The Regulation of Insurance Industry Act No 43 of 2000 established a new body, the Insurance Board of Sri Lanka (IBSL), to regulate and supervise the insurance industry. The 2000 act prescribed regulations for the registration of insurers, general provisions applicable to insurers and the registration of brokers and insurance agents.
Other chapters of the act refer to the IBSL’s inspection of accounts and its powers of investigation, the administration of insolvent insurers and subsequent winding up.
The Regulation of Insurance Industry (Amendment) Act No 3 became effective on 11 February 2011. The new act amended existing sections of the 2000 act and introduced some new features including the abolition of the composite insurer.
The Insurance Board of Sri Lanka (IBSL) is established as an insurance supervisory authority within the Ministry of Finance and Planning, in accordance with the provisions of the Regulation of Insurance Industry Act, No 43 of 2000.
The IBSL has wide powers and, according to the 2000 act, “the object and responsibility of the board shall be to ensure that insurance business in Sri Lanka is carried on with integrity and in a professional and prudent manner with a view to safeguarding the interests of the existing policyholders and potential policyholders”.
Admitted / Non-admitted
Non-admitted insurance is not permitted because the law provides that insurance must be purchased from local authorised insurers, with some exceptions.
- Motor third party bodily injury.
- Professional liability for insurance brokers.
- Professional liability for notaries (insurance or bond).
- Oil pollution cover for tankers entering the port of Colombo.
- Shipowners’ liability for marine oil pollution (financial guarantee or insurance).
- Weather-based crop insurance for farmers using the government’s fertiliser subsidy.
- Insurance for clinical trials.
There is no compulsory life, pensions or healthcare insurance.
State-owned insurers include the Sri Lanka Insurance Corporation (SLIC), the Agriculture and Agrarian Insurance Board, the Sri Lanka Export Credit Insurance Corporation and the National Insurance Trust Fund (NITF).
The strike, riot, civil commotion and terrorism fund risks are subject to an obligatory tariff which is reviewed annually by a committee of insurers’ representatives. The tariff applies to fire, engineering, motor and miscellaneous accident and marine business.
There are no statutory tariffs for life, pension or healthcare business.
Premium Taxes and Charges
All non-life classes including healthcare (stand-alone not as a rider) but excluding crop, livestock and agrahara” insurances are subject to 15% value added tax.
The official language for insurance policies is English but some policies are said to have been issued in Sinhalese and Tamil.
With effect from 1 January 2017, new rules applicable to the placement of reinsurance by local insurers took effect. The main addition to the previous rules is that, if insurers wish to place reinsurance with a related reinsurer, then such reinsurer must have a security rating of at least A from any of the four main ratings agencies. The rating for any other reinsurer remains at BBB, or the equivalent.
The National Insurance Trust Fund secured a rating of AA- from Fitch Ratings in November 2016.
Insurers in Sri Lanka are required to place their reinsurance only with reinsurers which are approved by a regulatory authority of their country of domicile to undertake reinsurance outside of that country. It is also mandated that Sri Lankan insurers may place reinsurance only with reinsurers which have minimum long-term ratings of “BBB” with Standard & Poor’s (S&P) or Moody’s, “B+” with AM Best or “Baa3” with Fitch. These requirements do not apply to reinsurance placements with the NITF.
Under the new risk-based capital (RBC) regime, different levels of risk charge will be applied to local insurers, based on the quality and security of the reinsurers they use. It is understood that the NITF will be treated as the highest level of security and will not, therefore, attract any additional charges.
An insurer is not required to seek special permission to reinsure. Indeed, the 2000 insurance act says that a company may reinsure with any other insurer in or outside Sri Lanka, subject to any terms and conditions which may be specified by the Insurance Board of Sri Lanka (IBSL) in order to ensure that the interests of policyholders and the companies are safeguarded adequately.
Details of treaties are to be lodged with the IBSL, to which the ceding company must furnish information about the reinsurer’s credit rating. The IBSL may ban insurers from placing reinsurance with a particular reinsurer or reinsurers if, after enquiry, it is of the opinion that doing business with such reinsurers would be “detrimental to the national interest”. Certified copies of all cover notes for reinsurance treaties must be forwarded to the IBSL as soon as possible but no later than the end of March of each year.
Since 1 January 2013, a compulsory cession of 30% (previously 20%) of all classes of business within the scope of the following proportional and non-proportional treaties must be made to the NITF:
- fire/property and engineering
- marine hull and cargo
- miscellaneous accident
It is understood that the NITF will also accept 30% facultative cessions on the above-mentioned classes. Certain types of specialist reinsurance such as that for aviation and energy covers are exempt from the NITF rule.
Maximum or minimum retention levels and withholding taxes are not a feature of the Sri Lankan reinsurance scene.
With effect from 1 January 2013, insurers have been required to place their reinsurance only with reinsurers which are approved by a regulatory authority of their country of domicile to undertake reinsurance outside of that country. Minimum long-term ratings are required of “BBB” with Standard & Poor’s (S&P) or Moody’s, “B+” with AM Best or “Baa3” with Fitch. These requirements do not apply to reinsurance placements with the NITF.
From 1 January 2017, additional rules require that if an insurer wishes to place reinsurance with a related reinsurer, then such reinsurer must have a security rating of at least A from any of the four main ratings agencies.
Certain types of specialist reinsurance such as that for aviation and energy covers are exempt from the NITF rule. There are no other entities which can be described as a local reinsurance company.
Brokers, particularly the larger ones with or without international links, tend to concentrate on corporate industrial and commercial non-life business, whilst agents focus on personal lines including motor. In any case, agents say that they prefer to work in life insurance rather than non-life because the rates of commission are more attractive for long-term business.
According to the Insurance Board of Sri Lanka (IBSL), direct placements accounted for 27.38% of non-life premiums in 2015, with agents placing 28.29% and brokers 17.34%. The direct figure is somewhat distorted, however, by the requirement that all government-linked business be placed directly with one of the state-owned insurers.
Several of the largest brokers are owned by companies with interests in vehicle leasing and act, effectively, as in-house brokers for motor insurance related to customers of their parent organisations.
The first price comparison website in Sri Lanka commenced operations in January 2017.
Sri Lanka is not regarded as an earthquake zone and there was no history of earthquakes affecting the island until the tsunami which followed the underwater earthquake in the Indian Ocean off Sumatra at the end of 2004.
The most serious potential problem is cyclones, which may occur during the monsoon period along the east coast, causing damage there and in hilly districts inland. Insured property is affected from time to time.
In Sri Lanka flood follows very heavy monsoon rain, which can overwhelm the drainage systems of most urban areas. Related problems include the absence of a land policy with no proper legal framework for land management. As a result, many flooding problems ensue from the reclamation of marshy land and the encroachment of canal banks by unauthorised building. Many legal matters have to be resolved before these risks can be eliminated. Another problem which encourages flooding is that drains often are not kept free of rubbish.
Whilst flooding often affects rural areas where insurance is less common, there have been significant insured claims in recent years, with especially large losses in May 2016.