IBSL to separate life and general insurance
Insurance regulators are gearing to separate firms with life and general insurance into two different companies, in a bid to make them more transparent, amidst opposition from the industry.
“This is to keep in line with the trends in the rest of the world. Also there is a growing need to have a clear line between the assets in the company and the liabilities backing these assets for shareholders as well as the regulator,” an Insurance Board of Sri Lanka (IBSL) source told The Sunday Times FT.
“In the life fund, it takes time to build profits or reserves for profits, because the life premiums go to the life fund. The non life or general fund has operating profits of the insurance company, after paying reinsurance charges,” the source clarified.
“The regulator felt and it actually happened that some companies transferred their non-life profits to life funds.”The source said when a company grows, it would result in a huge life fund, because it grows and increases its reserves. “It has been found that when the general insurance or non-life insurance is not making any profits, some firms transfer their life fund profits to general insurance fund to carry out their day to day operations,” the source said. “When there are two firms this cannot happen.” The source explained that in insurance firms, there are liabilities namely general reserves, investments out of shareholder capital, investments in long term funds and investments in technical reserves.
“There should be assets to back these liabilities and that is why IBSL is trying to separate the companies, because at any point in time if there is a risk of liquidation in an insurance firm, the assets and liabilities should be identifiable,” the source further said, adding that the law is being drafted. However, some insurance firms are concerned about this decision. “The question is what is IBSL trying to achieve by doing this. It is not very clear whether the objective has been clarified to the industry or whether IBSL is merely following the trends in other countries,” an industry source pointed out. However he noted that IBSL is trying to make sure that the customers get the right attention and their interests are safeguarded, it probably is the right thing to do.
“But it is clear that IBSL has not looked at the business impact in some players in the industry who are operating in a highly competitive market, who with this decision will have an added burden with additional cost,” he said.
Jagath Alwis, President Insurance Association of Sri Lanka (IASL) told The Sunday Times FT that IASL is not in favour of this move. “It is mainly because the IBSL has still not had a proper dialog with IASL regarding this issue. We are unclear as to why IBSL is trying to do this,” he said.
He added that if the insurance firms are separated in this manner, the companies will almost double. Presently there are 16 insurance firms in the country. Alwis pointed out that IBSL does not have the manpower to monitor nearly 30 insurance companies.
“If this is done, the long term policies such as the life insurance policies need to be transferred to a new company and there are many legal implications when doing this. In the Insurance Act itself it is said that policyholders cannot transfer their policies to another company,” he explained.
He also noted that in most of the firms, some agents handle both life and general insurance together, but in case insurance firms are split, a single agent cannot be employed by more than one firm, according to insurance law. “The agent will have to give up one, which will affect their income and this may lead to trade union action also,” he said.
He pointed out that there are various expenses that are shared between life and general sectors. “If you split them this cost will be duplicated. Ultimately the cost will have to be borne by the consumer and this decision will be against the interest of the consumer,” he noted.
However the industry analyst noted that when you take the fundamentals into consideration, it is the right thing to do with regards to safeguarding the consumers. “Insurance companies need to have enough funds to back the life and general insurance claims, but it should be done gradually. If needs to be done in the longer term and there needs to be more clarifications from the regulator,” he noted.
Alwis when asked whether it is not good practice to separate the life and general in order for transparency and for both policyholders’ and regulators, to see that life and general insurance assets are separated, Alwis denied this vehemently saying, “That is nonsense. Life and general assets are separated even now. It is the regulator’s job to se whether funds are transferred from life to general reserves. That is why the regulator is there.”
“Also why is the regulator looking at the liquidation of companies. They need to see it positively to develop companies and to make sure that insurance firms are strong,” he added.