Marina Thamararatnam Chief Executive Officer of Union Assurance. explains the importance of educating the public about investing in life insurnace

Q: How would you assess the performance of the life-insurance industry?

There is significant potential for growth in the life-insurance sector. Life-insurance penetration as a percentage of GDP is only 0.6 per cent at present, compared to 4.1 per cent in India. It is noteworthy that life-insurance penetration in India increased from 2.5 per cent in 2004 to 4.1 per cent in 2006. Industrialised markets have penetration levels of over five per cent - in the UK, it exceeds 13 per cent.

Taking into account Sri Lanka’s ageing population, and the need for protection and investment, insurance penetration here is low. This was evident when the tsunami tragically took the lives of over 45,000 people - and unfortunately, very few had insurance cover.

Q: Why has the growth of the life-insurance market been so slow?

Distribution is good because most companies have an islandwide network of branches, but we have not been able to build confidence in people obtaining life cover or create sufficient awareness about the importance of life insurance.

Globally, it is one of the most popular methods of saving for retirement. In Sri Lanka, people tend to postpone saving for retirement. They prefer to rely on extended family structures, but today’s financial needs are much greater in the event of the untimely death of a breadwinner.

Tax breaks would be ideal to incentivise people to save more. Countries such as India have increased tax-deduction quanta for life insurance premiums. The local industry is working together with the Insurance Board of Sri Lanka (IBSL) to increase awareness about the need for life insurance. A recent concession for insurers to invest 20 per cent of their life fund in approved investments outside Sri Lanka may help diversify the products that are offered to customers.

Q: Why would it be in the Government’s interest to provide such tax breaks?

Insurance is the world’s largest industry, accounting for over eight per cent of global GDP. In the 1990s, the assets of insurance companies worldwide grew faster than those of banks. It is critical for the Government to develop the insurance sector, as it is an important source of funds for capital investment, which promotes economic growth and facilitates full employment.

In developed countries, a large component of the nation’s savings is for retirement and as a safety net in case of loss are in this sector, LMD reported .

Q: What methods is the industry using to reach out to the public?

The IBSL and the relevant ombudsman who resolves disputes with policy-holders have published a series of articles to communicate the need for adequate insurance, improve the image of the insurance sales force and build confidence in insurance in general. The regulatory environment has been streamlined and this has improved governance levels - so, this transparency will help boost the public’s confidence.

Q: How can Sri Lanka move forward in the field of medical insurance?

The high cost of medical care and high medical-cost inflation are realities today. Even in the US, the high cost of medical insurance and the large number of Americans who cannot afford medical care has become a key election issue. In India, there’s a dearth of medical- insurance products, as this component of insurance is not profitable.

In Sri Lanka, most medical products are tailored for corporates. In Singapore, employees contribute to a medical fund and the individual controls the level of medical expenses he or she wishes to incur, and draws from this fund.

They could then opt for less expensive wards instead of the more costly private rooms - and this concept of sharing costs seems to discourage waste and a depletion of the respective medical funds.

Perhaps, Sri Lanka should study such schemes and implement one of them here - with the participation of the Government, the private sector, insurance companies and even hospitals.

Q: Why do insurance companies appear reluctant to venture into medical insurance?

For medical insurance to be profitable, there needs to be a large critical mass and moral hazards have to be minimised - with doctors, hospitals, government and insurers working together. They are developing related products in India, where there is a large market.

Q: How is general insurance faring?

Existing levels of general-insurance premiums do not adequately reflect the risks being carried by insurance companies and most of them aren’t realising adequate margins. We expect premiums to improve in the medium term, as the IBSL has proposed regulations that will compel industry participants to re-examine their pricing policies to stabilise the general-insurance sector.

The credit policy that was recently introduced by the IBSL helped facilitate the collection of outstanding dues.

The regulatory environment has also improved considerably. Solvency requirements have been introduced and are being enforced.

There is also a need for corporate leaders and heads of finance to understand the important aspects of insurance.

Often, due to time constraints, insurance renewals are delegated to a junior manager - and as a result, senior management only examines price comparisons.

To avoid disputes in case of a substantial claim, there should be a better understanding of the re-insurance arrangements that are in place, the terms and conditions of the policy, and even the sum covered by insurance.

Q: Is competition among industry players fair at present?

Competition is fair, but there are several players and pricing has moved too far down for general insurance.

Most insurers have realised that their margins are being eroded and will opt to increase premiums.

This is a cycle that occurs globally - it will correct itself. Life insurance is profitable, although there is healthy competition

Q: What are the latest developments in motor insurance?

Motor comprises over 50 per cent of the general-insurance sector. The motor market has been growing significantly with the increase in the number of vehicles. Motor insurance is very competitive and this product has been developed to such an extent that it is no longer basic motor-insurance covers that were traditionally available to consumers before the removal of the tariff for motor insurance. Competition is stiff vis-A-vis the benefits available to customers in terms of service levels, including islandwide service. Claims ratios are also growing, and inflation is sending the cost of spare parts and labour sky high.

A non-tariff regime requires aggregating market data to facilitate risk-based pricing to offer preferential ratings. The Sri Lankan market is small and as insurance companies use only their own data to determine the accuracy of the results may be in question - it is not sufficient to calculate an appropriate premium rate.

A market aggregator collects and aggregates detailed data from all insurance companies and prepares consolidated statistics. It is recommended that the National Insurance Trust Fund or the IBSL serve the industry better by providing aggregated industry statistics.

The industry needs to work together to develop a motor vehicle ‘accident database’, which will enable insurance companies to underwrite drivers rather than vehicles, which is presently the case. We now have a common database of claims to protect against duplication of motor claims - so, it’s only a matter of taking this one step further, to include the person’s identity card and driving-licence numbers. This would discourage irresponsible driving, as errant drivers would have to pay higher premiums.

Q: Is the insurance sector presently lobbying the Government on any issues?

The proposed Insurance Act is in the pipeline and industry players have opposing views about listing insurance companies, as well as differences of opinion on the proposed segregation of life and general-insurance companies.

The proposed changes to the act allow "persons" to sell insurance, whereas the existing act permits only ‘individuals’ to do so. The insurance sector is lobbying for this change because this would bring in institutional agencies and enable bancassurance, which is now becoming an important channel of distribution globally.

However, the industry agrees that there must be proper regulatory control, with licensing of these institutions by the IBSL. There is also a proposed change to the act, which could enable the IBSL to determine the payment of a disputed claim. All insurance companies want to see this section removed, as some of these disputes could amount to hundreds of millions - or even billions - of rupees and it would not be acceptable to international reinsurers, as globally, a high-value disputed claim has to be settled by a court of law.