2014Cambridge Conference Business & EconomicsISBN : 9780974211428

Determinants of Growth in Life Insurance Policies in Sri Lanka

The Case of A Public Limited Company.

Pradeep Randiwela[1]

Professor of Marketing - Department of Marketing

Faculty of Management and Finance

University of Colombo – Sri Lanka

+ 94 718161312

J.P.C.K. Wijerathne

Asian Allians Insurance – Sri Lanka

+ 94 777874330

Tharaka W.B. Hettiarachchi

Business and Economics Faculty,

Monash University – Australia

+61426605912

Determinants of Growth in Life Insurance Policies in Sri Lanka

The Case of A Public Limited Company.

Abstract

Primarily insurance was introduced to Sri Lankan market by foreign firms but later there was greater domestic involvement. Following the transition of economic policy in 1978, the economy along with the insurance industry grew and as of this date there are 16 insurance operators and 15 insurance brokers in Sri Lanka. This paper intends to explore the reasons for the growth of the life insurance industry in Sri Lanka.

The study employed primary research methods in the form of a questionnaire and sample analysis to recognize the factors which has attributed to the growth. The study also analyses prominent literature to consolidate the conclusions that are drawn.

This study has identified and substantiated several determinants which contribute to the growth in the insurance industry such as: Socio-economic factors and Business/organisational Factors. Furthermore, it was understood that the Socio-economic factors was the more noticeable of the two of such as the per capita income contribution to the insurance industry’s growth, business/organizational factors though not obvious like the socio-economic factors plays a critical role in the growth of the industry as it is the positive individual performance of firm has resulted in the collective growth of the industry.

Finally, the essay concludes that it was the combination of these determinants under their respective spectrums that has contributed to the growth of the life insurance industry in Sri Lanka.

Key Words: Insurance, determinants of growth, socio-economic, organizational factors, Sri Lanka

  1. Introduction:

Trade and financial liberalisation policies introduced in 1977 made a remarkable change in the economy and society increasing per capita income from USD$193 in 1978 to USD$2014 in 2008[2]. With the changing economic policy it also opened up the foreign job market which saw a tremendous influx of revenue to the country, this was especially centred on the Middle East as there was a huge demand for unskilled labour in that region which was generated most of the income to the country.

De-monopolization and privatization of certain industries brought new revenue streams for the country, they eliminated certain public sector inefficiencies and competition which was encouraged ensured that firms be profitable as well as economical in its resource utilization. While they also encouraged job creation and job variety to the general public, this implied that more means of earning an income was available to them. Some of the industries that were subject to de-monopolisation include telecommunication, banking, transport etc.This growth in the economy in general was reflected in the insurance industry in particular. The Table 1 illustrates the contribution of insurance to the GDP.

Table 1: Insurance Contribution to GDP(in million Rs)

Premium Income / 2002 / 2003 / 2004 / 2005 / 2006 / 2007 / 2008
Long Term Insurance / 8682 / 10613 / 12518 / 14814 / 17104 / 20729 / 23613
General Insurance / 11599 / 13534 / 17037 / 22410 / 25931 / 31156 / 34553
Total Premium Income / 20281 / 24147 / 29555 / 37224 / 43035 / 51885 / 58166
Gross Domestic Product / 1822 / 2091 / 2453 / 2939 / 3578 / 4411
Total Premium as % of GDP / 1.28 / 1.33 / 1.41 / 1.52 / 1.46 / 1.45 / 1.32
Growth Rate / 20.29 / 19.06 / 22.39 / 25.94 / 15.61 / 20.56 / 12.11

Hence, this study attempts to find out reasons which led to the growth of the insurance industry with regards to life insurance is concerned.

  1. Objective of this study:

The key objective of the study is to explore the reasons for the growth in life insurance policies in Sri Lanka.

  1. Method/s:

The study analyses literature and secondary sources and employed primary research methods in the form of a questionnaire and sample analysis to recognize the factors which has attributed to the growth. The periodicals published by the Insurance Board of Sri Lanka (IBSL) were used to collect data with regards to life insurance policies are concerned.Thereafter the questionnaire, was used among 100 policyholders and 50 potential customers to identify the factors affecting an individual to purchase or consider purchasing a life insurance policy. In addition, in-depth discussions were conducted with Insurance Professionals and Heads of Insurance Companies to identify as to what measures insurance companies employed in promoting and positioning their policies.

  1. Literature review:

Carson and Dumm (1999) staterelationships between policy performance and characteristics of insurance depends on lapse rate, insurer expenses and investment yield. Beck and Webb (2002) emphasise the importance of life insurance companies as part of the financial sector has significantly increased over the past decades, both as provider of important financial services to consumers and as a major investor in the capital market. However, they observe a large variance in life insurance consumption across countries, which raises the question of its determinants.

Meanwhile Sen (2008) states the insurance industry, in most of the Asian economies, ASEAN and SAARC economies in particular, was publicly owned and remained isolated from participation of either domestic private insurers or foreign insurers or participation of both. But, regulatory reforms and policy changes in the ASEAN economies during the post-financial crisis period and the process of economic liberalization in some of the SAARC countries and China led to phenomenal changes in the growth pattern of the insurance industry in these economies.

