Insurance Companies

Risk Sensitive Capital Model for the Insurance Industry Supervision

Paid up share capital of insurance companies was increased to rupees one hundred million for each class of insurance business from the present requirement of rupees twenty five million for life insurance and rupees fifty million for general insurance by Regulations made by the Hon. Minister of Finance under the powers vested on him under the RII Act. This requirement will apply to new companies. In order to apply this requirement to the existing companies necessary amendments are being effected to the RII Act.

Introduction of Statement of Recommended Practice (SORP) - Insurance Contracts for Insurance Companies

The IBSL liaised with the Institute of Chartered Accountants of Sri Lanka (ICASL) in developing the SORP which all insurance companies are required to adopt for the preparation of Audited Financial Statements with effect from the year 2007. This standard will ensure a uniform financial statement reporting system, which will facilitate extracting more information for regulatory purposes.

New Quarterly Returns

To be consistent with the migration to a Risk Based Supervision Methodology and the development of an “Early Warning System”, the Board undertook a major overhaul of the quarterly, annual and actuarial reporting requirements of insurance companies to ensure that relevant, appropriate and complete information was filed on a timely basis to monitor solvency margins, financial condition and compliance with the Board’s requirements. New regulatory reporting requirements will come into effect from Q4 2006.

Review of Quarterly Returns

The RII Act requires all Insurance Companies to submit their Quarterly Returns within forty-five days following the end of each quarter. The Supervision Division reviewed the Quarterly Returns submitted by Insurance Companies for the first two quarters of 2006. The details in the Quarterly Returns pertaining to premium income, reinsurance, and other expenses and investments were analyzed in order to obtain a general overview of the performance of the insurance industry and ascertain class wise and company wise performance within the industry based on premium income.

Investment of long term insurance fund of long term insurance business and the technical reserves of general insurance business are reviewed to ensure that invest in government securities and other investment instruments are made in terms of the provisions of the RII Act and Determinations made under the Act.

New Annual Statutory Returns

New Annual Statutory and Actuarial Return Formats were developed which will replace the existing formats. All insurance companies are required to submit Annual Statutory and Actuarial Returns in the new formats with effect from 2007 i.e. for Q4 2006.

Review of Annual Statutory Returns, Audited Accounts and Actuarial Reports

The Audited Accounts, Annual Statutory Returns and Actuarial Reports are required to be submitted to the Board within six months following the end of the financial year.

The IBSL also reviewed the Audited Accounts, Annual Statutory Returns and Actuarial Reports of Insurance Companies for the year ended 31st December 2005. The Solvency Margins of the Insurance Companies were also verified as at 31st December 2005.

Where discrepancies were observed in the above documents, the companies concerned were required to take corrective action within given timelines. Areas of concern identified from the review of Annual Statutory Returns, Audited Accounts and Actuarial Reports, which required further examination were addressed at meetings with companies and/or during onsite inspections and the necessary guidance for corrective action was provided to the insurance companies.
 
Compliance Certification – Circular 18

With effect from 1st January 2005 Insurance companies were requested to file a compliance certifications on a half-yearly basis to the effect that the insurance companies are in compliance with various requirements in terms of the RII Act. This certification is required to be submitted to the Board within 6 weeks of the end of every half-year.

The IBSL examines the compliance certifications and requests further details where necessary in order to verify the accuracy of these certifications. During on-site inspections of insurance companies, the supervision staff examines relevant documents in order to determine whether the certification provided to the IBSL was based on complete and accurate information.

Risk Assessment Summary (RAS)

Risk Assessment Surveys were sent to all insurance companies in order to obtain the information necessary to develop a Risk Assessment Summary (RAS) for each insurance company. The IBSL uses the RAS as the primary document to assess the risk profile, risk management and financial position of an insurance company. The RAS is used as the basis for planning the nature, scope and extent of the on-site inspection work prior to commencement of inspection of insurance companies. The RAS is updated to reflect the on-site inspection findings and the results of off-site supervision.

