Financial Times

Local insurance sector needs effective regulation
By C. S. A. Fernando Insurance Consultant
It is desirable, if not imperative, that an industry or business should be disciplined by an effective regulatory system. That is the way of ensuring, in particular, that the consumer is not exploited. Insurance is a sector where the majority insured are laymen, who hardly ever read the small print in their policies, far from studying the ramifications of the subject.

Following the nationalism of insurance in Sri Lanka under the control of Insurance Act, there was the Controller of Insurance to enforce the statute but he was hardly equipped with the necessary technical expertise to tackle misdemeanours of insurers towards insured, or with the powers to do so.

Grievances of the insured had, therefore, to be contested in Court - the last thing one would have liked to face. In the days before nationalisation of insurance, when the industry was in the hands of the private sector companies, there were the Insurance Offices Committees manned by competent personnel, to lay down the norms for member insurers, who were brought under a common Tariff. Now with insurance once again being liberalised, the Insurance Board of Sri Lanka (IBSL) has been named as the regulatory body.

The IBSL however, would appear to be lacking in the technical know-how in order to deliver the goods adequately, as evidenced by what has already happened -- it had to seek the assistance of the very insurers whom it was expected to regulate. The result was that insurers were even successful in persuading the board to deregulate motor insurance despite opposition from those affected.

Insurers formed themselves into a cartel and went on a premium-hike, with impunity. Not stopping at that, they are now trying to tamper with universally-accepted principles and norms in insurance, by introducing conditions, which are alien to motor insurance, though they may be present in certain other classes of non-life policies.

The "Pro rata Condition of Average" is one such example. That is a clause common in most property insurances, with the exception of motor insurance - and for good reason too. It states that, if on the happening of a contingency insured against, the insured value of the asset is collectively of greater value than the sum insured, then the insured shall be considered his own insurer for the difference, and shall bear a ratable proportion of the loss. Policies in which that condition occurs are identified as 'Valued' policies; but a motor policy is not a valued policy.

Another instance where some local insurers have faltered in their interpretation relates to the assignment of a motor policy. The standard motor policy has provision for the insurer to "repair, reinstate or replace" a vehicle in the event of a total loss arising from a risk insured against.

When such a policy is assigned in favour of a third party, say, a Lessor/owner of a motor vehicle, in keeping with a mandatory requirement under a lease agreement, the endorsement assigning the policy carries the identical proviso, except that, it is expressly stated that "Any monies" (arising from a claim) has to be paid to the "Owner" (the Lessor).

Some insurers, however, have been observed to pay only total loss claims to the owner/lessor, while they arbitrarily tend to disburse partial loss claims to the lessee, merely because the lessee is the insured, from whom they collect the premium. That could, sometimes, be detrimental to the owner/lessor, particularly if the lessee is a defaulter of his rentals.

Yet another irregular practice of some insurers is to misinterpret their own policies in respect of third-party insurance under a motor policy. The Motor Traffic Act (MTA) lays down that an "Authorised' insurer should meet "Any" liability of an insured to a third party victim of an accident.

The standard wording of the insurance policy however, states that the insurer would meet third party claims for which the insured is "Legally" liable. So far so good. When it comes to interpretation of that wording, the insurers insist that the insured or his driver should be convicted in a court of law before they admit liability. They would not accept prima facie evidence of negligence of a driver to meet a third party claim, where the doctrine, res ipsa loquitur (the fast speaks for itself) applies. An example of such a case is where a vehicle crashes into a stationary object such as a parapet wall.

There seem to be some insurers, who lean too heavily on their legal departments to tackle technical problems. It has to be appreciated, however, that insurance Law is a shade different from Delicit law, the latter of which covers offences such as injury to persons and damage to property. One thing that it does not cover is known to be a breach of contract - and insurance is such a contract!

While the above are some of the irregularities, if not shenanigans, relating to operation of motor insurance in Sri Lanka, it is reliably learnt that local insurers, in the cartel, are on the verge of calling for deregulation of Fire Insurance too. If that were to happen that would be disastrous, to say the least.

It would appear that, after much deliberation, the Insurance Board of Sri Lanka (IBSL) had considered it expedient to cause a revision of the Fire Tariff obtaining locally. A special committee appointed for the task is said to have dealt with the matter, to prevent insurers from resorting to cut-throat competition.

Confirmation of the insurer's approval of the revised tariff had been sought by the IBSL but, rather late in the day since the insurers seem to have retracted on the issue. In the meantime, reinsurers abroad are said to be gradually increasing their premium rates in keeping with global trends, though it is observed that rates obtained in Sri Lanka are comparatively low, even as it is. That means that in the event of an unfortunate catastrophe, the reinsurers will think twice about meeting their commitments to the local insurers. It is, ultimately, the insured who will be affected, apart from the insurers themselves.

In such a context the wider scope of the Consumer Affairs Authority (CAA) functioning under the Consumer Affairs Act Number 9 of 2003 which has replaced the Consumer Protection Act Number 1 of 1979 and the rescinding of the Department of Internal Trade and the Fair Trading Commission would appear to be a timely step by the Minister of Consumer Affairs. It is hoped that the Authority, in conjunction with the IBSL will have a more affective check on errant Insurers.

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