THE SRILANKAN INSURANCE MARKET&THE IMPACT OF THE ASIAN TSUNAMI ON THE SECTOR

By Buddhika Piyasena January 26, 2005

“ Insurance is a mechanism for spreading risk, for sharing the losses of the few among the many ”

GLOBAL INSURANCE MARKET

Premiums written -USD3,000 bn

Non-Life: 40% , Life: 60%

4.6% CAGR

• Improved underwriting results

• May see some softening

• 3Q04 – Hurricane Season

-

500

1,000

1,500

2,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

US$

bn

Non-Life Life

Source: www.internationalinsurance.org

Regulatory pressures

Re-insurance market: USD 200 bn • Downward pressure on premiums Charged

12% of insurance products are sold through the internet

GLOBAL INSURANCE MARKETPer-Capita Non-Life Insurance Premiums Written (’03)

Source: Munich Re(MR Economic Research/NatCat SERVICE ® )

SRI LANKAN INSURANCE MARKETDevelopment of the Industry – Key Milestones

Pre - 1961A number of local and representative offices of foreign insurance companies were in operation

1961The industry was nationalized. The Government took over the operations of the then-existed insurance companies. SLIC was setup as the only supplier of insurance.

1986Setting-up of National Insurance Corporation creating a government controlled oligopoly

1987 Insurance sector was opened for the Private Sector

2001- 03 Privatization of NIC (2001/02) and SLIC (2003)

SRI LANKAN INSURANCE MARKETOverview

Size and Growth:

> LKR 26bn of Premiums Written p.aNon-Life: 60%; Life: 40%> LKR 60bn of AssetsNon-life : 14% CAGR Life : 17% CAGR

Reasonable growth even during low points in the economic cycleOpening of the North and East providing room for growth

LKRbn

Source: IBSL

-

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

1998 1999 2000 2001 2002 2003 3Q04-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Non-Life (LKRbn) Life (LKRbn) Grow th: Non-life

Grow th: Life GDP Grow th

SRI LANKAN INSURANCE MARKETSome Statistics ….

USA UK Singapore India Sri LankaNon-LifeGross Written Premiums (GWP) - USDmn 574,579 91,891 3,337 3,712 135 GWP/ GDP 5.5% 7.9% 3.0% 0.1% 0.8%

LifeGross Written Premiums (GWP) - USDmn 480,919 154,842 5,561 13,590 106 GWP/ GDP 4.6% 13.4% 4.9% 0.5% 0.6%GWP/ Population 1,656 2,577 1,207 13 6 Source: www.iii.org, Central Bank of Sri Lanka

SRI LANKAN INSURANCE MARKETMarket Participants

13 Insurance Companies Currently in Operation11 of these are composite companies; Other 2 only engaged in Life Insurance

(5,000) (4,000) (3,000) (2,000) (1,000) - 1,000 2,000 3,000 4,000 5,000

Non-Life 2003 Non-Life 3Q04 Life 2003 Life 3Q04

Sri Lanka Insurance

Ceylinco

UAL

Eagle

Janashakthi/ NIC

Others

Source IBSL

Gross Written Premiums (LKRmns)Life Non-life

Intensifying Competition• Greater no. of participants• Greater aggressiveness

Limited Foreign Interest; but has improved recentlyNo Insolvencies post 1987High Concentration :

2 Largest Players : Non-Life – 64%, Life – 59%

5 Largest Players : Non-Life – 92%, Life – 93%

Other27%

Motor46%

Fire20%

Marine7%

SRI LANKAN INSURANCE MARKETNon-Life Market

Rapid growth, particularly Motor

Several Players with Motor accounting for 60-70% of GWPIncreased competitionDe-tariffed, except Workmen’s Comp. Government Business up for grabs for all playersOnly compulsory insurance – Motor 3rd partyWrite Business in MaldivesWide differences in Profitability and Capital Positions

-

2

4

6

8

'97 '98 '99 '00 '01 '02 '03

Fire Marine Motor Other

Non-Life Premium Written (LKRbn)

Source: IBSL

SRI LANKAN INSURANCE MARKETNon-Life Insurance: Profitability

OwnershipGovt. vs Private

• Government Business• Operating Costs - staffing

Parental Support – reinsurance

Business StrategyBusiness WrittenReinsurance

SizeEconomies of ScaleReinsurance

Operating Costs

Combined Ratio Net Claims Incurred Ratio

Profitability of the 5 Leading Non-Life Insurers

2000 2001 2002 2003

130%

110%

90%

70%

50%

30%

SRI LANKAN INSURANCE MARKETNon-Life Insurance: Capital

6%47%0%32%15%% of NWP

8%50%0%29%13%% of GWP

>150%100-150%50-100%25-50%< 25%Net Assets/NWP

Wide differences in the level of capitalization

Adequacy of regulatory capital requirementsHowever, no insolvencies;• No large scale losses/ catastrophes (till the Asian Tsunami)• Regular cash flows from new business written/ renewals

Return on Capital – a practical issue when strengthening the capital position

• Solvency measured by Net Assets/NWP :At Dec. 31, 2003: 24% - 202%

SRI LANKAN INSURANCE MARKETLife Insurance Market

Sound GrowthConsiderable differences between the average premium/ contract – some

preferring the “creamier’ segment of the market Changing demographics provide growth opportunities

• aging population – living too long and outliving one’s assets• social trends, less being privy to govt. pension schemes etc.