Evaluation of Financial Standing of New Applicants for Insurance Business

During the year 2006, registration was granted to Ceylinco Takaful Ltd. The Business Plan and Financial Statements of the company, and other relevant documents were reviewed in detail prior to issuance of registration in order to ascertain the financial viability of the projected insurance business.

Risk Based Supervision

The IBSL carried out on-site inspections of four Insurance Companies using the new Risk Based Supervision Methodology introduced by the independent consultant (Insurance Supervision Advisor) enlisted through the IMF. The purpose of the inspections was to assess the financial condition and operations of the insurance companies, their ability to meet obligations as they fall due, and to assess compliance with the RII Act and Board requirements. The inspections focused on assessing and rating the risk profiles of the insurance companies,  with regard to Capital (C), Assets (A), Reinsurance (R), Actuarial Liabilities (A), Management (M), Earnings (E), Liquidity (L) and Subsidiaries (S). The Board refers to this methodology as the ‘CARAMELS’ Rating Framework.
The Risk Based Supervision Methodology includes detailed reviews of documents such as organization charts; strategic/corporate plans; mandate and minutes of Boards of the respective companies and Committee meetings; internal and external audit reports; policies relating to capital, dividends, investments, reinsurance and liquidity; procedure manuals for product development, underwriting, marketing, reinsurance and claims etc. In addition, interviews are held with all relevant senior officials of the companies, audit committee/board members, as well as the actuaries and internal and external auditors.

Prior to finalization of comprehensive on-site inspection reports, the draft inspection reports are discussed in detail with the company officials in order to obtain their views pertaining to the observations and recommendations made by the IBSL. This follows the issuance of a final inspection report setting out the Board’s observations and recommendations and requesting the company’s response, together with an Action Plan for corrective action, within a prescribed timeframe. The Board reviewed the completeness and adequacy of responses from the companies and further information is requested where necessary.

As per the guidelines issued by the IBSL, all insurance companies submit the Statement of Reinsurance Arrangements and copies of certified Cover Notes..

Statement of Reinsurance Arrangements and Cover Notes are reviewed to ensure that reinsurers who provide reinsurance cover possess the minimum rating from a recognized international rating agency prescribed by the IBSL or if the reinsurer is a government owned or government guaranteed reinsurance company or a recognized pool. In which event whether approval of IBSL has been obtained as required.

Broking Companies

One of the main activities of off-site supervision process is to review the quarterly returns, which are submitted by all Insurance Brokers as specified by the Board. If discrepancies are observed the brokers are informed of these and explanations are called for regarding such discrepancies. Companies may even be requested to re-submit the returns to ensure accuracy of the information submitted therein. The information in the quarterly returns is further verified during on-site inspections.

The Board identified the need to improve the standard of quarterly reporting formats and introduced a new set of reporting formats with the consultation of the industry. These new quarterly reporting formats were published in Government Gazette No. 1412/30 – 29th September 2005. The insurance brokers were required to submit the quarterly returns in the new formats commencing from the 4th quarter 2005.

Evaluation of Financial Statements of Insurance Brokers

The Audited Financial Statements and Interim Financial Statements of Insurance brokers are reviewed in order to evaluate the financial performance and condition of insurance broking companies. Such reviews and analysis are considered in the annual renewal of registration of brokers.

During the year the Board carried out on-site inspections of four Insurance Broking Companies in order to ensure that these entities carry out their business in a professional and prudent manner in compliance with the RII Act.

During the inspections where weaknesses are observed, the companies are requested to take remedial action, based on the inspection findings and recommendations given by the Board. Compliance with such instructions is followed up by the IBSL.

Interim Financial Statements Formats such as Income Statement, Balance Sheet, Cash Flow Statement and Statement of Changes in Equity   were developed by the Supervision Division and discussed with Sri Lanka Insurance Brokers Association. After suitably amending the Formats in consultation with SLIBA, the Formats were circulated to insurance brokers. The insurance brokers are required to submit un-audited Interim Financial Statements on a quarterly basis with effect from January 2007, i.e. from Q4 2006.