By: Isuru Parakrama
December 11, Colombo (LNW): Fitch Ratings has highlighted the evolving but somewhat opaque regulatory environment in Sri Lanka’s insurance industry, describing it as one that is “developing with limited transparency”.
This assessment points to the challenges faced by both the industry and regulators in fostering a more transparent and sophisticated market.
The report referenced the Insurance Regulatory Commission of Sri Lanka (IRCSL), which has been responsible for overseeing the country’s insurers.
In an effort to strengthen the sector, the IRCSL introduced a risk-based capital (RBC) framework in 2015, which was fully implemented by insurers in 2016.
Under this system, insurers are required to maintain a minimum RBC ratio of 120 per cent. Companies that fail to meet a ratio of 160 per cent must submit a plan to enhance their capitalisation.
Whilst these measures are aimed at improving the financial stability of insurers, the report suggests that the regulatory framework still lacks the clarity and transparency needed to facilitate smoother operations within the sector.
Additionally, the commission has enforced rules aimed at separating life and non-life insurance operations.
It has also mandated that all insurance firms be listed on the local stock exchange, a move intended to increase accountability and transparency.
However, some exceptions are made for insurers whose parent companies are already listed on an internationally recognised stock exchange, which may limit the overall impact of this requirement.
Fitch’s analysis also points to Sri Lanka’s insurance market, which remains one of the least penetrated in Asia. The market is still underdeveloped, with both life and non-life insurance sectors dominated by basic products.
This lack of sophistication leaves many opportunities untapped and presents significant challenges for growth and diversification.
In the non-life insurance sector, motor insurance remains the dominant force, making up more than half of all premiums. However, restrictions on vehicle imports, which have persisted for some time, have forced insurers to broaden their offerings.
As a result, sectors such as health insurance and miscellaneous types of coverage have seen growth, along with fire and property insurance.
Additionally, small and medium-sized enterprises (SMEs) have contributed to the rise in business-related insurance, driven by the increased pace of construction and a growing number of commercial ventures.
The life insurance sector is also undergoing a transformation, albeit at a slower pace. Traditional whole-life and endowment policies, particularly those with investment features, continue to lead the market.
Despite pure protection policies being gradually gaining popularity, their uptake remains limited when compared to other Asian markets, Fitch noted.
This can largely be attributed to the relatively low demand for such products in Sri Lanka, as many individuals continue to favour policies that offer more immediate returns or savings components.
In layman’s terms, whilst there have been some regulatory and product developments in Sri Lanka’s insurance sector, challenges remain, particularly in terms of market sophistication and the transparency of the regulatory framework.