Differentiation through service, product choice and claims settlementGood distribution channels required for long-term growth

• acting as investment advisors -> requires training of staff/ agentsFunds largely invested in G-secs. Insurers sensitive to rates offered by

savings products

SRI LANKAN INSURANCE MARKETLife Insurance Market

Lapsation of policies – common problem to the industryThough improved, still remain high

Low insurance penetration; means high growth potential?Tax regime – not very favourableRegulation of solvency requirement – adequate, but not a very good RBC

modelCapital Position – remained largely stable with sound life-assets to reservesBancassurance

60-70%30-40%% of policies lapsing

3rd yr. From writing (cumul.)1st year from writing

Mostly participating policies. Minimum guarantees of c.3-4%.Very low participation in equity markets – c. 5% of inventible funds though

regulations allow more

SRI LANKAN INSURANCE MARKETReinsurance Environment

Market size - too small to easily attract good reinsuresLarge companies and ones with parents in the reinsurance business at an

advantageMinimum credit quality for reinsures – investment grade rating Largely with Asian reinsuresIncreasing competition Quality of business writtenNo regulatory restrictions on the level of cedingLimited scrutinizing of reinsurance programmes by the RegulatorStrike, Riot, Civil Commotion and Terrorism (SRCC&T) Fund

SRI LANKAN INSURANCE MARKETRegulation

Regulated by the Insurance Industry Act No.43 of 2000Supervisor/ Regulator – Insurance Board of Sri Lanka Duties and functions of the Regulator include• Licensing and supervising the conduct of the market participants • Determination of solvency and capital requirements and investment/

assets allocation guidelines for the industry• Tariff related matters• Reinsurance • Resolve complaints of policyholders• Legislative matters relating to the Industry

Regulations are better compared to most South Asian countriesRequires more resources to effectively regulate the sectorStandard reporting formats for Insurers

IMPACT OF THE ASIAN TSUNAMIEconomic Losses

Lives – 40,000Houses – 11,000Vehicles – > 6,000Infrastructure, Business Properties etc.Losses from Business InterruptionMany Industries Affected

Cost to Re-build – USD 1.5 bn ( c. 8% of GDP)

The Present Value of Economic and Insured Losses – since 1950

Economic losses (2003 values) Trend of economic losses

Of which insured losses (2003 values) Trend of insured losses

Average economic losses per decade

Source: Munich Re

IMPACT OF THE ASIAN TSUNAMIBut, what does this cost the Insurance Industry?Economic Losses Vs. Insured LossesNot All Losses Insured

IMPACT OF THE ASIAN TSUNAMIReasons for Low Insured Losses

Low insurance penetration Less Industrial/ commercial activityInfrastructure – not insuredExclusion of relevant Perils from Insurance Policies/ Non-availabilityExclusion of additional covers, such as loss of profits from business

interruption

Flip Side …..Several Large Exposures – Hotels/ resortsExposure to Maldives – Hotels/ resorts and Construction WIP

IMPACT OF THE ASIAN TSUNAMIApplicable Perils

ApplicabilityPeril

Only a very few entities had taken this cover

YESTsunami

Typically Flood policies issued in Sri Lanka exclude inundation of sea water

NOFlood

Under the principal of “proximate cause”YESEarthquake

IMPACT OF THE ASIAN TSUNAMIEarthquake? It was Thousands of miles away!!

“ The efficient cause which brings about a loss with no other intervening cause which breaks the chain of events ”

An Earthquake was the “Proximate Cause” for the Loss.

Proximate CauseDefinition

IMPACT OF THE ASIAN TSUNAMIToll on the Insurance Industry

Gross Claims: Estimated LKR 12 – 15 bnNet Claims : Will depend on the soundness of the re-insurance programme

• Level of retention• The re-insurance programmes in place on the risk transferred to reinsures and the resulting liability sharing arrangements• Catastrophe Cover on the retained risks

Honoring of claims and timely payments by reinsuresRe-instatement cost of Cat. PoliciesEx-gratia Payments• could be a fairly significant number for the industry (may > LKR 1 bn)• competitive pressures at work - important not to risk solvency• insurers ‘trying their luck’ with re-insurers for ‘payments-in-kind’

IMPACT OF THE ASIAN TSUNAMIPossible Long-term Impact on the Industry

Depletion of capital Re-insurance• Re-rating of risks Higher premiums• Conduct of primary insurers in making claims against reinsures

Will the event create demand for insurance?

IMPACT OF THE ASIAN TSUNAMILessons to Learn

Top-line growth and profitability are important; but1. Good underwriting 2. Sound re-insurance programme3. Sound financial strength; are more important

Insurers

Need for risk and size reflective capital requirementsAssess soundness of reinsurance coverMechanism for the public to assess the soundness of insurers

Regulator

Need to assess the financial strength of insurers before obtaining a policyAre companies that paid claims and hefty ex-gratia payments now financially sound? Can they withstand another shock in the short-term?

General Public/ Policyholders

THANK YOU