New capital rules for insurance companies are expected to spur consolidation within the industry apart from improving soundness, according to the Central Bank.

“To improve the financial strength and soundness of insurance companies and to promote the consolidation of the industry, the IBSL also proposes to increase the minimum equity capital of insurance companies from the current level of Rs. 200 million to Rs. 250 million for each type of insurance business in 2008,” the Bank said in its 2007 Annual Report released recently.

The Report also noted that the insurance industry recorded solid growth in terms of premia and assets in 2007.

The insurance sector accounts for about 3.1 per cent of the total assets of the financial system. As insurance coverage is estimated to be less than 10 per cent of the population, there is considerable scope for growth in the industry.

The insurance sector consists of 15 companies, of which 11 firms are both life and general insurers, while 3 firms are general insurers and 1 firm is a life insurer. Five firms have collaborations with foreign insurance companies. The insurance industry is highly concentrated, with two firms accounting for about 70 per cent of the total assets of the industry while the largest five firms accounting for 95 per cent of total insurance assets. The total assets of insurance companies grew by 14 per cent in 2007. General insurance premia rose by 23 per cent while life insurance premia increased by 21 per cent during the year. The overall profitability of the industry is expected to be sustained at a level similar to the previous year, the Central Bank said.

It also noted that soundness of insurance companies had improved in 2007.

“The solvency margin is the main indicator to measure the soundness of insurance companies. New solvency margin requirements for the general insurance business came into effect in 2007. All insurance companies were compliant with the solvency margin requirement for general insurance, except for two companies, which were marginally below the requirement. All life insurers met the solvency ratio,” the Bank added.

The capital levels of insurance companies also increased during the year. Four insurance companies have obtained ratings on their claim paying ability from a local rating agency in 2007.

The regulatory framework of the insurance sector is being strengthened. The insurance regulator, the IIBSL has initiated action to conduct risk based supervision of insurance companies based on the CARAMELS rating system.

Amendments to the insurance law are being finalised. The legal framework relating to prudential regulation and supervision will be upgraded with the proposed revisions of the Regulation of Insurance Industry Act. The powers of the IBSL with respect to the stipulation of capital requirements, making rules and determinations, and enforcement will be strengthened. The “fit and proper” test for directors of insurance companies and brokers and the registration of loss adjusters will be a requirement. The appointment of institutional agents will be introduced.

The other important changes will be the requirement that life and non-life companies be separately incorporated within a period of three years and the listing of insurance companies on the stock exchange within a year.