Recent trends and future of life insurance industry

By M. Hakim Usoof B.Com., F.C.A.

The Sri Lankans as a nation can be confident that the insurance industry in Sri Lanka is regulated. The necessary legal teeth have been cut to protect the policyholders’ interest through necessary legislations. The commitment of the Government to regulate the insurance industry is evident through Control of Insurance Act No.25 of 1962 which has been repealed by Regulation of Insurance Industry Act No.43 of 2000.

The economic upturn in Sri Lanka presents both opportunities and challenges to the insurance industry. As you know, insurance is all about trust. Therefore, we have to believe innovation in insurance products, and public confidence is the key for the growth of the insurance industry.

The industry should take note of the importance of public confidence when introducing innovative life insurance and health insurance products to meet challenges.

The insurance sector is still small in size accounting for about 1.2% of GDP in terms of premium income. This is very low against an average of 6.2% in the Asian region. Sri Lanka’s relatively low per capita income may be one of the key reasons for this.

The number of Life policies in force as a percentage of the total population was 11.5% as at end 2011 against 10.7% as at end 2010, while as a percentage of total labour force was 29.2% as at end 2011 against 27.3% as at end of 2010.

Insurance companies in Sri Lanka have recorded a growth rate of 18.5% in insurance premium income in 2011 over the year 2010. The premium income recorded in the first six months for 2012 was Rs. 43.78 billion. The detailed statistics are shown in the following table.

The Life insurance segment will continue the growth momentum, though the escalating cost of living could be a threat to the life insurance business. The new motor vehicle registrations may have an impact on General insurance.



Insurance companies in Sri Lanka

22 insurance companies were registered as at end of the year 2011. Of the total, 12 companies were engaged in composite insurance carrying on both long term and general Insurance business, while three companies conducted only long term insurance business and seven companies were solely involved in General insurance.

However, only 21 companies are in operation as operation has been suspended of one insurance company engaged in General insurance business. Seven insurance companies were listed on the Colombo Stock Exchange which means 32% of the total number of registered insurance companies is listed.



Insurance brokering companies

There were 46 insurance brokering companies engaged in insurance brokering business in Sri Lanka as at 31 December 2011. 35 companies were engaged in both long term and General insurance brokering business while 11 companies have engaged only in General insurance brokering business. Their total gross written premium generated from both general insurance business and long-term insurance business amounted to Rs. 6.31 billion during the first half of 2012 compared to Rs. 4.94 billion during the same period in 2011.

There were 32,651 insurance agents as at 31 December 2011 who play a key role in marketing Life insurance products.



Total assets

Total assets of insurance companies stood at Rs. 279.10 billion as at 30 June 2012 compared with Rs. 265.41 billion as at 31 December 2011, representing an increase of 6.6%. The total assets of long term insurance business amounted to Rs. 165.67 billion at 31 December 2011 representing 62.4% of the total assets of insurance companies. The total assets of general insurance amounted to Rs. 99.74 billion at 31 December 2011, accounting for 37.6% of total assets of industry.



Performance of long-term insurance sector in 2011

The total number of life insurance policies in force was reported as 2,408,202 as at 31 December 2011. During 2011, insurers have issued 587,916 new Life insurance policies, recording an increase of 13.9% compared to 516,139 new policies issued in 2010.

This growth was mainly due to the favourable economic conditions that prevailed in the country, new long term insurance products introduced to the market and advertising campaigns carried out by insurers during the year.

The top five insurers accounted for 87.5% of the total GWP (gross written premium) of long term insurance business in 2011, while the balance 12.5% was shared among the remaining insurers. In 2011, Ceylinco Insurance PLC secured its top position in the market, similar to previous year in terms of GWP of long term insurance business by achieving a market share of 27.9%.

Aviva NDB Insurance PLC has been able to maintain the second position in the long term insurance sector in terms of GWP with a market share of 22.36%. Sri Lanka Insurance Corporation Ltd. has secured the third position with a market share of 19.17%. Union Assurance PLC achieved a market share of 12.71% (fourth position), while Janashakthi Insurance PLC accounted for a market share of 5.32% (fifth position) in the 2011.



Performance of General insurance sector in 2011

General insurance business made a higher contribution to the industry GWP by recording 55% of the total GWP. In 2011, total GWP generated by the insurance companies amounted to Rs. 43,331 million (in 2010 it was Rs. 35,101 million) and reflected a growth of 23.45% compared to the previous year’s growth of 4.63%.

The top five insurance companies accounted for 74% of the total GWP of General insurance business while the balance 26% was shared among the remaining companies. Sri Lanka Insurance Corporation Ltd. led the general insurance market as it did the previous year, by achieving a market share of 25.68%. Ceylinco Insurance PLC and Janashakthi Insurance PLC have been able to secure second and third positions similar to previous year by achieving a market share of 22.06% and 11.74% respectively. Union Assurance PLC and AVIVA NDB Insurance PLC ranked at the fourth and fifth places by recording market shares of 9.27% and 5.67% respectively.



General insurance class-wise performance in year 2011

The premium income for motor insurance, which constitutes 62.6% of the total premium of general insurance, recorded a growth of 29.5% against a 17% growth in 2010. This growth was mainly due to the increase in number of motor vehicle registrations as a result of granting permits to import motor vehicles at concessionary tax rates for public servants, low import duties and interest rates prevailed during the year.

