The implementation of the risk-based capital regime, increase in capital requirements and compulsory public listings in the past one year have resulted in the slower growth of the insurance industry in Sri Lanka. Seen to be in a transition phase, the sector is expected to rebound in 2016 with the government’s thrust on development and growth.
The presidential elections of January 2015 changed the political scenario in Sri Lanka with the election of a new president. This was further endorsed by the nation when the two main political parties formed a national unity government after the parliamentary elections in August.
Though economic activities had slowed down since the middle of 2014, the country still recorded an economic growth of 7.4% compared to 7.2% the previous year.
The Sri Lankan insurance industry had registered a growth of 5.14% in 2014, slower than 2013’s 8.97%. In 2014, GWP was LKR100 million (US$706,800) while total net claims ratio of the market was 65.42%. Average market net expense ratio was recorded at 44.24% and the net combined ratio was recorded at 109.66%, compared to only 102.13% in 2013.
“The key reason behind the decline in the growth was due to the slower growth rate of 3.66% in the general insurance business compared to 7.28% in 2013 and this was mainly due to the slowdown of infrastructure development in the country that led to a drop in non-motor business,” said Mr Prakash Schaffter, Managing Director, Janashakthi Insurance Company.
Motor business was also impacted due to the decline in average premium rate as a result of heavy price competition between players.
GWP of long term insurance business (life insurance) also experienced a slowdown in growth in 2014 and grew by only 7.04% compared to 11.20% recorded in 2013, impacting the overall industry growth.
“The growth rate in 2014 was lower than the growth rate reported in 2013 mainly due to political uncertainties as Sri Lanka went through Presidential and Parliamentary elections,” said Mr Dirk Pereira, President of the Insurance Association of Sri Lanka (IASL) and also CEO of Union Assurance Company. He feels that this is just a temporary setback and expects the industry to rebound in 2015.
Need to increase awareness
Insurance penetration which reflects the total insurance premium as a percentage of GDP was recorded at 1.02% in 2014 and indicated a decline compared to 1.10% recorded in 2013, as reported by the Insurance Board of Sri Lanka (IBSL)’s annual report 2014.
Penetration level of long term insurance business was 0.46% in 2014 compared to 0.48% in 2013, while penetration level of general insurance business was recorded at 0.56% in 2014 as compared to 0.61% in 2013, with both classes indicating a decline in penetration levels.
“Low growth rates and low penetration levels recorded for both long term and general insurance businesses reflect the greater need to create and drive awareness of insurance and its benefits across segments and social strata of the country,” said Mr Schaffter. He added that the industry needs to drive flexibility to customise and provide tailor-made solutions in order to cater to expanding market needs.
Implementation of Risk Based Capital
The industry will have to adopt a risk based capital framework from 2016 and so a parallel RBC run has commenced and except for a few smaller companies, all other companies are well within the proposed RBC norms.
“We do not foresee any significant challenges for insurers in implementing RBC norms as the regulator and insurance companies have worked together to implement these rules and we have been conducting parallel runs on a quarterly basis for some time,” said Mr Pereira.
He is positive that going forward, this framework will enable shareholders and Boards to make informed decisions and assess the impact to their capital positions in the event any key events occur.
Dr Jagath Alwis, Director (Technical) and Chief Technical Officer, Ceylinco Insurance Company, however said that the minimum capital requirement should be increased from the current amount. “The minimum capital requirement of LKR500 million (US$3.5 million) is too low for a market like Sri Lanka and the regulator should consider to raise it to LKR1 billion which will help in developing a very strong insurance market,” he said.
Impact of segregation on companies
The process to segregate composite companies to separate life and non-life companies commenced in the last quarter of 2014 and most of the segregated companies have commenced operations from 1 January 2015.
This split will be a positive step for the industry as it will promote greater transparency and policyholder protection, along with efficient capital allocation, corporate governance and better risk management.
“However with this split, it is expected that some of the entities may face operational uncertainties, which could lead to consolidation, as currently there are too many insurers operating in Sri Lanka,” said Mr Schaffter.
He said that many companies will now be keen to concentrate on the more profitable lines of business and will look out to strengthen their portfolio via inorganic growth. “Though it is too early to indicate any impact of segregation, industry experts predict that there will be consolidation and companies will choose to play in one of the two businesses and opt to open their business for mergers and acquisitions,” he said.
Compulsory listing – Need to include all companies
As per the regulations, all insurance companies will have to be listed, after three years of issuing a license and within one year of segregation.
However, the companies segregated were given an extension period of three years from the date of segregation. “The challenge is that within the next three years, around 30 insurance IPOs will flood the stock market and can smaller companies face this challenge?” said Dr Alwis, on this move by the IBSL.
He further raised concern on the Government’s plan to exempt foreign insurance companies whose parent companies are listed in overseas stock exchanges and also the state-run Sri Lanka Insurance Corporation from the compulsory listing requirement.
“This will create an unfair trade practice and breach in the level playing field conditions, an issue which might even end up in courts and the government will have to look into this proposed amendment seriously to be fair to all parties concerned,” said Dr Alwis.
Implementing new technology
Insurers in Sri Lanka are adopting technology-driven predictive solutions encompassing a much wider range of exposures and this develops a comprehensive mechanism to identify, measure, and mitigate organisation-wide exposures, such as currency fluctuations, political and reputational risks, and compliance challenges, all of which help in taking away discretionary pricing.
“As an organisation, we are also moving to ERM, to overcome the limitations of traditional risk management and expand to loss control capabilities,” said Mr Schaffter. He believes that the great strides being taken by the insurance industry in the areas of Nat CATs and disaster management will help secure the nation against any major event. “Companies have disaster recovery plans, strong reinsurers to cover potential losses and adequate reserves to manage risk,” he said.
Life insurance gets a boost
The Insurance Association of Sri Lanka (IASL), with the support of the IBSL, had declared the month of September 2015 as the “Life insurance month” where life insurers in the country were able to take the message of life insurance to over 1 million Sri Lankans with a target to sign up a minimum of 75,000 new policies.
This initiative will help to create awareness among the citizens about the need for life insurance and also to boost the penetration rate for life insurance which is on the significantly lower side at 0.46%.
“This was the second time that the industry conducted such a joint campaign and we believe such efforts will go a long way to raise awareness regarding insurance in Sri Lanka,” said Mr Pereira.
The IBSL and the insurance ombudsman have also played a key role in building confidence and raising awareness regarding the concepts of insurance. IASL also successfully held the National Forum for Life Insurance Advisors, the local version of MDRT which is an annual event focusing on increasing professionalism of life insurance advisors.
Future of the market
Sri Lanka has the highest per capita GDP in South Asia and with consumer spending patterns having evolved over time, there is greater investment in real estate as well as other lifestyle products rather than traditional investment methods.
This opens up new avenues for insurers to protect consumers and their assets as they evolve. “We are extremely positive about the future of the life and general insurance in Sri Lanka. The rapid economic growth is likely to increase purchasing power, enabling and requiring customers to purchase life and general insurance solutions to safeguard their assets and lifestyles,” said Mr Pereira.
The entry of MNCs in the market will ensure that high standards of services are set within the industry. Local private and government entities will have to improve their service levels and upgrade their technology to stay relevant in the changing scenario. “I see immense opportunity in the industry but creating awareness on the importance of insurance is key to driving industry penetration and growing the industry,” said Mr Schaffter.