Sri Lanka

Principal Legislation

The Regulation of Insurance Industry Act No. 43 of 2000 established the Insurance Regulatory Commission of Sri Lanka (IRCSL), originally the Insurance Board of Sri Lanka to oversee licensing, solvency, registration of insurers, brokers, and agents, enforce compliance, and manage insurer insolvency and winding up.

Since 2024, IRCSL has announced reforms to modernise regulation, including:

• Tightening the Risk-Based Capital (RBC) requirements (minimum RBC ratio of 120%, with remediation plans required for ratios below 160%)
• Requiring listing of insurers unless exempt under parent company status
• Regulating microinsurance distribution and mandating the ACII qualification for senior insurance broker officers
• Introducing digital-insurance pilot frameworks, enhanced market conduct supervision, and reinsurance placement rules aligned with international standards

Supervision

The Insurance Regulatory Commission of Sri Lanka (IRCSL), operating under the Ministry of Finance, is the official regulator of the insurance industry. Originally established as the Insurance Board of Sri Lanka under the Regulation of Insurance Industry Act No. 43 of 2000, the IRCSL oversees licensing, solvency, and market conduct of insurers, brokers, and agents.

Its mandate is to ensure that insurance business is carried out with professionalism and prudence, protecting the interests of both policyholders and the market. The IRCSL is also advancing regulatory reforms covering microinsurance, digital innovation, and risk-based capital compliance.

Admitted/Non-Admitted

Non-admitted insurance is generally not permitted in Sri Lanka. The law requires all insurance risks situated in the country to be covered by locally licensed insurers.

However, exceptions may be granted by the Insurance Regulatory Commission of Sri Lanka (IRCSL) on a case-by-case basis, typically where coverage is not available in the domestic market.

Compulsory Classes

The following insurance classes are compulsory under Sri Lankan law and regulatory policy:

• Motor third-party bodily injury insurance
• Professional liability insurance for insurance brokers
• Professional liability (or surety bond) for notaries
• Oil pollution liability cover for tankers entering the Port of Colombo
• Shipowners’ liability for marine oil pollution (via insurance or financial guarantee)
• Weather-index crop insurance for farmers receiving government fertiliser subsidies
• Insurance for clinical trials

State Involvement

Several state-owned entities operate in the Sri Lankan insurance sector:

• Sri Lanka Insurance Corporation (SLIC) – Offers both life and non-life insurance.
• Agriculture and Agrarian Insurance Board – Provides insurance for agricultural risks and rural sectors.
• Sri Lanka Export Credit Insurance Corporation – Covers export-related credit and political risks.
• National Insurance Trust Fund (NITF) – Oversees reinsurance, government insurance schemes, and national disaster risk coverage.

Tariff Classes

Strike, Riot, Civil Commotion (SRCC) and Terrorism risks are subject to an obligatory tariff, reviewed annually by a committee of insurer representatives. The tariff applies to fire, engineering, motor, miscellaneous accident, and marine classes of business.

Premium Taxes and Charges

A 15% Value Added Tax (VAT) applies to all non-life insurance classes, including stand-alone healthcare insurance. Exemptions include crop, livestock, and Agrahara insurance schemes.

Policy Language

• The official language for insurance policies is English.
• In practice, some insurers may issue policies in Sinhalese or Tamil to accommodate local policyholders.

Sri Lankan insurers are subject to specific rules regarding reinsurance placements. As of the latest regulations, any reinsurance placed with a related reinsurer must be rated at least ‘A’ by one of the major credit rating agencies. For unrelated reinsurers, the minimum acceptable rating is ‘BBB’ (S&P/Moody’s), ‘B+’ (AM Best), or ‘Baa3’ (Fitch). These requirements do not apply when placing business with the National Insurance Trust Fund (NITF), which holds a high domestic rating and is considered the safest counterparty.

