Changing regulations look to deepen and strengthen Sri Lanka's insurance sector

Recent times have seen the government and private sector take significant steps to strengthen Sri Lanka’s insurance industry. These have involved regulatory measures to make it both deeper and narrower, while outreach campaigns to demonstrate to ordinary citizens the benefits of being insured have been launched. On this latter point, the industry has also been making efforts to counteract negative sentiment from the past, providing reassurance that it will operate in a fully transparent manner.

Separating Life & Non-Life Business

On the strengthening and deepening side, under a 2011 amendment to the insurance industry regulations a deadline of February 2015 was given for all the country’s composite insurers to segregate their life and non-life businesses into two, separate companies. At the time, there were some 12 companies that engaged in both lines of business under the same roof, with three specialist life insurers and six specialist general insurers, which were unaffected by the amendment.

The amendments also required insurers to be listed on the Colombo Stock Exchange (CSE) by February 2016, by application to the Sri Lankan Securities and Exchange Commission. New companies entering the market were also required to list within three years. Prior to this requirement, only seven companies – around a third of the licensed insurers – were listed.

By late 2016 most companies had complied with these regulations, although there were some exceptions. Chief among these was the state-owned Sri Lanka Insurance Company (SLIC), which commanded 20% of the non-life market in 2015 in terms of written premiums and 19% of the life segment, making it the country’s largest insurance company.

In 2014 SLIC was granted an exemption from the segregation deadline as well as from listing, although the regulator, the Insurance Board of Sri Lanka (IBSL), reported that both processes were in progress in late 2016. SLIC says that it is awaiting a government directive on the issue, as it is a state-owned company – a factor that might complicate its listing on the CSE. In addition, the corporation’s employees and unions had raised concerns over potential job losses.

In early 2016 two other companies were reported to be late with their segregation due to external factors and “issues beyond their control”, according to reports from the IBSL. At least one of these appeared to have segregated by October 2016, however.

On the listing requirement, several international insurers that operate in Sri Lanka via a subsidiary expressed concerns that they were already listed elsewhere. This led to a new measure, approved by the government and waiting passage through parliament, which will mean the domestic subsidiaries of foreign companies listed abroad may apply for an exemption to the CSE listing requirement.

The new rules were introduced in order to try and strengthen the industry through consolidation by bringing to an end previous cross-subsidy issues within composites. At the same time, the requirement to list brings greater transparency, as companies are obliged to produce frequent reports and open up to other owners via share issues. The CSE also benefits from insurers listing on the market, which deepens the market and provides a traditionally conservative asset class, with the stability that can bring. Likewise, access to the CSE raises the possibility of insurers gaining access to greater funding, further underpinning their financial stability. In 2017 a range of insurers are set to list on the CSE, while 2016 saw several begin trading, including People’s Insurance, a general insurer and a subsidiary of the state-owned People’s Bank subsidiary, People’s Leasing and Finance.

Raising The Threshold

The listing and segregation requirements also effectively raise the threshold for the size of companies that can operate in the market. Previously, some composite insurers had been able to subsidise one part of their business with the other, yet now they will be obliged to provide sufficient capital and profitability for both sides of the business.

This dynamic has also been reinforced by a further government move under the amendments, which raised the minimum capital requirements for insurers. For companies registered before 2011, the minimum was raised for a particular class of business from LKR100m ($682,000) to LKR500m ($3.4m), while for those registered after that date, LKR500m ($3.4m) became the minimum stated capital.

This dovetails with the IBSL’s move to shift the industry from solvency margin rules to risk-based capital (RBC) rules, a change that was made mandatory in 2016. This should also lead to an increase in the amount of capital some companies will need, as more precise risks in many areas need to be taken into account, rather than just solvency. The sector professional body, the Insurance Association of Sri Lanka (IASL), and the IBSL successfully conducted a road test of RBC rules between 2015 and 2016, with full implementation likely to further pressurise some outfits to merge or exit the market. Indeed, in the first six months of 2016 two mergers took place in the industry, with many expecting more to come.

Mergers are likely in non-life, where competition is fierce, especially among motor insurance players. Segregation has also caused some firms to exit one side of the industry while maintaining a presence in the other. Asian Alliance Insurance, for example, sold off its non-life operation to Fairfax Asia in June 2016, while also rebranding its life operations under a new name, Softlogic Life Insurance, a few months later.

In the longer term, the government’s strategy is designed to mould an insurance sector that can also take on new lines of business, such as large project insurance. At present, the domestic financial sector as a whole in Sri Lanka lacks the resources to undertake large amounts of risk, yet the country also has a major infrastructure and construction rollout under way. The hope is that a better capitalised and better resourced sector – even if containing fewer players – will be able to take on such ventures, rather than leaving them to offshore insurers and reinsurers.

Emphasis On Improving Reputation

The year ahead will thus likely see more mergers and exits, with companies also trying to raise capital and make successful listings on the CSE. Sector players have broadly welcomed the new rules too, anxious to see a more streamlined and robust sector. This is particularly relevant given what sector players term “reputational” issues for the insurance industry, a factor that also acts as a break on penetration levels.

“For many people there is a question of confidence in insurers,” Chamarie Ekanayake, director of supervision at the IBSL, told OBG. “The reputation of the sector needs improving to overcome this.”

Unfortunately, in the past unprofessional practices have on occasion led to failures in the insurance business that have left some Sri Lankans concerned as to the legitimacy of insurance companies and their policies. With this in mind, insurers have been running awareness campaigns on the benefits of insurance, such as the annual “Life Insurance Week” run by Ceylinco Life that involves hundreds of insurance sales reps going door-to-door. The IASL also ran a successful life insurance awareness month in September 2015 and in 2016, in partnership with the IBSL, it organised competitions and media events, aiming to spread knowledge of the usefulness of the sector’s products.

Additionally, advertising campaigns also often highlight real-life stories of successful claims and pay-outs, helping to convince potential customers that they can trust the sector to deliver.

At the same time, the IBSL has acted in conjunction with the IASL to strengthen the regime of legal recourse for insurance policy holders. The office of the Insurance Ombudsman was established in 2005, with the ombudsman able to take up cases of complaint and dispute between those insured and their insurer.

Moving Forward

“As an industry, we need to envision a country that is fully insured,” Indrani Sugathadasa, the chairperson of the IBSL, told insurers at the launch of the IASL/IBSL Life Insurance Awareness month in 2015. This entails a considerable increase in insurance coverage from the current levels of penetration (see overview), with all sector participants determined to see this happen. Boosting awareness and confidence is of crucial importance in this effort, as is strengthening the finance and governance sides of the industry itself. Partly, this is also a question of personnel, with the recruitment and training of capable staff a pre-requisite.

There are signs that Sri Lanka’s insurance industry is moving forward on all these fronts, with the year ahead likely to include further listings, along with the benefits of RBC rules and greater capitalisation. In addition, further amalgamation and restructuring among the smaller players is also highly likely. The result will be a sector that is much better equipped to meet the ambitious target of a fully insured Sri Lanka.