As per the Insurance Board of Sri Lanka (IBSL) (2008), the overall gross written premium from long term and general insurance businesses added up to Rs.58,166 million showing an annual growth of 12.11%, when compared with previous year’s total of Rs.51,885 million and an annual growth of 20.56%. The decline in the premium income growth during the year has resulted in a lower GDP contribution of 1.32% when compared with the previous three years, while Total assets of insurance companies as at 31 December 2008 was Rs.155,994 million, which shows an increase of 15.7% when compared with the previous year’s total of Rs.134,876 million.

Perera (1999),identifies5 best practices that were persistently present in the management of successful services sector companiesnamely: Lifetime Partnership with the Customer, Dedicating Skills to the Organization, Building Affective Commitment, Now beforeHow, and Well Orchestrated Controls.

  1. History of the Insurance Industry Sri Lanka:

The first insurance policy holders could well have been the Chinese; they employed certain policies in order to reduce the risk of loss of cargo on their voyages.The Roman Empire too employed insurance for its soldiers as it compensated the families of soldiers who lost their lives in battle while it is also said that life insurance first began in securing the lives of individuals who took part in early sea voyages. English Insurance began in 18th century, this was tied closely with the growth London coffee houses.

Insurance was first introduced to Sri Lanka by foreign firms in the 1930’s and later on domestic firms too started their own insurance operations. The standout firms among these domestic insurance firms were Sri Lanka Insurance Company and C.W.E Insurance Company and along with the foreign operators they engaged in selling General Insurance as well as Life Insurance policies. In 1961 Sri Lankan governmentby act in parliament brought all insurance companies into normal company law.

It was also in 1961 that under parliamentary Act No.2, The Insurance Cooperation Act, sought to establish an Insurance Cooperation in Sri Lanka and by 1962, The Control of Insurance Act, Act No. 25 was introduced and passed in parliament. Under Act No. 25 these insurance companies were allowed business operations but were prohibited to introduce new insurance policies to the market and thereby the complete control of the insurance market were under the government.

In January 1962, under the directive of Act No. 2, the Sri Lanka Insurance Cooperation was established by acquiring the assets and ownership of the C.W.E Insurance Company. And afterward up to 1980 the insurance market was monopolized by Sri Lanka Insurance Cooperation. However, after 1978 liberalised trade policies facilitated the growth of the industry paving competitive business opportunities. By 1980 the National Insurance Cooperation then established several principal agents to supplement their business value. Some of these agents were;

  • Ceylinco Ltd.
  • Mercentile Credit Ltd.
  • James Finlay and Co Ltd.
  • Aitken Spence and Co. Ltd
  • Whittalls Boustead Ltd.
  • P & I (Protection & Indemnity)

In 1987 legislation was brought to privatise insurance operations in Sri Lanka under Act No. 23, Public Companies Act of 1987. As a result Sri Lanka Insurance Cooperation and National Insurance Cooperation were stipulated under the Companies Act but the government retaining 100% control of operations.

It was also during this period that some companies which acted as principle agents to National Insurance Cooperation broke free to act as insurance operators on their own or merged amongst each other to do so. One of the firms which started operations on their own was Ceylinco while Union Assurance was a company which was brought about after the merger between several agents. Also several other foreign operators too started up operations in Sri Lanka once again.

Currently there are 16 Insurance operators in Sri Lanka and 15 broker companies in Sri Lanka, given the complete privatization of the insurance industry it was deemed necessary that a regulatory authority to be present thereby in 2000 the Insurance Board of Sri Lanka was formed under Act no. 43, Regulation of Industry Act of 2000.

  1. An overview of the company:

Asian Alliance Insurance PLC (AAI PLC) is a composite insurance company offering both Life and Non-life insurance solutions to individual and corporate clients. Asian Alliance Insurance began its operations in the year 1999 with Non-life Insurance. Commencement of Life Insurance operations was in the year 2001.

Asian Alliance Insurance is a public quoted company with a paid up capital of Rs. 250 Mn. Its major shareholders are Asia Capital PLC, Richard Pieris Company Limited and Vallibel Investments. Asian Alliance Insurance is currently operating in a very competitive market consisting of 16 players. The company has positioned it self both in the industry and in the minds of consumers as “the professional insurance provider with tailor made solutions...” (Asian Alliance Insurance Annual Report 2008)

Asian Alliance Insurance at present holds the 5th position in the market with regards first year premium. It also enjoys the highest annual average policy value of Rs. 36,000/= and the highest retention rate of 70% of first year retention and 52% for the second year retention in the Life Insurance market. In the year 2005, for the first time since it began operations, AAI PLC made a net profit of Rs. 26 Mn, whilst declaring a reversionary bonus to its Life Policyholders and which has continued to date.

The current staff strength of Asian Alliance Insurance is 220, supported by a field force of approx. 450. The day to day operations of Asian Alliance Insurance is monitored by the Chief Executive Officer and the executive committee consisting of GM – Life & Technical, GM – Life Sales & Distribution, GM – Non Life and GM – Finance.