Premium income on account of fire insurance increased by 7.3% while that on account of miscellaneous insurance services increased by 19.4%, accounting for shares of 12.4 % and 21% respectively of General insurance premium income.



Claim ratios

The overall claim ratio of 62.55% in 2011 was marginally high when compared to 61.27% in 2010. The claim ratios of fire, marine, miscellaneous and motor insurance stood at 40.41% (2010 – 48.21%), 33.68% (2010 – 32.05%), 59.14% (2010 – 58.52%) and 65.43% (2010 – 63.92%) respectively in 2011.



Retention of Gross Written Premium

Insurance companies were able to retain 82% of their gross premium, while 18% were ceded as reinsurance premium for cover large risks. Motor insurance continued to maintain the retention of 98% when compared to other classes. Fire insurance, miscellaneous insurance and marine insurance with retention level of 22%, 74% and 49% respectively in the year 2011, showed a marginal increase when compared with the year 2010 retention levels of 15%, 73% and 45 % respectively for the previous year.



Concentration of assets

Insurance companies are required to invest in Government securities not less than 20% of their assets in the technical reserve maintained for General insurance and not less than 30% of the assets in the long term insurance fund. As at end December 2011, 24.87% of General insurance assets and 50.67% of long term insurance assets were invested in Government securities.



Amendment in the legislation

Landmark changes were introduced in the year 2011. The amendment to the Regulation of Insurance Industry Act No.3 of 2011 was passed in Parliament to strengthen the supervisory framework of the entire insurance industry.

The following are noteworthy amendments to the insurance industry.

• Corporate bodies will become eligible to be registered as insurance agents.
• A new insurance company will be permitted to carry on, only one class of insurance business and such company will have to list itself on Stock Exchange licensed under the Securities and Exchange Commission of Sri Lanka Act No.36 of 1987 within a period of three years from the date of registration as an insurer.
• Companies carrying both classes of Insurance business (i.e. long term insurance business and general insurance business) are required to segregate their business into two separate companies within a period of four years from the date of the coming into operation of the Amendment Act. Accordingly, the composite insurance companies will be required to separate long-term and general classes of business by year 2015.
• Provisions were introduced to register persons as ‘loss adjusters.’
• The Insurance Board of Sri Lanka is empowered to increase the capital of registered insurance companies and brokering companies even after registration, by rules on same.

Amendments to the rules include that the stated capital of new insurance companies was increased from Rs. 100 million to Rs. 500 million per class of insurance business. Furthermore, the registration fee of insurance brokers was increased from Rs. 50,000 per class of insurance brokering business to Rs. 100,000 per class of insurance brokering business.



Solvency margin

The solvency margin which reflects an insurance company’s ability to meet the obligations arising from its insurance contracts is the main indicator to measure the soundness of insurance companies. Prevailing insurance regulations require all insurance Companies to maintain a minimum solvency margin for each class of insurance business any time.



Risk based capital

The Insurance Board of Sri Lanka (IBSL) is the regulatory body for insurance companies. The IBSL has shifted from compliance-based supervision to a new paradigm of risk-based supervision, which is widely used internationally.

The Insurance Board of Sri Lanka, with the assistance of the World Bank and the FIRST initiative, aims to enhance its supervisory abilities and enable market participants to effectively manage their business risks by providing a ‘risk-based’ framework to maintain the minimum capital regime for the insurance sector in Sri Lanka.

Deloitte Touche Tohmats India Pvt. Ltd. has been appointed by the World Bank and the FIRST initiative to propose a suitable risk-sensitive capital regime considering the domestic insurance market. The RBC is in its testing stage.

Once the risk-based capital is implemented it provides comfort to the stakeholders that risks are being actively controlled. This would enhance the reputation of insurance companies for risk management.

The following measures have been taken by Insurance Board of Sri Lanka to strengthen the confidence of the industry and the general public:

• The website of the board was continuously updated with changes pertaining to revision of laws that are applicable to the insurance industry details.
• To publish news articles in national newspapers regarding insurance industry to create awareness among general public.
• The IBSL has also requested all insurance companies to obtain a rating of Insurer’s Financial Strength (IFS) and the Claims Paying Ability (CPA). In response to this call, many insurance companies have obtained ratings.

All these measures have been taken to enhance the public’s confidence.



Future of Life insurance industry in Sri Lanka

The number of life policies in force as a percentage of the total population of 11.5% as at the end of 2011 itself is an indication the extent to which insurance industry should concentrate in developing the Life insurance products.

The development of Life insurance lies in introducing innovative products to the market. In future, there will be a growing demand for health insurance and pension linked products due to the modern lifestyle cultural values of the Sri Lankan society.

The public need not hesitate today to obtain insurance policies, as the necessary close monitoring process and supervision are in place through the Insurance Board of Sri Lanka. The insurance industry in Sri Lanka is highly regulated.

The premiums that are being collected by the insurers are required to be invested in safe and secure investments as per the directions set by the IBSL. The office of an ombudsman created under the provisions of Act, is now in function to whom an aggrieved policyholder can lodge a complaint regarding any dispute on a claim settlement. All these will ensure a healthy environment for the future development of Life Insurance industry in Sri Lanka.



(The writer is a fellow member of the Institute of Chartered Accountants of Sri Lanka.)