Local insurers must place reinsurance only with reinsurers that are approved by the financial regulator in their home jurisdiction and authorized to operate internationally. All reinsurance treaties must be filed with the Insurance Regulatory Commission of Sri Lanka (IRCSL), including documentation of reinsurers’ credit ratings. The IRCSL may prohibit placements with any reinsurer deemed not in the national interest.

From 1 January 2013, a compulsory cession of 30% applies to all proportional and non-proportional reinsurance in classes including:

• Fire/property and engineering
• Marine hull and cargo
• Miscellaneous accident
• Motor
• Travel

This 30% rule also applies to facultative placements in these classes, with exceptions made for specialist risks such as aviation and energy.

Under the risk-based capital (RBC) framework, reinsurance credit risk charges vary depending on the financial strength of the reinsurer. NITF placements are treated as the highest quality and exempt from capital charges.

No regulatory approval is required to reinsure, but all arrangements are subject to IRCSL guidelines aimed at ensuring prudence and safeguarding policyholders’ interests. Maximum and minimum retention levels are not prescribed, and no withholding tax is applied to reinsurance premiums.

Sri Lankan insurers are required to place reinsurance only with reinsurers approved by the regulatory authority of their home country to operate internationally. Minimum long-term ratings apply: at least “BBB” with Standard & Poor’s or Moody’s, “B+” with AM Best, or “Baa3” with Fitch. These requirements do not apply to placements with the National Insurance Trust Fund (NITF).

As of 1 January 2017, if a local insurer wishes to place reinsurance with a related-party reinsurer, that reinsurer must hold a minimum security rating of “A” from one of the four major international rating agencies.

Specialist reinsurance, such as that covering aviation and energy risks, is exempt from the NITF cession requirement. There are no other registered local professional reinsurers apart from the NITF.

As of 2025, Sri Lanka’s insurers are fully subject to regulatory oversight in respect of reinsurance arrangements. Details of treaties, including reinsurer credit ratings, must be submitted to the Insurance Regulatory Commission of Sri Lanka (IRCSL). The IRCSL may prohibit reinsurance placements it considers detrimental to national interests.

Sri Lanka’s reinsurance regulations reflect a continued commitment to prudential standards, with the NITF retaining its exemption status and strong market role.

The insurance distribution landscape in Sri Lanka continues to be dominated by agents and brokers. Brokers, particularly the larger ones with or without international affiliations, tend to focus on corporate, industrial, and commercial non-life business. Agents, on the other hand, primarily handle personal lines such as motor and medical insurance, though many prefer life insurance due to more attractive commission structures linked to long-term policies. Direct placements still account for a significant share of the market, historically around 27–28% of non-life premiums, although this figure is influenced by the requirement for all government-linked business to be placed directly with state-owned insurers.

Digital distribution is growing steadily, driven by increased internet and mobile access, along with regulatory encouragement for transparency and accessibility. Bancassurance and online platforms are gaining momentum, with digital sales seeing strong year-on-year growth. The first price comparison website in Sri Lanka launched in 2017, marking the beginning of a gradual shift toward digital engagement. As of 2025, digital and bancassurance channels are estimated to be growing at over 14% annually, signalling an evolving market dynamic where technology plays an increasingly prominent role alongside traditional methods.

Sri Lanka is not situated in an active earthquake zone and historically has not experienced major seismic events. The only significant occurrence was the 2004 Indian Ocean tsunami, which followed an underwater earthquake near Sumatra. Cyclones is the most serious natural hazard, particularly along the east coast during the monsoon season. These storms can cause extensive damage to both coastal and inland hilly districts, occasionally impacting insured properties.

Flooding is another persistent issue, especially following heavy monsoon rainfall that overwhelms urban drainage systems. Contributing factors include poor land management policies, illegal construction on marshlands and canal banks, and blocked drains. While flooding frequently affects uninsured rural areas, recent years have seen considerable insured claims, notably during the severe floods of May 2016.