Sri Lanka's insurance sector develops as firms capitalise on underpenetrated markets


A growing economy, changing demographics and investment by major international companies are all contributing to the growth of Sri Lanka’s insurance sector. Alongside this, ongoing regulatory changes to stabilise the sector have catalysed mergers and acquisitions, and further consolidation looks likely.

Overall Picture 

As the sector regulator, the Insurance Regulatory Commission of Sri Lanka (IRCSL), formerly the Insurance Board of Sri Lanka, listed a total of 27 companies operating in the industry as of March 2018. Of these firms, 12 were categorised under long term, or life, while 12 provided general, or non-life, insurance and three were composite companies, dealing in both product areas. In addition, there were 58 brokerage firms registered, with 39 working in both areas and 19 focused solely on general coverage.

The country’s market is middle-income with a sophisticated consumer base for financial products. Though it has had relatively low penetration and density, high growth in recent years is indicative of rapid development from a relatively low base. In 2016 insurance penetration reached 1.21%, which was a 0.08% increase over 2015, according to the IRCSL. Despite the continued development, this was still lower than neighbouring countries in 2016: penetration was 3.49% in India, 1.78% in the Philippines and 5.05% in Malaysia, averaging 4.77% across Asia as a whole, according to Swiss Re.

Meanwhile, life premium in the country accounted for 0.54% of GDP in 2016, the last full year for which data is available, up from 0.49% in 2015, while non-life rose to 0.67% of GDP in 2016, from 0.63% a year earlier. Insurance density – or premium income per person – rose by a considerable 14.97% in 2016, to LKR6743 ($44) from LKR5865 ($38) in 2015, as premium earnings outstripped increases in population.

Double-digit Growth 

The industry has seen impressive development in recent years. According to latest data from the IRCSL, in September 2017 total gross written premium (GWP) were LKR118bn ($770.4m), made up of LKR51.9bn ($338.8m) and LKR66.1bn ($431.6m) in life and non-life, respectively, a 15.5% year-on-year (y-o-y) increase.

This expansion came on the back of a strong 2016, in which growth of GWP reached 16.27% over the previous year, totalling LKR143bn ($933.7m), comprising LKR63.5bn ($414.6m) in life premium and LKR79.5bn ($519m) in general insurance, which grew by 18.3% and 14.7%, respectively. This outstripped broader economic growth by a notable margin.

Profits & Claims 

In the first three quarters of 2017 pre-tax profit saw some fluctuation. According to latest available data from the IRCSL, in June 2017 overall pretax profit had declined 11.3% over the same period in 2016 to LKR4.7bn ($30.7m). This was driven by a sharp decrease in the profits of life providers, down 78.5% y-o-y to LKR738m ($4.8m), while general insurers saw a surge of 114.9% y-o-y to LKR3.9bn ($25m). However, this was not an indicator of decreasing profitability in the life segment as a whole, as it was largely caused by a LKR2.3bn ($15m) loss incurred by the state-owned Sri Lanka Insurance Corporation (SLIC). Moreover, by the third quarter of 2017 the figures had adjusted considerably: total pre-tax profits reached LKR10.9bn ($71.1m), comprising LKR5.1bn ($33.3m) in life and LKR5.7bn ($37.2m) in non-life, though this was still behind the same period in 2016, when the total was LKR14.7bn($96m). However, full-year pre-tax earnings in 2016 did exceptionally well, growing 41% over 2015, to LKR24.7bn ($161.2m), with life insurers seeing an increase of 23.7% to LKR11.5bn ($75m) and non-life profits rising 44.7% to LKR13.1bn ($85.5m).

Meanwhile, claims have risen at a slower rate than GWP, which should bolster margins. In 2017 claims grew from LKR32.2bn ($210.2m) in the second quarter to LKR50.6bn ($330.3m) in September 2017. The latter figure comprised life claims, including maturity and death benefits, of LKR19.4bn ($126.7m), and non-life claims of LKR31.2bn ($203.7m); values that mark y-o-y increases of 16.2% and 11.1%, respectively. Full-year data for 2016 recorded claims for both segments at LKR63.6bn ($415.3m), which was a 17% increase over 2015, according to the IRCSL.


