So what should insurers and regulators do ?

The biggest problem is that the people who create the issues are rarely able to identify the problems. Most of the underlying issues maybe unclear and hard to deal with from the inside, at the same time, it is futile to devote resources to tackle technical issues such as underwriting, claims or asset management before sorting out the underlying problems. One way to start would be to step back and assess the total situation. The area to focus attention should include;

*  How has the company fared in anticipating and acting on potential changes both internally such as systems, products and skills and externally such as market forces and changing economic conditions.

*  Are senior management incentives geared only to short term goals of the company ? Do they take into account the medium and long term interests of the company ? What is the incentive to management to give importance to all these three areas ?

*  Have the risk management and internal audit functions been suitably resourced and empowered to get to the core issues and advise the Board of Directors accordingly? The internal audit, particularly, should be empowered to deal with the Board directly without having to route matters through the management.

*  It is necessary to ensure that the company has in place, best practice corporate governance. Monitoring procedures and controls should be in place to prevent or detect problems that may emerge in identified risk areas, particularly those that have been outsourced.

*  Even though many of the risks run by insurers may appear to be distinct, it would be wrong to assume that there is no relationship between them. It is therefore necessary that systems or procedures are in place for a coordinated exchange of information and ideas between all the key areas of the business. The Board of Directors must ensure that all the significant aspects are co-ordinated and drawn together and any adverse scenarios are brought to its attention without delay.

*  The Board of Directors of an insurance company are ultimately responsible for the business of an insurer. This means that the Board must have complete control of the Company’s affairs and be alert to its obligations not only to shareholders but also to other stakeholders of an insurance company. The stakeholders will include policyholders, shareholders, employees and even insurance intermediaries such as insurance brokers who may have recommended the insurers to their clients. It is not uncommon for insurance legislation to prescribe a ‘fit and proper person’ criteria for appointment as a Director. This means that a Director must have the necessary qualifications, experience and integrity for him to be suitable to be appointed as a Director of an insurance company.

*  The fiduciary nature of the insurance business requires Directors of insurance companies to be persons of unquestioned integrity and credibility. It would be a good practice for at least one or preferably two Directors of an insurance company to be qualified and experienced in the insurance business. Ultimately, the Board of Directors of a insurance company are responsible for its business. However, to do this it must be fully competent in each area it overseas.

*  The management has an obligation to provide the Board of Directors with appropriate and timely information. However, information volunteered by the management may not be sufficient in all circumstances. Directors should therefore request for such additional information as maybe necessary. Directors of insurance companies must always bear in mind that perhaps more than any other business activity, the interest of policyholders (ie., their customers) many of whom will be with them for a long time, are equally valid as shareholders interest.

*  There should be necessary laws that will enable the Regulator to enforce government policies on regulating and developing the insurance industry. The laws should address all the relevant aspects of an insurer’s operations, that is from the time of establishment of an insurer, up to liquidation (if necessary). The most important aim of insurance regulation is to protect the interest of the policyholders and the most important priority is to maintain a continuous review of the operations of an insurer to ensure that the solvency requirements, to cover all the insurers liabilities and risks, are maintained.

*  The insurance market usually knows before the regulator does, when a company is going to get into difficulties. The tests are simple, aggressive growth, offer of low prices, fancy products with bold promises, are recipes for trouble. The problem is that whilst regulators are usually able to spot the wayward smaller company, they do not seem to be too good at recognizing the stars racing towards a black hole.

The situation in Sri Lanka

There are sixteen insurance companies operating in Sri Lanka. Out of the sixteen companies, eleven insures transact both Long-term and General Insurance business, three insurers transact only General Insurance business whilst two insurers do only Long-term Insurance business.

The industry is governed by the Regulation of Insurance Industry Act No. 43 of 2000 which came into operation from 1st March 2001.

The regulatory authority is the Insurance Board of Sri Lanka (IBSL). The IBSL Board consists of seven members. The Director General of IBSL functions as the Chief Executive Officer.

The minimum paid up share capital for a insurance company is Rs.100 million in respect of each class of insurance business (i.e., Long-term Insurance and General Insurance). The IBSL has decided to increase the capital in respect of each class of insurance business to Rs.250 million by the end of December 2008 and to Rs.500 million by the end of December 2010. The IBSL has also decided to request the insurers to obtain a rating of financial strength to meet its liabilities from a approved rating agency, on a voluntary basis. The IBSL has also decided to implement a Risk Based Capital System by the year 2010.

In April 2002 the government decided to permit foreign participation up to 100% of the equity in a insurance company in Sri Lanka.

When the insurance business was liberalized in Sri Lanka, three private insurers commenced operations in 1988. They began to compete with the already existing two state insurers. Since that time the two state insurers have been privatized and we now have altogether sixteen private insurers operating in Sri Lanka.

The total Gross Written Premium received by the insurers in the year 2007 was Rs.51,885 million. Out of this General Insurance and Long-term Insurance contributed Rs.31,156 million (60%) and Rs.20,729 million (40%) respectively.

A notable feature of the Sri Lankan insurance market is the heavy concentration of the insurance business with the top players. For instance in the year 2007, 83% of the Long-term Insurance Gross Written Premium was with four insurers who incidentally were those who were in business in 1988.

For General Insurance the position is almost the same, except that out of the four top insurers with whom 82% of the General Insurance Gross Written Premium is concentrated, one insurer commenced business after 1988 that is in September 1995.

It will therefore be evident from the above that none of the insurers who commenced insurance business in Sri Lanka within the past ten years have really been able to take a significant share of either the Long-term insurance or General insurance business.

Fortunately in Sri Lanka, we have not seen any insurance failures, since the liberalization of insurance in 1988. However, there is no guarantee it may not happen. There are no safe havens anywhere in the current economic conditions. Further in Sri Lanka, as in many other liberalized insurance markets, insurers operate in a highly competitive market.

Good judgment comes from experience, sadly, often, experience comes from bad judgment. The stakeholders in the insurance industry in Sri Lanka particularly the Regulatory authorities, Directors and Management of insurance companies should learn from the experience of other countries, rather than be in the unfortunate position of having to learn from their own experience.

The insurance industry in Sri Lanka, particularly since its liberalization in 1988, has played and will continue to play a very important role in the economic and social development of the country. The importance of safeguarding the confidence of the public in insurance as a necessary savings and protection mechanism cannot therefore be over emphasized.