ECONOMYNEXT – Sri Lanka’s AIA Insurance is strongly capitalized above the industry, official data shows, with officials saying its prudent investment approach and practices provide policyholders with stability through economic cycles and shocks like Covid-19.

In 2015, industry watchdog Insurance Regulatory Commission of Sri Lanka (IRCSL) brought in a risk-based capital regime replacing an earlier rule-based one.

The principle behind the capital adequacy rule is to ensure insurers are solvent enough to honour claims as they fall due.

Domestic insurers started to fully comply with the risk-based capital (RBC) regime in 2016 and must maintain a minimum RBC ratio of 120 percent.

Life insurers that report an RBC below 160 percent must provide a written submission to the regulator with a plan to improve capitalization.

AIA Sri Lanka reported the industry’s highest capital adequacy ratio at 655 percent according to the last published regulator data for 2018, improving from 595 percent a year earlier.

State-run Sri Lanka Insurance Corporation reported the second-highest capital adequacy ratio of 440 percent up from 432 percent in 2017.

“AIA Sri Lanka’s high capital adequacy ratio should provide comfort to stakeholders that the company is able to stand strong in the face of external shocks.  The capital adequacy ratio of over 5 times the stipulated regulatory minimum is a reflection of the capital that shareholders are maintaining within the business and of the prudent investment strategy that has been in place for many years” explains Gavin D’ Rosairo, Chief Financial Officer at AIA Sri Lanka.

“We have an investment policy that ensures significant exposures in government securities and high investment-grade debentures.  Credit quality is of utmost importance and therefore we ensure that we invest in A and above instruments as rated by Fitch Ratings.  We don’t invest in shares from our universal life fund for this same reason.”

Life insurers, especially those more exposed to the middle-to-low income segments, should see a spike in surrenders given the loss of income due to the covid-19 impact, though medical insurance claims would be lower during the lockdown, Asia Securities Research said in a June 2020 note.

“We also expect a significant slowdown in group insurance, downsizing in policy ticket size, as an increased number of corporates face business continuity concerns,” the report said.

“A recent industrywide push into group life policies saw an uptick in health insurance claims, across the board.

“But, with the COVID-19 scare reducing hospitals visits and admissions, life insurers will see a decline in claims in (the first half of 2020).”

AIA says it used digital channels for policyholders to make claims as well as premiums.

“This helped us to pivot quickly during the lockdowns and ensure continued service to our policyholders,” D’ Rosairo said.

According to Asia Securities, life insurance investment incomes will cushion the negative impact on operational cashflows. “As such, we still expect companies to return a profit, albeit affected, given the cash-rich nature of the business,” Asia Securities said.

For D’ Rosairo, the covid-19 crisis presents an opportunity for growth.

“It takes a crisis for people to realise the importance of having health and life insurance. Several insurance companies have digital channels but what will matter now is how effectively technology will be used to generate more awareness, increase accessibility, and generate growth,” D’ Rosairo said.

(COLOMBO, 27 July 2020)