Meanwhile, overall assets of underwriters reached LKR548.3bn ($3.6bn) in September 2017. The figure, made up of LKR387.5bn ($2.5bn) of assets held by life companies and LKR160.9bn ($1.1bn) of non-life firms, was up 10% on the LKR497.9bn ($3.3bn) of total assets in the same period in 2016, according to the IRCSL. In all of 2016 assets rose by 13% over 2015 to LKR527.2bn ($3.4bn). Life assets grew by 10.5%, general insurers’ by 16.3%, and those of the state-owned National Insurance Trust Fund (NITF) – which offers reinsurance, coverage for public sector workers and civil commotion and terrorism – by 64.1%. According to the IRCSL, assets grew at a compound annual growth rate (CAGR) of 14% between 2011 and 2015.

The regulator attributes continuing industry growth in the life segment to increased consumer awareness, the introduction of new products that cater to the evolving market and improved customer service. The third quarter of 2017 also saw the implementation of a LKR2.9bn ($18.9m) government-implemented health insurance policy covering all school children. In the general segment, on the other hand, a focus on niche markets, the launch of more innovative products and the implementation of enterprise risk-management strategies by businesses have driven the expansion.

“We are very positive on the insurance sector, as premium growth has started to accelerate as Sri Lanka moves up the GDP ladder,” Dimantha Mathew, senior manager for research at First Capital Equities, a Colombo-based brokerage, told OBG.


Recent years have seen ongoing reform, as the government and regulator have moved to encourage a stronger insurance industry through consolidation, better risk provision and improved access to insurance companies’ equity as an asset class.

Crucial changes came in 2011 with amendments to the Regulation of the Insurance Industry Act of 2000, which required composite firms to divide life and non-life into separate businesses. It also obliged existing insurers to list on the Colombo Stock Exchange (CSE), and new entrants to the market to list within three years of establishing operations in Sri Lanka.

At the time of the amendments, there were 12 companies operating as combined life and non-life insurers, which were required to split into two separate entities, each with a minimum risk-based capital (RBC) of LKR500m ($3.26m). The move was intended to prevent cross-subsidisation between different elements of the companies, protecting each side of the business from the risks of the other, and to encourage consolidation, as some of the newly split companies were less viable as stand-alone units. However, enforcement has been a challenge, with several companies continuing to operate life and general insurance under the same brand, in some cases offering bundled life and general services.

“Larger and more established players regard the segregation between life and general insurance positively, as it creates an opportunity to focus strongly on each entity separately,” Sanjeev Jha, managing director and CEO of Fairfirst Insurance, told OBG. “However, small companies with weak general insurance businesses view the segregation as detrimental as they can no longer depend on profits of life products to keep the general business afloat. These factors, as well as heightened competition and a lack of technical know-how for some firms in the segment, are leading to a gradual consolidation of the industry.”


The listing requirement was designed to strengthen the insurance industry and boost the capital markets. For insurers, listing would encourage greater transparency as listed companies must comply with financial disclosure rules and be more accountable to shareholders. Bringing insurers to market was also expected to open the sector up to investors and boost liquidity on the exchange. Equity is traditionally seen as a conservative asset class, providing a stable long-term option for investors in a market that has seen volatility in the past. Listing also provides a capital boost for the companies themselves. However, the move to market has not been entirely straightforward.

Indeed, both reform measures have proved slower to implement than expected, with some composite companies missing the February 2015 deadline to segregate. Moreover, concerns expressed by foreign-owned insurers that their businesses were already listed on exchanges elsewhere prompted further amendments to the listing rules in August 2017. Under the changes local subsidiaries which are owned by foreign-listed companies, with an at least an 85% stake, may apply for an exemption from the CSE floatation requirement. At the time, this applied to Allianz Group, listed on the Frankfurt Stock Exchange.

More controversially, SLIC and the NITF were also exempted from listing as long as they remain state-owned. Private insurers have complained about exemptions given to the government entities, saying that it creates an unfair advantage. Those not exempted are expected to list in 2018, including new entities formed by the life-general split (see Capital Markets chapter).

Risk-based Capital 

Another important reform came into effect in 2016 with the introduction of an RBC framework, which replaced a regulatory system based on solvency margin rules. This follows a global trend of more robust regulatory capital models being adopted to ensure that the risk profiles of firms are covered adequately. The higher requirements are expected to put further pressure on weaker players to merge, creating a more streamlined, robust sector overall. Sri Lanka’s RBC framework, in development since 2011, takes into account risk factors including credit, concentration, market, operational and liability, entailing capital charges for each. Moreover, the system is expected to strengthen risk awareness and management, stimulate efficient use of capital depending on risk exposure and improve the flexibility of the regulator to amend the framework as the industry changes.

