Salient features of the Insurance Industry Act

The Regulation of Insurance Industry Act, No.43 of 2000 was enacted for the establishment of an Insurance Board (IBSL) for the purpose of developing, supervising and regulating the insurance industry. The object and responsibility of the IBSL is to ensure that insurance business in Sri Lanka is transacted with integrity and in a professional and prudent manner with a view to safeguarding the interest of the policyholders and potential policyholders.

No person can engage in insurance business in Sri Lanka unless such person is registered as an insurer under the RII Act. To be qualified for registration after 12th October 2005, every potential insurer should have a paid up share capital of Rs.100 Million. for each class of business. However IBSL has proposed to increase the minimum share capital in future and to implement ‘Risk Based Capital’.

Registered insurance broking companies function as intermediaries for placing insurance business with the insurance companies. The insurance companies and brokers appoint individuals who have passed pre-recruitment test conducted by SLII, as agents. Howeve insurers may be allowed to appoint ‘any person’ as an agent to facilitate bancassurance etc. in future.

Every insurer who carries on long term insurance business (LTIB) shall maintain a “Long Term Insurance Fund”, and after an investigation is done by the actuary into the financial condition of such LTIB, actuary makes an abstract. If there’s a surplus in respect of participating policies (where the profits of the company is paid as dividends or bonus), available for distribution, insurer can declare dividend to the shareholders, only after paying bonus amounting to 90% of that surplus to the policy holders.

Section 31 of the RII Act deals with ‘reinsurance’ and it has been amended by Regulation of Insurance Industry (Amendment) Act, No.27 of 2007 according to which every insurer who reinsures shall be required to reinsure with the National Insurance Trust Fund Board established by the National Insurance Trust Fund Act, No. 28 of 2006, a percentage not exceeding fifty per-centum as shall be determined by the minister by order published in the Gazette, of the liability sought to be reinsured. Employers if they wish can extend the Workmen’s Compensation Insurance cover to Riot and Strike cover and Terrorism cover.
The Act has statutorily vested upon the insurers to repudiate liability (and the policy will be cancelled) arising under policies of general insurance where premiums relating to such policies have not been paid on or before 60 days from the date on which the premium is payable. According to the IBSL requirements, all insurance companies shall indicate in their policy documents, renewal certificates, endorsements or cover notes in respect of general insurance business a clause to the above effect.

IBSL abolished the tariff on motor insurance with effect from January 2002, tariff on fire insurance with effect from January 2005 and tariff on Workmen’s Compensation insurance with effect from January 2007.

Resident Sri Lankans are prohibited from obtaining foreign insurance policies except for health and travel. Further registered insurers can obtain, if they so desire, foreign insurance cover for their directors and other employees in respect of liabilities arising from the discharge of their duties.

With regard to new advertisements a certificate signed by the CEO must be sent to the IBSL confirming that all the advertisements are in conformity with the provisions of the Act.

Legislature to register ‘loss adjusters’ will shortly come in force. Insurers may be required to be listed on a stock exchange as well in future to achieve better transparency and good governance in the industry.

All the insurers may be required to comply with not only the provisions of the RII Act and Companies Act being a public company, but also with Securities and Exchange Commission Act and Listing rules of Colombo Stock Exchange as well in future.