Comparative Performance Analysis of Life Insurance Index and NEPSE Index

July 11, 2025 | Investopaper

This study presents a comprehensive analysis of the performance of the Life Insurance Index, comprising stocks of life insurance companies, and the NEPSE Index, the benchmark index of the Nepal Stock Exchange, from July 2003 to April 2025. Here, we examine key metrics such as index levels, daily returns, volatility, correlations, and risk-adjusted performance. Visualizations, including time series plots, normalized performance charts, scatter plots, and box plots, provide insights into trends and relationships between the two indices. The Life Insurance Index significantly outperformed the NEPSE Index in total returns but exhibited higher volatility.

Introduction

The Life Insurance Index, representing the performance of life insurance companies listed on the Nepal Stock Exchange (NEPSE), and the NEPSE Index, a broad market index, are critical indicators of sectoral and overall market performance in Nepal’s financial markets. This study analyzes their performance over the period from July 2003 to April 2025, focusing on index levels, daily returns, volatility, correlation, and risk-adjusted returns. The analysis provides statistical and visual insights for investors and financial analysts.

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Data and Methodology

The dataset, sourced Nepal Stock Exchange (NEPSE) website, contains daily values of the Life Insurance Index and NEPSE Index from July 2003 to April 2025. The analysis was performed with the following methodology:

Returns Calculation: Daily percentage returns were computed as the percentage change in index values from the previous day.

Summary Statistics: Descriptive statistics (minimum, first quartile, median, mean, third quartile, maximum) were calculated for index levels and returns.

Correlation Analysis: Pearson correlation coefficients were computed for index levels and daily returns.

Volatility Analysis: Volatility was measured as the standard deviation of daily returns.

Total and Risk-Adjusted Returns: Total returns over the period and Sharpe-like ratios (assuming a risk-free rate of 0%) were calculated.

Visualizations: Time series plots, normalized performance charts, scatter plots, box plots, and rolling correlation plots were generated for visual analysis.

Results

Summary Statistics

Index Levels

Table 1: Summary Statistics for Index Levels

Index	Life Insurance Index	NEPSE Index
Minimum	139.5	195.1
1st Quartile	499.7	423.5
Median	3,496.30	925.2
Mean	4,747.90	1,097.00
3rd Quartile	8,635.80	1,575.20
Maximum	18,997.40	3,199.00

Life Insurance Index: Ranged from 139.5 to 18,997.4, with a mean of 4,747.9 and a median of 3,496.3, indicating significant growth and variability.

NEPSE Index: Ranged from 195.1 to 3,199.0, with a mean of 1,097.0 and a median of 925.2, reflecting more moderate growth.

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Daily Returns

Table 2: Summary Statistics for Daily Returns (%)

Index	Life Insurance Index	NEPSE Index
Minimum	-41.577	-6.96963
1st Quartile	-0.49924	-0.54224
Median	0	-0.0069
Mean	0.09671	0.059371
3rd Quartile	0.47664	0.579195
Maximum	71.67431	6.061152

Life Insurance Daily Returns: Ranged from -41.58% to 71.67%, with a mean of 0.097% and a median of 0.000%, indicating high volatility.

NEPSE Daily Returns: Ranged from -6.97% to 6.06%, with a mean of 0.059% and a median of -0.007%, showing lower variability.

Correlation Analysis

Index Level Correlation: 0.9751, indicating a very strong positive relationship, suggesting the indices moved in tandem over the period.

Return Correlation: 0.4966, indicating a moderate positive relationship, implying less synchronized daily movements.

Volatility Analysis

Life Insurance Volatility: 1.8789%, reflecting higher risk in daily price movements.

NEPSE Volatility: 1.2722%, indicating relatively lower risk.

Total Period Performance

Life Insurance Total Return: 5,381.34%, reflecting strong growth in the life insurance sector.

NEPSE Total Return: 1,202.32%, substantial but significantly lower than the Life Insurance Index.

Risk-Adjusted Performance

Life Insurance Risk-Adjusted Return Ratio: 0.0515, indicating modest risk-adjusted returns.

NEPSE Risk-Adjusted Return Ratio: 0.0467, slightly lower than the Life Insurance Index.

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Visual Analysis

Figure 1 shows the historical trends of both indices, with the Life Insurance Index exhibiting a steeper growth trajectory.

Figure 1: Time Series Plot of Life Insurance Index vs. NEPSE Index Over Time

Figure 2 highlights the Life Insurance Index’s superior relative performance when normalized to a starting value of 100.

Figure 2: Normalized Performance Comparison (Base = 100)

Figure 3 displays a strong linear relationship (correlation: 0.975) between the indices, with a fitted regression line.

Figure 3: Scatter Plot of Index Levels

Figure 4 illustrates the volatility of daily returns, with the Life Insurance Index showing larger fluctuations.

Figure 4: Daily Returns Comparison

Figure 5 shows a moderate correlation (0.497) between daily returns, with a fitted regression line.

Figure 5: Scatter Plot of Daily Returns

Figure 6 highlights the greater variability in Life Insurance returns compared to NEPSE.

Figure 6: Box Plots of Daily Returns

Figure 7 tracks the evolution of the correlation between daily returns, revealing periods of varying co-movement.

Figure 7: 20-Day Rolling Correlation

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Discussion

The Life Insurance Index significantly outperformed the NEPSE Index, achieving a total return of 5,381.34% compared to 1,202.32%. This likely reflects the growing importance of the life insurance sector in Nepal’s economy. However, its higher volatility (1.8789% vs. 1.2722%) indicates greater risk, possibly due to sector-specific factors like regulatory changes or market dynamics.

The strong index-level correlation (0.9751) suggests that the Life Insurance Index is closely tied to overall market trends, driven by macroeconomic factors. The moderate return correlation (0.4966) indicates that daily movements are less synchronized, offering potential diversification benefits.

The Life Insurance Index’s slightly higher Sharpe-like ratio (0.0515 vs. 0.0467) suggests that its higher returns compensate for increased volatility. However, both ratios are low, possibly due to market inefficiencies or external economic factors.

Conclusion

From July 2003 to April 2025, the Life Insurance Index demonstrated exceptional growth compared to the NEPSE Index, with significantly higher total returns but greater volatility. The strong index-level correlation highlights shared market exposure, while the moderate return correlation suggests diversification opportunities. Investors seeking higher returns may find the Life Insurance Index attractive, but they must account for its higher risk.

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This analysis is based on historical data from July 2003, to April 2025, and past performance does not guarantee future results. Investment decisions should consider individual risk tolerance, investment objectives, and current market conditions.