Insurance sector liquidity and capital improve despite pandemic

Sri Lanka’s insurance sector’s capital adequacy and liquidity — the two key performance indicators measuring the strength of the sector — have been improving, defying the temporary setback caused by the pandemic-induced business disruptions during the second quarter, last year, according to the industry data seen by Mirror Business. 

The risk-based capital framework implemented from January 2016, suspension of dividend payments to ride out the worst of the pandemic, relief afforded to policyholders by payment deferrals for three months and the quick return of normalcy since the end of lockdowns on the long-term insurance business, have all cushioned both the capital and liquidity profiles of the sector. 

For instance, the capital levels of both long-term and general insurance sectors have been on an increasing trend, while the total capital adequacy ratio has stayed well above the regulatory minimum requirement of 120 percent, under the risk-based capital approach.

For instance, the capital adequacy level of the long-term insurance business is at slightly above 300 percent, while the same for the general insurance business is around 250 percent, both indicating an increase from the levels seen in 2019 and substantially above the regulatory-mandated 120 percent levels. 

Under the risk-based approach to capital, the adequacy of the capital is measured by taking the available capital relative to the risks inherent in liabilities and the adequacy of such capital to absorb unforeseen losses. 

The data also showed that the liquidity ratios in both general and long-term insurance sectors have been on an increasing trend, albeit a slight slippage was recorded in the first quarter of 2020. 

The decline in claims during and after the lockdowns may have also played a role in the improvement in liquidity in the sector, as the general insurance segment in particular experienced a substantial drop in claims, due to the reduction in incidents covered by insurance, as a result of the economic lockdowns and mobility restrictions.  Meanwhile, the sector profitability as measured by the return on equity (RoE) has also trended upwards, as the RoEs have risen to 14.6 percent and 16.2 percent, respectively for the long-term and general insurance sectors, from 11.7 percent and 12.0 percent, respectively for the two segments in 1H19.

The higher RoEs in the sector amid rising capital levels demonstrate faster increase in earnings, as there was a faster uptake of insurance policies, particularly life insurance policies, after the pandemic.

The companies also turned aggressive in their promotional and marketing campaigns to sell policies with health protection covers and pension schemes, citing the increased risk to people’s lives after the virus scare.