The theme of the conference “Future Direction of the Sri Lankan Insurance Market Aftermath of 26/12”, is both topical and timely, in the context of the increasing frequency of natural catastrophes across
the globe affecting countries with greater harshness.

Tsunamis, Hurricanes, Earth Quakes, Natures vagaries are not foreseen. A study performed by a group of US climatologists has revealed that the number of tropical cyclones had grown in both duration and intensity by about 50 percent since the 1970’s. In the year 2004 we saw the hurricane season inflicting greater losses on the US.  Further, Japan was hit by an unprecedented number of typhoons.  Worst was when Sumatra was hit by a strong earthquake on 26th December, resulting in a massive tsunami that hit twelve coastal states around the Indian Ocean. In such a situation the worst hit would be the individuals and their properties.  Relief from the Government will either be inadequate or sometimes may not reach the victims. Compensation provided would not help to build their properties and to earn their livelihood. Insurance is a mechanism, which could take care of situations of this nature.

In this background it is most apt to speak on the regulatory Environment Governing the Insurance Industry of Sri Lanka in the backdrop of December 26th Tsunami.

We have to accept that it is not possible to change the action of nature, which are often perceived as “Acts of God”.  Natural catastrophes will continue to occur.  As I was preparing this speech, South Asia’s worst earthquake had occurred in Pakistan. The point that we have to drive is to be prepared to face the consequences of natural catastrophes of any magnitude. 

The insurers cover risk for the economy, financial and corporate undertakings and households.  The total insurance claims in Sri Lanka as a consequence of the Tsunami amounted to an approximate value of US$ 130 million.  This is a very low figure compared to the loss of lives numbering around 40,000 and the value of property affected.  As you know this was due to the low density of insurance that prevailed at the time.
However the past experience and the increasing trend of natural disasters could serve as a useful reminder to the public of the economic benefit that insurance would provide.

Therefore it is vital that we develop products providing cover against the natural perils while continuing to educate the consumers the value in concepts of risk management and risk transfer.

At this stage I am glad to mention that the Insurance Companies in Sri Lanka were proactive in the post Tsunami recovery process.  Immediate action taken by the insurers to settle claims is commendable. Several companies even made ex-gratia payments to the affected parties amply demonstrating Corporate Social Responsibility they assume as Insurers and the implicit role they play for the economic well being of the country.

A proactive approach in the event of claim settlements especially in the event of catastrophe losses does good to the Insurer, not only from a contractual point of view but also adds to the image of the company.
Though it may be a daunting task to serve all who are affected with greater speed, all insurers should be geared to handle disaster situations effectively.  For this purpose it is important that all insurers have in place an effective contingency plan.

In the event of a catastrophe the roles of the insurers and reinsurers become important.  In spite of the important roles they play in most instances they are blamed if the claim settlements are not met due to the ambiguities in the policy wordings.  It is therefore important to have greater clarity in the insurance contracts, so that the insured easily understand what are the risks covered in the policy they possess.  In addition, greater clarity in insurance contracts is important to avoid unwarranted legal suits and consequent bad publicity.

A key lesson from the events in the last few years is the importance of analysis and management of accumulation of risks.

In addition to direct business risk, significant risks to insurers are generated on the liability side of the Balance sheet. These risks are referred to as technical risks and relate to the actuarial or statistical calculations used in estimating liabilities.  On the asset side of the balance sheet, insurers incur market, credit and liquidity risks from their investments and financial operations, as well as risks arising from asset-liability mismatches.

When assessing the future risks we depend on the traditional statistical methods with the assumption that future losses will be comparable to those experienced in the past. Having seen the effect of the tsunami we know that the scope of what natural perils could cause is simply too wide.  This raises doubt as to whether we could depend on historical experience in analyzing and projecting future risks.  Therefore it is timely to make progressive change in risk analysis and risk management with appropriate modeling techniques. 

Our regulatory system does not yet require adopting sophisticated risk management techniques to identify, model and monitor risks. In the present regulatory system the companies have the discretion in setting their technical provisions.  This may allow the technical provisions to be set at various levels without giving due consideration to all types of risks that an insurance business may be exposed to. Motor and Fire insurance were de-tariff in the years 2004 and 2005 respectively.  The insurance industry is now moving towards a more competitive insurance market.  In a de-tariff market like ours the insurers should take sufficient care to practice technically sound underwriting.  It is important that risks are assumed at adequate premiums.  It is essential that the Insurance Companies maintain strong Balance Sheets with adequate reserves and capital surplus to meet the potential losses.  We have heard of an Insurance company in the Pacific collapsing after few months of reporting a very strong Audited Balance Sheet leaving many policyholders in distress.  The reason for the failure of this Company was attributed to poor underwriting and lack of prudential provisioning.  This Company had an Internal Auditor, Internal Actuary and an Audit Committee.  This is where the importance of Risk Managers, Internal Auditors, actuaries and audit committees comes to light.  What is required is reliable reporting from these parties.  It is also important to recognize the roles played by these parties. 

Actuarial certification of loss reserves is a good discipline, which is expected to come into effect for the Sri Lankan Insurance Industry during the next two years.  We believe that this requirement will address the issue of inadequate reserving.

Retention levels for some classes of business are very low in Sri Lanka.
To a greater extent we depend on re-insurance.  Insurance companies assume risks and in turn cede part of the risks they have assumed to reinsurers in order to spread out the risks that may be too significant for any one insurer to bear.  This is a very important exercise that takes place in the process of covering risks.  Without adequate reinsurance arrangements insurers may have difficulties in meeting their claim obligations arising from a single event such as the Tsunami.  After the Tsunami there is a demand from the insuring public for more clarity in the policy wordings as to what is covered.  This may equally apply to the re-insurance contracts too regarding the clarity of treaty wordings to avoid technical misinterpretations, which may cause delays in claim settlements.      

