Major changes are on the horizon in the Sri Lankan insurance industry, with much of the groundwork laid for future growth in recent years. A government focus on regulatory improvements, the modernisation of processes, market consolidation and further investment in human resources point to continued opportunities for expansion in the sector.
While the performance of the life insurance segment has been bumpy, the sector as a whole continues to thrive. Double-digit growth is expected for both general and life insurance in the short term as many lines of business expand in a market known for its low penetration rates. Campaigns to promote insurance and build awareness of the benefits of coverage have been rolled out, contributing to the sector’s improved performance.
Structure & Oversight
The main supervisory body for Sri Lanka’s insurance sector is the Insurance Regulatory Commission of Sri Lanka (IRCSL), known as the Insurance Board of Sri Lanka until October 2017. The commission, which is part of the Ministry of Finance, has supervisory, development and regulatory powers to safeguard the interests of policyholders and potential policyholders.
All insurers, insurance brokers and loss adjusters operating in the country come under its purview, with the exception of the Agriculture and Agrarian Insurance Board (AAIB), the Sri Lanka Export Credit Insurance Corporation and the Social Security Board. Given that the Regulation of the Insurance Industry Act (RIIA) of 2000 requires insurance companies to list on the Colombo Stock Exchange (CSE) unless they are listed abroad or allowed an exemption, the Securities and Exchange Commission (SEC) and the Central Bank of Sri Lanka (CBSL) also play a macro-prudential supervisory role.
There are multiple membership organisations representing the sector, including the Insurance Association of Sri Lanka, established in 1989 to bring together insurers to consult and cooperate, and the Association of Chartered Insurance Professionals, established in June 2016 with around 100 members. As of end-2018 there were 26 companies registered with the IRCSL. Of the 26, 12 were general insurance firms, 12 were life or long-term insurers and two were composite insurers.
According to the most recent full-year figures available from the IRCSL, the top-five companies by share of total gross written premium (GWP) in 2017 were the state-owned Sri Lankan Insurance Corporation (SLIC), with 18.8%, followed by Ceylinco General (10.3%), Ceylinco Life (9.6%), Janashakthi General (7.1%) and AIA Life (7%). In September 2018 Janashakthi General merged with Allianz General Insurance Lanka, which accounted for 3.4% of total GWP in 2017, widening its share.
In general insurance, the top company in terms of GWP in 2017 was again SLIC, with 19.7%, followed by Ceylinco General (18.3%), Janashkathi General (12.6%), Fairfirst (10.3%) and the National Insurance Trust Fund (NITF), with 8.7%. For the life segment, Ceylinco Life led the pack with 22.1%, followed by SLIC with 17.5%, AIA Life with 16.1%, Union Life with 14.2% and Softlogic Life with 10.5%.
The 2011 amendments to the RIIA obliged composite companies to segregate, a process most have complied with. However, as of early 2019 SLIC and Sanasa Insurance, a more modest private micro-insurance outfit with around 0.5% of life GWP and 0.6% of general GWP in 2017, had yet to meet the segregation conditions, and discussions on segregating these companies’ lines of business were ongoing.
The 2011 amendments also added a requirement that all companies be listed on the CSE. After consultations with the industry, in 2017 the regulation was amended to exempt companies already listed on other recognised exchanges or part of already listed entities. According to the IRCSL, as of December 2018 almost all companies were compliant with the amended regulation. The SLIC and the NITF received exemptions in 2017 because, while the entities are not listed outside the country, they are owned by the government of Sri Lanka.
State-owned insurers continue to hold a sizeable market share, thanks in part to competitive pricing, and this has raised some concerns among private sector players that struggle to compete. Competition has intensified in recent years as state entities, which have traditionally provided services in dedicated segments, have expanded into general insurance. The AAIB, for example, whose main role is to provide agricultural insurance, now also offers motor insurance, while national reinsurer NITF has become a significant player in the general segment.
The IRCSL is also a member of the International Association of Insurance Supervisors (IAIS), meaning that it follows IAIS guidelines and industry standards. To keep up with international developments and create a more secure sector, the industry moved to a solvency margin, or riskbased capital (RBC), model in 2013 and completely replaced the previous factor-based solvency regime in 2016. Under RBC, each insurance company must maintain a capital adequacy ratio (CAR) of at least 120% of risk-weighted assets while maintaining total available capital (TAC) of at least LKR500m ($31.1m); this is also the minimum capital requirement. Since implementation, insurers have largely maintained CARs and TACs above the statutory requirement, but meeting these conditions has been difficult for smaller companies. As of early 2019 IRCSL officials were working to improve the regulation and close some unforeseen loopholes.