The implementation of RBC may push up costs for insurers. Some will need to increase their capital to take into account their profile, while across the board, new IT and risk-management systems, actuarial support and training staff in new methodology will also incur costs. Broadly speaking, an RBC model tends to have a greater impact on life than general insurers, due to the longer duration of the former’s liabilities.


Further changes to sector dynamics are expected from the new Inland Revenue Act, passed in September 2017 and due to take effect in April 2018. This imposes a tax of 14% on bonuses and dividends paid to life insurance policyholders, potentially making insurance a less attractive investment product than bank deposits, which are taxed at 5% of interest income. It also broadens the taxable income of insurance companies, a move which is expected to have a particular impact on mid-sized firms and newcomers. “Changes to the regulatory and financial reporting framework would continue to pose challenges and require additional resources and cost,” Prasantha Fernando, COO of HNB Assurance, told OBG. “This will affect profitability, and companies would have to rethink current business models to ensure long-term sustainability.”


Against the backdrop of the recent legislative changes and their impact on the industry, the market is attracting international interest, particularly in the non-life segment. In February 2018 Germany-based Allianz, already present in the country through Allianz Insurance Lanka, agreed to acquire Janashakthi Insurance’s general subsidiary for LKR16.4bn ($107.1m). The acquisition will make it one of the leading companies in the sector, controlling around 20% of the non-life industry, ahead of Ceylinco and SLIC, which in 2016 held market shares of 19.2% and 19.1%, respectively. This follows Janashakthi’s takeover of AIA’s general insurance business for LKR3.2bn ($20.8m) in 2015. Additionally, in 2016 Fairfax Asia acquired 100% of Asian Alliance’s non-life arm, two years after taking a 78% stake in Union Assurance’s business in the segment. Further transactions are expected in the coming years, with larger international firms eyeing acquisitions, capitalising on their economies of scale and greater institutional strength in a more robust regulatory environment.


The life segment has been the most dynamic part of the sector in recent years. Aside from economic expansion and urbanisation, one of the most significant factors driving growth is demographic change, as the country has a rapidly ageing population. In April 2017 local media reported that the percentage of people aged 60 or older was projected to grow to 16.7% in 2021, up from 12.5% in 2012. The the trend continue it would lead to the age group making up nearly 25% of the population by 2041. Not only is this increasing demand for health coverage – often sold alongside life policies – it has also led to Sri Lankans buying accumulator policies, which provide a lump-sum payment on retirement.

Another factor affecting the segment is the growth of non-communicable diseases (NCDs), which, like many countries with emerging economies, Sri Lanka is now seeing. The public has also become more aware of the costs of treating NCDs, increasing interest in life insurance products that can be used to pay private medical bills. “State medical institutions alone cannot fulfil the increasing demand from the public; therefore, those who can afford the additional costs go to private medical institutions,” Thushara Ranasinghe, deputy CEO of Ceylinco Life Insurance, told OBG.

There is also a growing trend for younger Sri Lankans to see life insurance as an investment product which can be drawn on in tough times. However, leading companies are keen to emphasise that the purpose of coverage is protection, rather than asset appreciation.

According to a 2017 report by Colombo-based brokerage LOLC Securities, factors such as increased product awareness and demographic changes, such as a growing urban population, are expected to significantly drive growth in life GWP from 2017 to 2019, with a forecast CAGR of 21%, nearly twice the rate of recent years. However, there are significant downside risks to the health insurance segment from high loss ratios. Some unscrupulous care providers inflate their costs for those with insurance; as a result, some companies have steered away from the segment.

While there were 15 companies offering life insurance as of mid-2017, the segment is dominated by five major firms, holding a market share of around 79%, according to Ranasignhe, down from 85% in 2012. Nonetheless, outside the main players the sector remains fragmented. The “big five” have succeeded in building profitability, but have not focused on aggressive market share acquisition, partly due to a wariness about the effect on risk profile of rapid growth into more volatile market segments.


Due largely to regulatory requirements for insuring vehicles, motor insurance is the largest contributor to the non-life sector. In 2016, the last full year for which data is available, the segment’s GWP totalled LKR49.3bn ($321.9m), which was 62% of all general insurance. Of all motor policies, 51% were third-party only and 49% were comprehensive, reflecting a growing demand for fuller coverage and an increasing capacity to pay for it; in 2011, 37% of motor policies were comprehensive. The next-largest contributor to non-life GWP was health and surgical insurance comprising 13%, followed by fire with 9%, marine with 3% and miscellaneous accounting the remaining 8%.


