Doubts over new insurance fund

Doubts have been cast as to the practicality of the government undertaking the kind of risks it does under the Regulation of Insurance Industry (Amendment) Bill passed June 20, as it will have to raise large amounts of capital to back it up.

The amendments require all insurers to re-insure 50% of their liabilities with the National Insurance Trust Fund (NITF). It will also release the NITF from the Insurance Act No. 43 of 2000. The NITF was established under the 2006 budget to give insurance benefits for government servants.

These details emerged at a meeting this week at the Trans Asia Hotel where Jim Webber, Group Actuary and Economic Capital Director of Aviva plc conducted a workshop on Risk Based Capital (RBC) for the local insurance industry. The topic is of importance today, due to the proposed legislation on increased minimum capital requirement of insurance companies. The current minimum is Rs 100 million and it is proposed to increase it to Rs 1 billion by the years 2012.

“Capital requirements for Sri Lankan insurers are determined according to a system that has worked well for a number of years, but given global developments there are strong reasons for thinking seriously about moving towards a full risk based system that can reflect the complexity of today’s insurance and investment markets” said Perry.

RBC is the amount of capital that an insurer should hold to protect policyholders against negative developments. It is complicated from an assessment of the company’s size, complexity and risk profile.

Perry went on to state that the amount of capital that an insurance company needs depends on the size of the company. If the capital requirement is too low, it could result in the protection of the policyholder becoming compromised and the government, or the government having to bear the cost of compensation. Perry also went on to explain that if the capital requirement is too high, the cost of capital will ultimately be passed on to the consumer, who will have to pay higher premiums and it could also impede the entry of smaller players into the industry.