In addition to the RBC regime, the industry is in the early stages of implementing International Financial Reporting Standard 2017 (IFRS 17), aimed at boosting transparency, accountability and efficiency in financial markets around the world. Currently, companies in the sector use the Sri Lankan Financial Reporting Standards 4, the local version of IFRS 4 which requires companies to perform a liability-adequacy test. The new regime will require a shift from some manual techniques and processes to IT-based systems to improve information flow and transparency. A transition period for the IFRS 17 through to January 1, 2021 was initially announced by the IRCSL, but in November 2018 the International Accounting Standards Board announced that it was allowing a one-year deferral for implementation globally, shifting the deadline to 2022. The move was broadly welcomed by Sri Lankan insurers, who were already working to adapt to the RBC and had concerns about the investment needed to adopt IT-based systems.
The IRCSL is working with companies to address the matter. “We have set up a committee to look at issues and areas of concern,” Damayanthi Fernando, director-general of insurance at the IRCSL, told OBG. The IRCSL and other bodies, such as the Actuarial Association of Sri Lanka, will also conduct workshops and roadshows about the implementation of IFRS 17. “In terms of financial sector modernisation, we will see a lot of changes in the next five years,” Fernando added. The modernisation envisioned by the IRCSL will likely involve further moves towards risk-based supervision, which will entail major changes in the legal framework. Reforms to reinsurance regulations aimed at widening reinsurance pools and exposure to reinsurance products are also on the way, according to Fernando, and details of these changes are expected to be announced in early 2019.
Figures from the IRCSL show that as of the third quarter of 2018 total assets in the sector, including both life and general, amounted to LKR588.6bn ($3.7bn), which broke down to LKR417.4bn ($2.6bn) for life and LKR171.4bn ($1.1bn) for general. Sector-wide GWP stood at LKR129.8bn ($817.5m), of which LKR58.2bn ($366.5m) came from life insurance and LKR71.6bn ($450.9m) from general insurance. These figures were all up on the third quarter of 2017, when GWP totalled LKR118bn ($743.2m), of which LKR51.9bn ($326.9m) came from life and LKR66.1bn ($416.3m) came from general.
Gross profit also posted an increase, with the industry recording LKR18.6bn ($117.1m) in profits for life and LKR6.2bn ($39m) for general, up from LKR5.1bn ($32.1m) and LKR5.7bn ($35.9m), respectively. Earned premium by line of business stood at LKR109bn ($686.5m), of which LKR55.8bn ($349.5m) stemmed from life insurance and LKR53.2bn ($335m) from general insurance. Motor cover was the largest line within general, responsible for LKR41.5bn ($261.4m) of the segment total, or around 78%. The second largest was the health segment, with LKR6.4bn ($40.3m), or 11.9%.
There have been key mergers and acquisitions in the sector in recent years, and consolidation is expected to continue into 2019. There are many insurers in the market, but the number of policyholders remains relatively small. Insurance penetration – expressed as GWP as a percentage of GDP – stood at 1.24% in 2017, with life at 0.54% and general at 0.70%. These figures were up slightly on 2016, however, when overall penetration was 1.20%, with life at 0.53% and general at 0.67%.
While the 2018 figures have yet to be released, the IRCSL and other industry players expect a similar incremental increase in penetration. Although still at a relatively low level, Sri Lanka’s general insurance penetration is comparable to India, at 0.77%, although total insurance penetration is lower than in India (3.5%) and Malaysia (4.8%).
In most markets, higher penetration tracks increases in GDP per capita. In Sri Lanka, this figure stood at around $4000 in 2017, with economic growth likely to be around 3% in 2018 and 3.5-4% in 2019, according to the CBSL and the Ceylon Chamber of Commerce. The penetration rate is therefore expected to see significant growth once the country reaches the upper-middle-income status of regional peers such as Malaysia, and insurers are hopeful that political and economic stability will make this goal achievable in the not too distant future.
The life segment experienced strong growth in 2017, with profits jumping 188.4% to LKR39.3bn ($247.5m). Profit growth remained strong in 2018, and pre-tax profits rose from LKR15.5bn ($97.6m) and LKR17.3bn ($109m) in the first and second quarters, respectively, to LKR18.6bn ($117.1m) in the third quarter, representing approximately a 20% increase over the first nine months of the year.
In the coming years, however, net profit is expected to be negatively affected by the Inland Revenue Act, which came into force on April 1, 2018. Prior to the new regulations, only the investment income of a life insurance fund was treated as corporate income, and all expenses related to the business were offset against this, frequently resulting in a taxable loss. The new law changes investment income by introducing a 14% tax on distributions to participating life policyholders, rising to 28% in 2021.
At the same time, the law imposed a 28% tax on surplus distributions to shareholders from policyholder funds, and on the investment income of shareholder funds less allowable expenses. While the new law may have a major impact on post-tax profits, insurers should be able to offset taxable losses accrued under the previous tax regime against profits over the next few years. As a result, the impact of the law may not be fully felt by insurers for some time.
Third-party liability (TPL) motor insurance is mandatory and, as with many countries, is very price competitive, with high claims and low margins. Indeed, IRCSL figures for 2017 show that motor had total net earned premium of LKR50.5bn ($318m), while net claims stood at LKR31.2bn ($196.5m), resulting in a net claims ratio of 61.7%. This was below the equivalent ratio for the fire segment, where it stood at 92.8%, and health, where it reached 91.1%. Fire and health are substantially smaller lines of business, with fire accounting for LKR1.7bn ($10.7m) of net earned premium and health generating LKR11.5bn ($72.4m).
