The insurance industry in Sri Lanka is regulated by the Insurance Board of Sri Lanka (IBSL) established by the Regulation of Insurance Industry Act, No. 43 of 2000. The role played by the IBSL takes 3 folds according to the Act, namely, it plays a development role, a supervisory role and a regulatory role.

Accordingly, the IBSL has a statutory obligation to play a development role in the insurance sector whilst ensuring that the activities of the insurance industry are carried on by the players with integrity and in a professional and prudent manner with a view to safeguarding the interests of policyholders and potential policyholders. Ensuring the second limb above is satisfied, will lead to strengthening confidence in the insurance sector whilst the development role cannot be overlooked by any regulator and requires encouragement, guidance and fostering of development activities. The aforesaid objectives have been statutorily enacted to assist maintain financial stability in the economy in view of the impact the activities of insurers and other market intermediaries make in the financial system.

The IBSL in its infancy stage was concentrating on a conventional regulatory framework to supervise the stability of insurers. However with developments taking place in the sector has seen the importance of a risk based regulatory framework, which commenced in year 2005 with its risk based supervisory model which focused on the dynamic events and circumstances of the insurance business that will have a bearing on solvency and the ability to meet contractual obligations. Towards ensuring effective supervision the IBSL devoted many resources to develop the risk based supervision model. During the supervisory process capital, assets, reinsurance, actuarial function management, earning, liquidity and subsidiaries of the business are assessed. At the completion of the supervisory process recommendations are made to improve the systems of insurance companies and close monitoring is done thereafter to ensure compliance. The IBSL is now embarking on a more positive approach in moving into a risk based capital model which is the way forward. In this model there will be a more risk sensitive regulatory capital requirement which will take account of a firm’s own assessment and the regulator’s assessment of the firm’s individual capital needs.

The IBSL in its regulatory process in the recent past has sought to protect the reputation of the market by identifying firms who have chosen to operate outside the perimeter of regulation. Policing the perimeter is of course vital also to consumers, ensuring they benefit from the safeguards of regulation and have access to redress and compensation mechanisms.

In ensuring that policyholder interests are safeguarded the IBSL has increased the limits that it could inquire into any dispute arising out of a long term insurance product from Rs 5 Mn to Rs 100 Mn. Further the IBSL has proposed that it be empowered to inquire and make orders in relation to disputes arising out of general insurance products.

An insurance regulator should also concentrate in ensuring that products and practices which are more likely to give rise to consumer detriment than others and the primary objective towards this is ensuring the quality of information and advice available to, and the fair treatment to consumers. This will also drive confidence in the insurance market.

Therefore the regulator should ensure fair treatment to consumers and not only on assessing compliance with the letter of rules, but also with the spirit of such rules.

Further to the role of the insurance regulator identified above, we need to understand the changes taking place to the character of insurance regulation world wide, particularly from the perspective of an integrated regulator, who has the ability to compare and contrast the different types of regulation which apply to different parts of the financial services industry.

An important development towards integrated regulation and supervision in Sri Lanka is the establishment of the Inter Regulatory Institutions Council (IRIC) by the Central Bank of Sri Lanka towards ensuring appropriate policy directions are set out for orderly development of the financial markets and that all regulatory agencies coordinate and exchange information in the interests of the entire financial system, where the IBSL is also represented. The ultimate objective of this is to assess the systemic risks of financial conglomerates, to recommend a course of action for regulation and supervision of such institutes on a consolidated basis and to propose a legal framework for the regulation and supervision of financial conglomerates.

Damayanthi Fernando