Capital market must focus on insurance sector to spur growth: NITF Chief

• Expresses confidence CSE has capacity to absorb additional Rs. 37 b if insurance companies double investments in listed equity 
• Highlights grey areas, suggests methods to improve insurance industry size and penetration levels
  
   

By Charumini de Silva

A top industry expert last week outlined insurance as a potential sector the capital market must focus on for future growth asserting that it will be a win-win proposition.

“If insurance companies can grow bigger and enhance their participation in capital markets, there is definitely potential to increase allocation in equity from 7% to 14% which results in an additional investment of Rs. 37 billion ($ 211 million),” National Insurance Trust Fund (NITF) Chairman Manjula de Silva said last Friday. 

According to him as per insurance sector investment allocation as of 1Q 2019, allocation to equity was 7% with an investment portfolio of Rs. 508 billion. Allocation on Government Debt was 43%, Corporate debt was 21%, and deposits were 19%.

He made these remarks delivering the keynote address at the Capital Market Awards 2019 organised by CFA Society Sri Lanka.  

Noting capacity of Colombo Stock Exchange (CSE) to absorb such an injection of inflows from the insurance sector is another concern as the process will have to be a very gradual, he however stressed that at current price levels; this is the best time to start.

“Insurance industry’s level of participation in capital markets is still quite low due to a range of reasons such as accounting treatment and regulatory framework, poor returns from stock market, lack of suitable instruments, lack of liquidity in secondary markets, making it hard to exit, conservative outlook of fund managers and attitudes of Boards,” de Silva said.

Engaging with accounting profession and regulators to look at how disincentives for long-term investment and deployment of funds into capital markets can be addressed, requesting Central Bank and Finance Ministry to ensure continuous supply of long-term risk-free instruments, facilitating the introduction of new capital market instruments such as Real Estate Investment Trusts (REITs) as well as infrastructure bonds, absorbing the services of international advisory firms to take advantage of overseas investment opportunities and educating Boards on importance of taking a long-term view on investments and risk/return trade-off were suggested by de Silva to mitigate the low equity investments in the capital market.

Pointing out that insurance penetration in Sri Lanka is as low as 1.24% of GDP, de Silva said low income level, lack of awareness or understanding, lack of trust, mismatch with potential target markets, consumerism and dependence on State for compensation were key issues that hampers the growth of the industry.

He recommended to build awareness and trust through sustained industry action, collaborate with other financial intermediaries to promote saving over spending (need for financial planning), greater attention to develop non-traditional distribution channels to reach out to target markets with high potential and partner with Government to piggyback on State-sponsored insurance schemes to improve the insurance industry size and penetration levels.

“By enhancing participation in capital market it will help insurers to boost their returns to both policyholders and shareholders as it also provides a closer match with duration of liabilities capital markets. In terms of capital markets it will increase demand for market instruments and improve market stability as well as for better corporate governance. Therefore, I would say it’s not too late, let’s start today,” de Silva stressed.