Unsatisfactory conduct of insurance regulator

Three months ago, at a session of the Committee on Public Finance (COPF), its Chairman Dr. Harsha de Silva slammed the conduct of Sri Lanka’s insurance watchdog – the Insurance Regulatory Commission of Sri Lanka (IRCSL) – over its apparent failure to address serious market distortion by the premier State-owned insurance provider – the Sri Lanka Insurance Corporation (SLIC). 

As per the regulations of the insurance regulatory body, insurance companies in the country were required to separate their life and general insurance businesses before 1 January 2015. However, even though private insurance entities complied with the directives of the IRCSL, the SLIC did not fulfil the requirement imposed by the Commission close to a decade. It was only last year SLIC finally segregated its life and general insurance businesses into two separate entities. Interestingly, no penalty had been imposed on the State-owned insurance entity by the regulator despite the obvious violation of the rule by the former. 

As per the COPF Chief, the regulator had not adequately explained the selective enforcement of the rule during the proceedings. In an obvious instance of partiality towards the Government ownership of SLIC, the Regulation of Insurance Industry (Amendment) Act No. 23 of 2017 exempted SLIC from being listed in the stock exchange as long as it is under the ownership of the Government. On the other hand, private insurance firms are mandated to become listed entities, thus, subjecting them to tighter compliance and financial reporting requirements. 

The IRCSL functions as an institution within the purview of the Ministry of Finance, hence, its ability to function with authority and decisiveness, devoid of being influenced by political intervention, appears to be quite weak. The Chairman of the Commission is appointed by Finance Minister and invariably the appointee has a close political relationship with the Government of the day. Furthermore, other ex-officio members of the Commission too are officials of Government departments and agencies like in the capital market watchdog Securities and Exchange Commission. 

Compared to the banking regulator – the Central Bank – the regulatory bodies of the capital market such as the SEC and IRCSL lack the wherewithal and legal superiority to stand up against the harmful political interference. As a result, such regulatory institutions are incapable of discharging their duties in an impartial and objective manner. In countries like Sri Lanka, where Governments continue the medieval practice of owning business undertakings, uneven playing fields arise in various sectors of the economy to the detriment of consumers as the regulatory authority is scared of taking action against the malpractices of the State-owned business enterprises.

Even the reputed credit rating agency Fitch Ratings last December, described the regulatory environment of the insurance sector in Sri Lanka as one that is developing with limited transparency. Meanwhile, Sri Lanka’s life insurance penetration is reported to be around 0.6% of the GDP, and it is considered as one of the lowest in the world in comparison with countries of similar or less per-capita income levels. In the neighbouring India, the corresponding figure stands at 2.8%. One of the reasons attributed to such an abysmally low penetration level is the lack of awareness about the benefits of insurance coverage among the general public.

The IRCSL is responsible for generating awareness on insurance-related matters among the general public. Regrettably, it has miserably failed in the aforesaid duty, and most of the people in the country are not even aware of the existence of the IRCSL. The regulatory authority has been completely unsuccessful in popularising insurance among masses. Many have also alleged that the regulator tends to favour the interest of the powerful insurance companies for their own benefit, while ignoring its obligation to safeguard the interest of policyholders who lack influence.

As the COPF Chairman had pointed out, effective regulation is fundamental to building market confidence and ensuring fair competition. When regulatory bodies like the IRCSL fail to act against powerful market players, it undermines the economic system and harms consumers. The IRCSL in its present setup would be detrimental to the country’s economy.