With the conclusion of Insurance Awareness Month, Chandana Aluthgama, Treasurer of the Insurance Association of Sri Lanka, one of the leading bodies behind the organisation of the events, programs, and activations that make up the month of September, discussed his views on several aspects of the industry, including penetration, value, recruitment, and challenges
Q: What is the role of IFRS 17?
IFRS 17 is an International Financial Reporting Standard that was issued by the International Accounting Standards Board in May 2017. Under the IFRS 17 model, insurance contract liabilities will be calculated as the present value of future insurance cash flows with a provision for risk.
 |
SLIC CEO Chandana Aluthgama
|
The new insurance contracts standard, IFRS 17, aims to increase transparency and to reduce diversity in the accounting for insurance contracts.
The changes could significantly affect the insurance industry in profitability patterns, volatility of financial results and equity, and the level of transparency about profit drivers and equity levels.
E.g.: How does IFRS 17 define an insurance contract? An insurance contract is a contract under which one party – the issuer – accepts “significant insurance risk” from another party – the policyholder.
As per IFRS 17 concerns, the issuer agrees to compensate the policyholder “in the face of a specified uncertain future event- the insured event – adversely affects the policyholder”.
Q: What is the current level of insurance penetration in the country?
Overall, 1.24% (Insurance Premium as a percentage of GDP). Life, 0.54%. Non- Life, 0.70%. This data is from the IRCSL Annual Report, 2018.
Q: Why is there need for insurance, and what are the risks that threaten the uninsured?
68% of economic losses caused by natural catastrophes over the past decade were uninsured. In terms of Asia specifically, the mortality protection gap stands at $ 67 trillion as of 2018. The size of Asia’s health protection gap accounts for 14% of the average annual household income as of 2017.
Q: Why do people not buy insurance? Could affordability be one of the reasons? What can the insurance industry do about it?
There are multiple reasons why people don’t purchase insurance:
- Price: One barrier to buying insurance is the price. Many consider it too expensive in the face of more pressing needs in their current budget. Paying for the basics (e.g., housing, food, and utilities) takes priority over life insurance; some value over end of life expenses.
- Misunderstanding: Many people have incorrect information on what coverage would actually cost. Young adults assume a much higher price than those who are older. That said, the costs tend to be only a couple of hundred dollars in difference in terms of life insurance.
- Priorities: When faced with decisions about purchasing life insurance, many opt to save for retirement first. Others choose to prepare for a premature death, to plan for the funeral, or determine the disposition of their estate.
- Culture: Culture plays a major role when it comes to decision-making of unsought nature of a product category such as insurance. People purchase insurance because they see it as a mandatory need in the face of any negative outcomes in life. A majority of the Sri Lankan society and family units are still dependent on each other. People do not focus much on risk management, risk transferring mechanisms, and the need of covering protection gap in terms of life and health. This has been further caused due to the fact we take these risks for granted. People tend to spend for many unnecessary goods and services in their day-to-day life, while keeping insurance as the last option.
- Demands: For many, thoughts of life insurance don’t enter their minds until after they’ve had kids, a time when every decision begins to be taken more seriously. However, the increased costs that come with having children may mean that life insurance takes second place again.
- Difficulty: Limited understanding and pressing obligations leave people paralysed, thus they make no choice. Trying to decide whether they should get term life insurance, permanent life insurance, or one of the numerous variations can leave them in a quandary. Most people have no idea how much life insurance they might need, let alone decide on which type to get.
- Distrust: Insurance companies do not enjoy a great reputation. This lack of trust has the potential to put people off the idea of acquiring life insurance.
- Discomfort: When asked to think about end-of-life planning, many people choose to do nothing because such thoughts make them uncomfortable. For some, trying to decide what type of life insurance they should buy falls into the same category, and provokes the same feeling of discomfort, meaning people just won’t do it.
- Good health: Those who are young tend to see themselves as healthier and more fit, and enjoy a sense of indestructibility, as death seems so far away. They fail to realise that being young and healthy makes them more likely to get better life insurance, whereas aging and other health problems that may arise later make it harder.
- No need: Some people won’t buy life insurance because they don’t have dependents. When you’re young, you’re likely to make less money, but you’re also less likely to have as many demands on your earnings. If you decide to prioritise the expense then, you become used to it and make financial decisions with it already priced in.
Q: What challenges come in the way of recruitment in the insurance industry and what solutions would you suggest to counter these issues?
Among the challenges faced in the industry are:
- Selecting the right people in terms of attitude, knowledge, competency and capabilities.
- Knowledge gaps between academic exposure and industry applications.
- Specialising in a specific area and narrowing down one’s approach when it comes to working in multi- discipline areas rather than multi-tasking roles. E.g. underwriter vs. claims officer, etc.
- Lack of open innovation culture, and due to this, the industry doesn’t attract much talent from Generation Z and segments of the Millennial generation.
- The industry’s inherent culture is not in the position to compete with companies with open innovation culture such as telco, digitech, and fintech firms. Open innovation culture would offer much more benefits than the insurance industry, due to its business structure and model.
- E.g., flexible working patterns, the open door approach, innovation and critical thinking, etc.
- Solutions to counter the above drawbacks/challenges:
- Closely work with academic institutions and universities in order to update and streamline the courses and academic qualifications, which should be aligned to modern industry practices.
- Much more involvement and contribution towards career guidance and professional orientation projects.
- Encourage open innovation culture within the industry.
- Re-define the business structures in order to attract a talent pool rather than lose heads.
- Encourage and attract multi-discipline and multi-tasking business structures, processes, and models.
Q: What is the ideal methodology to follow in order to ensure employee retention?
In my opinion, the ideal methods would be:
- Sustainable business succession plan.
- Acceptance of Human Capital Development as a strategic approach rather than an operational process.
- Encourage performance driven culture within the industry.
- Establish code of conduct and encourage ethical practices when it comes to headhunting.