Intense competition has driven considerable innovation in the motor segment, such as the introduction of daily motor insurance. In October 2018 Fairfirst, HNB General, and People’s Insurance launched an online platform providing motor insurance on a per day basis in cooperation with telecoms firm Dialog Axiata. The scheme enables drivers to boost their existing TPL to more comprehensive policies on a day-to-day basis, making temporary but more expensive coverage affordable for lower-income vehicle owners. The motor sector has continued to grow substantially as a result of this and other developments, with GWP rising from LKR15.6bn ($98.2m) in the first quarter of 2018 to LKR30.8bn ($194m) in the second quarter and LKR47.5bn ($299.2m) in the third, which represented a 13.6% year-on-year increase.
The NITF is Sri Lanka’s sole reinsurer, and all domestic general insurers must deposit 30% of their reinsurance with the fund; the remainder may be distributed to overseas companies. The state-owned company has received positive ratings from international credit ratings agencies, including an “AA-” rating with a stable outlook from Fitch in September 2018. “The affirmation reflects the company’s strong domestic business profile, conservative investment mix as well as strong financial performance and capitalisation,” the agency noted.
As Sri Lanka is prone to natural disasters such as floods, droughts, cyclones and landslides, the robust performance of the NITF is significant. The company reported an RBC ratio of 314% at the end of the first half of 2018, along with strong financial performance and earnings, although payouts after a string of natural disasters in the 2016-17 period and large dividend payments to the state have impacted its capitalisation. “We believe the insurer’s capital position may come under pressure if it continues to pay high dividends during the periods of increasing frequency of large natural disasters,” Fitch wrote.
Delays in the full rollout of the National Natural Disaster Insurance Scheme (NNDIS) also meant that the NITF had to pay out LKR1.7bn ($10.7m) in disaster management-related claims in 2017. The fact that the company absorbed this loss and continued to grow demonstrates its resilience. With better weather in 2018, the first half of 2018 saw the NITF’s pre-tax return on assets rise to 23.4%, up from 5.6% in 2017.
The NNDIS was introduced in 2016 to extend coverage to those previously uninsured for housing damage, the business premises of micro- and small enterprises, and loss of life and emergency relief expenses for those displaced by natural disasters and other emergencies. Between March 2016 and March 2018 some LKR5.5bn ($34.6m) was paid out under the scheme via the NITF.
First introduced in Sri Lanka as a subsidiary service to other microfinance initiatives in rural and poor areas, micro-insurance currently has no specific regulations. Nonetheless, the segment has the potential to play a significant role at a grassroots level in many villages and communities, which today rely on government-run insurance schemes such as the Divineguma (Samurdhi) Programme. Divineguma provides insurance coverage to 16.4% of households, or approximately 1.5m families, in the event of childbirth, marriage, hospitalisation and death. The AAIB also provides a variety of agricultural insurance policies to farmers, covering family events as well as crop loss and damage.
However, the introduction of the RBC model – in addition to the regulatory requirements to segregate lines of business and list shares – poses challenges to micro-insurers as they can act as a disincentive for low-premium business ventures. Muted demand for cover among low-income households due to a lack of awareness and distrust also hinders growth. According to a 2019 report by the Institute of Policy Studies and the International Cooperative and Mutual Insurance Federation, the sector was responsible for 3.4% of industry premium in 2015. While share of total premium is low, the number of micro-insurance policies issued between 2013 and 2015 rose by 300%. Despite these challenges, the growth potential for micro-insurance is notable, and a dedicated regulatory framework for providers would assist in the development of the segment.
As of September 2018 there were 65 insurance brokerage companies registered with the IRCSL, mostly in the general insurance business. Premium income generated through brokerages reached LKR6.6bn ($41.6m) in 2017, compared to LKR6.2bn ($39m) the previous year, for an increase of 7.8%. The Sri Lanka Insurance Brokers Association is the mandatory-membership professional body and advocates for, trains and develops brokers. The association and the IRCSL are working to build awareness about the benefits of insurance. The IRCSL’s Market Development and External Relations Unit plays a leading role in this regard by hosting public workshops, roadshows, tours and outreach programmes. In 2017 the unit began visiting schools, an initiative set to expand in 2019 to include more awareness-raising activities among the country’s youth. The unit also developed radio and television programmes, and question-and-answer broadcasts.
The year ahead will likely see continued growth in both life and general insurance, with low penetration rates highlighting the potential for further expansion. Factors such as increased occurrences of extreme weather due to climate change may signal challenging times ahead, as would renewed political and economic uncertainty. Nonetheless, given steady growth in the economy and the joint efforts of the IRCSL, companies and brokers to develop and modernise the sector, Sri Lanka’s insurers will be in a strong position to tackle the risks.
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