For many years, particularly after the restoration of democracy in Nepal in the 1990s, labour migration to other countries has become a way to earn money and escape the vicious circle of poverty. Migration to Gulf countries for labour is not merely an economic decision of migrants’ families but an insurance policy against dire poverty, rampant unemployment, and excruciating economic shocks. Let us use the “insurance contract model” to understand the phenomenon, as it treats migration as a co-insurance strategy in which remittances function as insurance claims paid when household needs arise.
Insured remittance
The insurance contract model emerges from the New Economics of Labour Migration (NELM) theory developed in 1978. This theory proposes the idea that an individual decides to migrate from the collective decisions of the family to diversify income and mitigating financial risks. This theory postulates the idea that remittance serves as a remedy against economic shocks and improves the wellbeing of impoverished families. The migrant then provides income insurance to the household, promising to remit funds if the origin household suffers adverse income shocks.
In this model, migration is a co-insurance strategy with remittances playing the part of an insurance claim. Just as any insurance contract exists between two parties, an implicit family contract develops between those who migrate and those who remain at home. The family invests in the migration costs and when the contract pays off through regular remittances, the household survives economic hardships.
It is found that over 50 per cent of all the remittance to Nepal originates from the Gulf Cooperation Council (GCC) countries. So, these countries have become the primary destination for Nepali workers for sending remittance back home. In the first four months of the current fiscal year, the inflow of remittance from the GCC countries accounted for 50.3 per cent of the total remittance inflow. To be precise, Nepal already received Rs 153.26 billion out of Rs 304.97 billion according to data provided by Nepal Rastra Bank.
Among the GCC countries, Qatar remains the top remittance sender country with 53.93 billion (17.7 per cent), UAE follows Qatar at Rs 40.87 billion (13.4 per cent), Saudi Arabia at Rs 38.15 billion (12.5 per cent) in the first four months of the current fiscal year. Kuwait and Bahrain remain the fourth and fifth highest GCC countries to send remittance to Nepal contributing to Rs 11.52 billion (3.8 per cent) and Rs 8.79 billion (3.8 per cent), respectively.
In the first eight months of FY 2025/26, Nepal received Rs. 1,449.65 billion in remittances. According to the central bank data, remittance inflow has surged by 37.7 per cent during the period. The growth was 9.5 per cent in the same period last year.
Policy framework
The implicit contract between migrant and family operates across multiple dimensions. First, the family finances the migration costs including travel expenses, recruitment fees, and initial subsistence in the host country. This represents the premium paid for the insurance policy. Second, once the migrant settles and earns income in Gulf countries, they begin repaying this investment through remittances, which function as both loan repayment and income insurance.
The risk diversification element is crucial in insurance contract models. Economic risks between Nepal and Gulf countries are not positively correlated. The key to the insurance contract model works on the premise that gulf income is independent of Nepal’s economic crisis (unemployment, inflation, financial sector failures, weak government policies etc.).
Economic crisis can hurt the Nepali household while Gulf oil revenues remain stable hence, the migrants can support their family during worsening times at home. Poor families can s\urvive despite the economic crisis. Conversely, for the migrant, having family in Nepal provides insurance since bad periods can also occur in the foreign country. Insurance pays off.
The insurance function of remittances has produced measurable outcomes. Remittance has played a crucial role in poverty reduction. As per Nepal Living Standards Survey data (NLSS-I), the percentage of poverty declined from 42 in 1995/96 to 22.27 percent in 2022/23. It can be said that remittances are instrumental in enhancing economic well-being and support in poverty reduction.
The insurance model works at macroeconomic level as well by providing relaxed foreign exchange constraints and strengthening Nepal’s balance of payments. Remittances surpassed exports as the top contributor to foreign exchange earnings after 2001/02, with their share in total foreign exchange receipts reaching 31.5 per cent in 2004/05 compared to exports’ 28.8 percent. The strong external position has allowed Nepal Rastra Bank to build official reserves to high levels, reducing vulnerability to external shocks. The central bank report highlights remittances as Nepal’s largest source of foreign exchange. In US dollar terms, inflows rose 16.3 per cent to $12.64 billion, following a 14.5 per cent increase in FY 2023/24.
Challenges
Despite its benefits, the insurance contract model faces several challenges. First, the cost of migration is ridiculously high for many families. Migrant workers often spend substantial money in the migration process, increasing their debt burden. Many workers incur debts to pay recruitment fees, which must be repaid through remittances before any surplus reaches family consumption or investment.
Secondly, migrants’ workers may face hazardous employment conditions that can have a serious concern to the workers physical and mental safety and wellbeing. Likewise, the Gulf war can drive migrants back home leading to massive return of emigrants, demonstrating the volatility of this “insurance policy”.
Third, high recruitment costs increase the risk of debt traps for migrant workers and reduce the overall utility of migration. NLSS data shows that loan repayment is the second major use of remittances (13.5-15.9 percent), indicating that much of the “insurance payout” goes to paying migration-related debts rather than productive investment.
The functioning of an effective insurance contract model can be ensured through- the reduction of migration costs and stopping unwarranted charges migrants have to pay. Encourage migrants to send remittance through official channels only.
Adoption of tax waiver and financial incentives policies to the migrant’s families for remittance-based investments. Government sponsored investment opportunities for the remittance receiving households should be placed in priority. Digital remittance is growing but its rigid caps of Rs 50,000 per day creates digital bottlenecks. Compatibility between smaller cooperative banks and different digital wallets is still limited. There are several compliance and disclosure mandates that slow down the full potential of digital remittances. Remittance driven migration is a largely neglected area as Nepal lacks a national framework that guides migrants’ workers from their departures to return to encourage safer migration and harness utmost remittance benefits.
In a nutshell, the insurance contract model provides a powerful tool for understanding Nepal’s migration-remittance trajectory with GCC countries. Millions of families who are sending their members to GCC countries not only for seeking employment but picking up insurance against poverty and economic precariousness in the origin. However, the insurance contract model works better when the government realises the full developmental potential of this model.
