Insurance industry veteran says outlook bleak in low rate regime

By Dilina Kulathunga
Insurance industry veteran and the Janashakthi Insurance PLC Deputy Chairman Chandra Schaffter gave a bleak outlook for the country’s insurance industry in the post-split, low interest rate environment.
According to him the splitting of the composite insurers as life and non-life insurers will further weaken the industry and lower interest rates will also dampen industry growth.
Speaking in detail about the insurance sector in the low interest rate regime prevailing currently, Schaffter said the industry, in particularly the life segment, would get badly affected.  
“Because when the interest rates are low, the returns to policy holders become low. So it becomes less attractive to the policy holder,” he noted.
Insurers earn income by investing the policy holders’ funds in interest rate bearing assets such as government securities, corporate debt, bank fixed deposits etc. But when the interest rates fall, this income naturally declines.
Further, the insurers are required by law to invest 30 percent of their assets in the government securities of which the returns have halved from last year. One year treasury bill fell 37 points last week to 5.89 percent.
However the Central Bank Governor holds a different view. Asked if the insurance sector growth is hampered with low interest rates, Ajith Nivard Cabraal argued otherwise saying, “All stakeholders agree that low inflation and interest rates help investment and growth.”

Meanwhile an independent research arm of Capital Alliance group, CAL Research forecasted a 16 percent compound annual growth rate in 2018 supported by rising income levels. “Further, the low interest rate environment is expected to accelerate life segment growth as investment products become more attractive,” they also commented.
At present Sri Lanka’s life insurance penetration is woefully low at 0.48 percent of GDP (based on the Gross Written Premiums) and Schaffter believes that penetrations levels could not be raised unless life insurance policy is made mandatory for every individual.
“You don’t have the money to spend on life insurance and medical insurance. Life insurance (for Sri Lanksns) takes very low priority. Our economy does not lend itself to place extra money in hands of the bulk of our people to take out insurance. But they are the people who need insurance the most because this is the most vulnerable category,” he opined.  Meanwhile, it is estimated that about 40-50 percent of the life insurance policies lapse in the first year of the policy.