Bhotekoshi floods.

A recent World Bank review further said Nepal had developed a disaster-risk financing strategy and catastrophe modelling but had not yet placed a market-based disaster-risk financing instrument.

No single institution pays the bill

The financing of Nepal’s reconstruction therefore involves two broad chains.

For insured assets, the money can flow from: Policyholder → insurer → reinsurer → retrocession/global risk markets

Insurance therefore provides only one layer of protection. Reinsurance and retrocession can spread insured losses across domestic and international risk markets, while government funds and development financing are needed for losses that are uninsured or fall on public infrastructure.

The NPR25.87 billion in preliminary insurance claims is therefore not a measure of Nepal’s total disaster bill. Nor does it mean insurers will ultimately pay NPR25.87 billion from their own balance sheets.

The much larger $4-5 billion reconstruction requirement will have to be met through a combination of government spending, insurance and reinsurance payouts, concessional and contingent loans, grants, donor support and private-sector spending.

In other words, reconstruction is not primarily an insurance exercise. It is a layered financing effort in which the financial burden of a disaster is shared—and, where insurance does not exist, a significant part can ultimately fall on the government and taxpayers.