Midsummer madness in insurance business

The proposal to make it mandatory to transfer 50 percent of reinsurance business to the new National Insurance Trust Fund led some industry officials to call it 'midsummer madness' as the threat of most re-insurers pulling out of the country loomed large.

The insurance industry head honchos met on Thursday to discuss the impact of the budget proposals and clarify some issues from Insurance Board Chairman Gamini Wickramasinghe this week.

"We will make representations to the Insurance Board Chairman and see where it gets us," Ramal Jasinghe, CEO Asian Alliance told The Sunday Times FT.

Lasinee Seresinhe, Director General Insurance Board said that she together with Wickremasinghe will meet the industry heads sometime this week.

Some industry analysts said that it is a good thing that such a percentage of money does not go out of the country, but at the same time there are questions raised about whether the state should be accepting such a huge risk. "When 50 percent of reinsurance is transferred to the National Insurance Trust Fund the government undertakes 50 percent of the risk. Can they take on another tsunami?" an industry source asked.

He said that with such a highly competitive industry where there is a lot of undercutting, many reinsurers are not happy, because their margins will shrink considerably.

"Whilst it is a good thing from the country’s point of view, that some of the money that go out of the country every year will remain in the country as a result of the proposal there are some concerns like will a government controlled fund management be able to give the efficient service that established reinsurers are providing. If not, it will affect the efficiency of the entire industry and the consumer will be the ultimate loser," Nalaka Godahewa, CEO Sri Lanka Insurance said.

He said it is doubtful whether the fund has sufficient funds to manage a catastrophe. "For example, if something like the tsunami, attack on the petroleum facility or an airport attack happens how fast can the claims be settled when all these money has to come through one source?"

He added that it is too ambitious to start with a 50 percent mandatory requirement. "This essentially means that the government is undertaking 50% of the country's risk when even a country as big as India keeps less than 20 percent within the country," he explained, adding that most of the insurance companies have already finalised next year’s reinsurance contracts. "If they are to go back to reinsurers with 50 percent less business, what would be the business impact of all these negotiations?"

Godahewa also added that Sri Lanka being a market where a lot of price undercutting takes place most of the leading reinsurers are already losing interest in the country. “We are not a big enough market for them to hang on to. If we reduce the business further by 50 percent, there is a concern that some of them will leave," he said.

The insurance industry is annoyed the government didn’t consult them beforehand. "The government should have consulted us," Jasinghe said.

An insurance law expert said that insurance firms are not in favour of the new proposal because the outflow of funds by reinsurer premiums has been significantly lesser than what was received by way of reinsurance claims and commissions. "The CEOs do not see the point in the budget proposal due to these reasons," he added.

"If they think that this is an easy source of funds such as the riot fund, which has been very profitable for the government, they are sadly mistaken," Chandra Shafter, former Managing Director, Janashakthi Group said. He said that taking into account the disasters by the tsunami and the huge payouts by the reinsurers, the losses cannot be covered for the next 10 to 15 years. "Apart from this, the government has imposed some rating standards for the reinsurers. I believe that the country's sovereign rating is below this standard. Therefore it is a negation of what the state is preaching to the private sector, if they plan to impose such a standard," he said.

The budget proposals also expect insurance businesses to treat their life insurance and general insurance separately for tax purposes. This means that the companies cannot set off their losses in the general insurance with the profits of life insurance. This will increase the tax burden of companies such as Asian Alliance and other related companies who make temporary or permanent losses on either life or general insurance," S.C. Securities said in a report.