The Board having recognized the importance of companies maintaining the required solvency margin, minimum capital requirement, adequate reinsurance coverage and being compliant with the legal and regulatory provisions of the Act issued a circular to all insurance companies to file a statement of assurance on a half yearly basis endorsed by the CEO and the CFO.
Assurance statement filed is a comfort to the Board.  The Board trusts that all companies are adopting a strong basis in submitting such assurances.   

In recognition of the necessity for effective supervision the IBSL has devoted many resources to the development of a risk based supervision (RBS) framework.  RBS is designed to assess the risk profile of the companies operations using the CARAMELS Rating Framework.  During the supervisory process Capital, Assets, Reinsurance, actuarial function, management, earning, liquidity and the subsidiaries of the business are subjected to assessment.  At the completion of the supervisory process recommendations are made to improve the systems.  The supervisory staff closely monitors compliance with such recommendations.  The inspection includes meetings with senior and middle management, Members of the Board, the internal auditors, External Auditors and Life Actuary of the Company.  The inspection also covers a review of relevant company documents.

The IBSL is taking sufficient care to ensure that the Supervisory Framework is working well and expects to complete this task for all companies by August 2006.

The IBSL is a member of the International Association of Insurance Supervisor.  IAIS has formulated a globally accepted framework for regulation and supervision of the Insurance Industry. The IBSL has been subjected to a self-assessment of compliance with the Insurance Core Principles (ICPs).  The ICPs can be used to establish or enhance a jurisdiction’s supervisory framework and in doing so may identify weaknesses, some of which could affect policyholder protection and market stability.  The IBSL in August 2005 formulated an action matrix to be fully compliant with the ICPs by end of the year 2007.  The Board has stipulated timeframes to achieve the compliant status for each ICP. In keeping with the time frames the IBSL has proposed amendments to the Act to include the Fit and Proper criteria when appointing members of the senior management of Insurance Companies.
 
The Insurance Association with the concurrence of the insurance companies drafted a code of Best Practice, which will be adopted by all insurance companies on a voluntary basis. The IBSL will be monitoring compliance with the code when required.

Insurance Association appointed Dr Weerasooria as the Insurance Ombudsman in January 2005.  In resolution of any complaint/dispute up to an award of Rs.500, 000/- Ombudsman’s decision is binding upon the insurer.  Awards over Rs. 500,000/- the Insurance Company or the complainant could decide whether the issue should be referred to arbitration or litigation and accordingly the Ombudsman is entitled to submit his report to the Arbitrator or Judge. 

Insurance Board is pleased to note that the dispute resolution system is working effectively. In addition the IBSL gets involved in resolving complaints relating to Long Term Insurance up to the value of Rs.5 million as empowered by the RII Act. The IBSL Observes that issues regarding claims have arisen mainly due to unethical practices of agents and ambiguous policy wordings.  We have brought all these matters to the attention of the respective companies.

A responsibility common to companies and regulator would be to promote greater awareness of insurance among policyholders, intermediaries, schools and universities and general public. The IBSL is in the process of developing leaflets and brochures in order to promote public awareness on insurance.  Further the IBSL intends meeting the academics of Colombo, Kelaniya and Sri Jayawardenapura Universities in order to introduce the curriculum on insurance for the undergraduates of the commerce stream.  

Long Term Insurance lapse ratio in Sri Lanka is estimated around 50% of the policies written.  This may be attributable to policyholders not taking a long-term view of financial commitment at the time of purchasing the policies.  Insurers and insurance intermediaries sometime have to play the role of financial advisers in addition to the product providers.  Further Life Insurance products are often complex which makes it difficult for the policyholders to select the most appropriate product for themselves.  For this purpose complete transparency through enhanced disclosure and clarity of what is being offered and the rights afforded to the consumers is essential so that they could make meaningful comparisons and evaluate competing products offered and select the best suited for them.

Insurance Board established itself as an independent body having its own staff in May 2005 and has received approval to recruit 17 staff members. We were able to recruit some of the staff but still the recruitment drive has not been completed.  As you know the regulator should have expert staff to be effective in discharging its mandate.  

The IBSL will continue to progressively strengthen the regulatory framework of the insurance industry.  In the process the IBSL will consult the industry whenever any changes to the regulatory framework would be effected.  Such a dialogue will be important to ensure, creating an environment conducive to the growth of the insurance industry.  It is the regulators interest to see that insurance business is developed on proper and healthy lines and in the interest of the insuring public and nation.  

For this purpose the regulator enacts its laws and makes rules and regulations as applicable.  This process will not stop there.  It is also mandatory upon the regulator to see that the rules are enforced.    Therefore the regulator will insist on compliance with rules. The industry has seen a number of regulatory changes in the recent past some of which I have already mentioned.   It is the objective of the regulator to progressively build a system for fostering effective risk management and governance.  The IBSL as the regulator of the insurance industry would wish to observe continuous upgrade of standards, development and commitment to best practices.

In conclusion I wish to bring to the notice of this forum the initiative taken by the Government of Sri Lanka to enact the Sri Lanka Disaster Management Act No. 13 of 2005, to set up a council for disaster management in order to minimize and prevent disasters encountered as a result of natural peril.

On this note I wish all the participants a fruitful and productive conference.