6.1.Life Department Policies, Recorded growth of Asian Alliance:

Life Business within Asian Alliance PLC recorded a continued growth throughout the year 2008 amounting to 9% rise in sales compared to 2007 and its customer portfolio amounted to 26776 policies as of 2008 (Annual Report 2008).The policies of Asian Alliance include, the following information has been compiled upon considering the information present at

6.2.Alliance Family:

This policy focuses on family protection, it encompasses areas such as, Health Care, Guaranteed Family Income, Guaranteed Maturity Values with Increasing Bonuses, Loan facilities based on your calculated cash values, extended free Life Cover for a plan designed for over 10 years

6.3.Retirement Plan

Aimed at individuals who are interested in investing for their future, the policy hopes to attract customers through issuing a substantial sum at maturity which can claimed through multiple avenues through a lump sum, re-investment, converted to an annuity to draw periodical sums and so on.

6.4.Child Protection

The Child Plan Asian Alliance in itself aims to be a protection policy for dependents, in this case the child. It carries immediate payment of credit assured in case of death as well as receiving bonuses upon policy maturity.

6.5.Loan Protection

Loan Protection is enacted in case of an individual failing to meet debt due to expiration or total disability. Due to the risk being covered on a capital reducing basis, the beneficiary will have the benefit of protecting their mortgage at the lowest premium in the industry

6.6.Individual Protection

While being the oldest form of insurance that is present, this policy covers a variety of unfortunate tragedies that could take place. The sum assured is paid on the death of the life assured during the term of the policy. The Alliance Term Plan also has the advantage of being able to accommodate rider benefits at a very nominal premium.

According to figures obtained from the company, it can be understood that there is a recorded growth in the amount of policies that Asian Alliance holds. There is also a recorded growth in the distribution network of Asian Alliance Insurance PLC.The sales force too has increased in strength, from 150 to 450 personnel approximately.


  1. Discussion:

As insurance coverage is estimated to be less than 10% of the population, there is considerable scope for growth in the industry. The insurance sector consists of 16 companies, of which 11 companies are composite insurers engaging in both long-term and general insurance business, while 3 companies engage exclusively in general insurance and 2 companies’ conduct only long-term (life) insurance business. Five companies have collaborations with foreign insurance companies. In addition, there are about 50 insurance brokers and about 25,000 insurance agents. The insurance industry is highly concentrated, with two companies accounting for about 66% of the total industry assets, while the largest five firms accounted for 94% of total insurance assets. Premium income for long-term insurance and general insurance grew by 14% and 11% in 2008, indicating moderation when compared with the previous year. While the total assets of insurance companies increased by 15% to Rs. 155 billion at end 2008.

Upon considering the statement above by the Central Bank (CB), it is understood that the number of insurance policy holders has risen moderately compared to year 2007. It is also safe to assume that such growth is recorded only after the liberalization of economic policy in 1978 thereby encouraging competition in the insurance industry. Nonetheless, it is incorrect to assume that growth within the industry was entirely dependent upon competition but was also subject to influence from other macro as well as micro economic indicators directly or indirectly. It is upon clear identification and analysis of these said indicators that we can draw conclusions as to the reasons for growth in the insurance industry.

It is understood that one’s capability to secure a Life Insurance policy depends greatly on the level of disposable income that individual possess. Thereby income or specifically disposable income is a factor which influences the quantitative aspect of insurance policies being sold; this fact can be deliberated upon analyzing the per capita income of the country.

Also upon the closer inspection of expenditure of consumers on goods and services would give an idea as to why there is a growth recorded in insurance industry.

We can also consider the behavioural pattern of inflation with regards to the topic under discussion and also the policy framework employed by the government more or less influences the industry.

This chapter then will look into the contribution that these factors had been and will critically analyse them and when ever relevant relating them to Asian Alliance.

7.1.Socio-Economic Characteristics affecting Industry Growth

One of the primary factors that are attributed to the growth within the insurance industry is the rise in the per capita income of the country. This persistent rise in per capita income is due to multiple factors, one of which is the rise in employment which in turn has increased the number of individuals who are obtaining an income. It is to be noted that there is a steady increase in employment in the Public Sector, as shown in Figure 2.

Also there has been a steady increase in foreign employment over the years contributing significantly to foreign exchange earnings, the total foreign remittances received during the year 2008 amounted to US dollars 2,918 million, an increase 16.6 %, compared to US dollars 2,502 million received during 2007 as recorded by the Central Bank, The following chart signifies the this fact.

Source:Sri Lanka Central Bank Reports 2004, 2005, 2006, 2008

Apart from foreign employment, foreign exchange and public sector employment which contributed positively to the per capita income a rise in employment in Agricultural, Industrial, Manufacturing, Construction and other sectors also positively increased the per capita income of Sri Lanka. This is more elaborated in the table below;

Given these facts, it is quite obvious that there is a rise in the per capita income of Sri Lanka, what this meant was, quite literally that individuals now had more disposable income and they could fulfil their desire to secure a life insurance policy if the chose to. Of course this depends greatly upon how a life insurance product reflect upon the need of the customer and how well it is marketed by an insurance company, this fact is looked into in the following chapter.