Despite motor’s dominance, LOLC expects the segment’s contribution to non-life GWP to decline to 58% by 2019, due to intense competition, catalysed by a lower cost for customers to switch providers. The regulator does not set a price floor for insurance premiums. Demand has also been influenced by registration of new vehicles and monetary policy tightening. Registration growth is expected to slow, which will drag down motor premium growth to a CAGR of 7% in 2017-19, from the 12% it has seen in years previous, according to LOLC.

The non-life sector also has relatively high combined ratios; in 2016 it was 101%. The calculation, which is made up of the net expense ratio plus the net claims ratio; accounts for the segment’s increasing dependence on investment income. This has helped drive mergers and acquisitions among non-life firms, as newly segregated insurers have looked to sell off their general businesses to focus on the more profitable life segment.

Nonetheless, the stronger players that remain see considerable upside potential, given relatively low penetration and an improving macro environment. Consolidation is also expected to benefit sector leaders “Competition in non-life insurance is extreme and challenging,” said Jha. “The segment is showing huge potential to drive growth in the industry, taking into account that it is still in its early stages.”


With investment income an increasingly important source of revenue for non-life companies in particular, the allocation of investment has become a more significant part of strategy. Index-linked policies were popular in the past, but the experience of volatility in recent years has dampened enthusiasm, and some companies now shy away from equity. Thus insurance companies are major buyers of government bonds, which are generally regarded as a secure investment, given the state’s unique ability to raise funds. Even though public finances have come under severe pressure several times in past decades, the country has never defaulted on debt.

As of the third quarter of 2017 total investment for both the life and non-life segments was LKR456.5bn ($3bn), of which 46%, or LKR211.3bn ($1.4bn), was in government debt securities. Life’s investment in securities totalled 51%, or LKR181.8bn ($1.2bn), of total assets, while non-life held 29%, or LKR29.6bn ($193.2m), in government debt, according to the IRCSL.

Evolving Market 

The big insurers have taken a steady approach to growth, and a cautious stance to higher-risk segments. But they continue to seek new avenues for building their businesses, including distribution channels, products and marketing.

Traditionally, the market has been slanted towards the agent distribution model. In December 2016 there were 43,800 agents in the country, which accounted for 90% of life GWP and 29% of non-life GWP, according to latest data from the IRCSL. Bancassurance was a relatively small part of the market, representing less than 4% of both GWP in both segments. Bancassurance in Asia as a whole accounts for around 45% of GWP, according to LOLC, suggesting the scope for growth is considerable. The bancassurance model allows providers to use banks’ extensive branch networks as a distribution channel, and leverage the partner bank’s brand. Additionally, Sri Lanka’s bank density has increased steadily in recent years and is considerably higher than most regional peers.

“Bancassurance is good for insurance companies, because of the high credibility that bank managers have with customers,” Ranasignhe told OBG. He adds that partnerships with Sri Lanka Post, which also has an extensive network around the country, has also proved fruitful, particularly in increasing premium collection.

One hurdle, however, is that central bank regulations do not allow bank tellers to sell insurance directly. This obliges insurers to place agents or other employees in bank branches to offer their products – a model which increases costs, particularly in a sector in which staff turnover is quite high, Fernando told OBG.

Alongside bancassurance, takaful, or sharia-compliant insurance, is another growing segment, catering largely for Sri Lanka’s 2m Muslims, around 10% of the population. In the marketing sphere, insurers are increasing their investment in social media marketing targeting younger, affluent Sri Lankans, while also boosting the ICT element of the service offerings.


With the economy expected to pick up pace in 2018, and steady expansion forecast over the coming years, the insurance sector is well placed to benefit. Regulatory changes are creating challenges for weaker firms, and encouraging even healthy companies to reconsider their positions, particularly in the non-life segment. This should lead to further consolidation, with the stronger players looking to expand. Major international insurers are already playing a role in this process, and the scope for growing penetration from a low base may see new entrants in the medium term.


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The Report: Sri Lanka 2018

Insurance chapter from The Report: Sri Lanka 2018

Cover of The Report: Sri Lanka 2018

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