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The high cost of living accounts for low insurance penetration in Sri Lanka, compared to other countries in the region, Chairman of the Insurance Board of Sri Lanka (IBSL), the regulator of the insurance industry, Udayasri Kariyawasam said.
The penetration of life policies to the total population was 9.6 percent in 2007, while the penetration rate to the labour force amounted to 25.3 percent.
"The macro economic conditions need to be conducive for the insurance industry to grow in terms of a wider coverage of the population," Kariyawasam said.
"The cost of living is too high and this has resulted in the lapse of life policies because people cannot afford to pay the premiums." he said.
In 2007, the insurance industry issued close to 527,400 life insurance policies.
However, about 232,700 life policies lapsed because premiums where not paid in to keep the policies going.
The President of the Insurance Association of Sri Lanka (IASL), Jagath Alwis, said that insurance companies had expansion plans that are shelved for the time being considering the state the economy is now in, it was not the right time to push their plans through.
"With inflation and the high cost of living people have less disposable incomes to spend on premium payments.
"We also see people shifting their comprehensive vehicle insurance policies to a third party vehicle insurance policy," Alwis said.
But the industry is optimistic.
Alwis said that with the liberation of the Eastern province, insurance companies have the opportunity to provide coverage for various infrastructure projects expected to mushroom in the region.
IBSL removes regulatory targets
It seems that the economic conditions were impeding the IBSL from effecting regulatory changes.
Earlier this year IBSL, proposed amendments to the Regulation of Insurance Industry Act (No. 43 of 2000 to split insurance companies (into separate entities handling general and life insurance) and to make mandatory the listing of insurance companies.
These amendments were expected to be passed in Parliament during the course of the year.
IBSL hoped these rules would protect insurance policy holders and promote public confidence in insurance.
According to the proposed amendments insurance companies had one year to get listed on the Colombo Stock Exchange and three years in which to separate the general and life insurance businesses into separate legal entities.
However, the industry did not receive these proposals with enthusiasm.
Kariyawasam said that IBSL now only recommended that insurance companies list in the stock exchange on a voluntary basis.
Splitting insurance companies on the lines of general and life insurance is still being negotiated by the industry and regulator.
"It is too costly, especially for a new entrant to the industry. We will have to maintain two separate boards and legal costs will also be too high," an insurer said.
The IBSL is also expecting insurance companies to increase their paid up share capital, which at present is Rs.100m for each class of insurance business, to Rs.250m by December 2008 and to Rs.500m by December 2010.
Some smaller and newer insurance companies have requested for an extension to be able to meet the capital requirements.
Doing well
While the macro economic conditions are impeding the insurance companies from growing to the extent they would have liked to, Alwis said that the industry was focused on maintaining the current growth momentum.
Both, life and general insurance businesses have recorded steady growth over the years.
In 2007, the insurance industry grew by 20.56 percent. In 2005 and 2006 the industry recorded growth rates of 25.94 percent and 15.61 percent respectively.
Compared with the first six months of last year, the industry has recorded a 17.93 percent growth for 2008.
Kariyawasam commended the growth momentum but said that when total premium incomes were compared to GDP it did not give a satisfactory picture.
In 2007, the total premiums were 1.46 percent of GDP (1.41 percent and 1.46 percent in 2005 and 2006 respectively).
The return on total assets was 2.49 percent in 2007 (2.76 percent in 2006).
"This rate of return is not very attractive to investors," Kariyawasam said.
"We are constantly monitoring the solvency margins of insurance companies and insurance brokers and we can say that the industry is healthy,
"But there are times when certain difficulties do arise, which are to be expected in an economy such as ours. But it is nothing we (IBSL) cannot handle," he said.
