6 J -

PROFIT & COMPETITION OF THE INSURANCE

INDUSTRY IN SRI LANKA WITH A SPECIAL
EMPHASIS ON NON-LIFE BUSINESS

By

(Ms) 1.1. K. Ekanayake

The Dissertation was submitted to the Department of Management of

Technology of the University of Moratuwa in partial fulfilment of the
requirement for the Degree of Master of Business Administration.

65 OS

Department of Management of Technology °° ^ (^#-^)

University of Moratuwa
December 2005

.University of Moratuwa

86359

86359

£ 6 ' 9
 DECLARATION

"I certify that this thesis does not incorporate without acknowledgement any material
previously submitted for a degree or diploma in any University to the best of my
knowledge and belief it does not contain any material previously published, written or
orally communicated by another person or myself except where due reference is made
in the text. I also hereby give consent for my dissertation, if accepted, to be made
available for photocopying and for interlibrary loans, and for the title and summary to
be made available to outside organizations"

30 - 12 - xooS

«=—(Ms)4-I-KrEkaffiayake
jlke '
Signature of the Candidate'
didate( Date

To the best of my knowledge, the above particulars are correct.

Dr Sarath Dasanayaka
Supervisor

II
 ABSTRACT

Role of the insurance in social and economic development cannot be under estimated.
Exploring new ways, making innovations and doing business involve risks to man's
life, goods and property. Insurance provides financial protection. In case of loss, a
person recovers his financial position as before the incidence. Thus a man takes big
risks to make innovations keeping in view the insurance support. In Sri Lanka
insurance has made an immense contribution to the development of the economy,
progress and prosperity of the country.

Unfortunately, insurance has not been given the importance it deserves in many
countries. This is one of the neglected sectors in Sri Lanka too. The government's
attention has repeatedly been drawn towards problems being faced by the insurance
industry. But all efforts have gone in vain due to poor administrative & regulatory
controls. It is evident from the treatment of the government with the insurance sector.
It is worth noting that in spite of this fact, insurance companies have constantly been
making a substantial contribution towards the government's revenues.

The situation demands revolutionary steps to bring about a positive change in the
insurance industry. Sri Lanka being a developing country can definitely be benefited
with the development of insurance culture. Hence, we do have to concentrate on that
aspect in the future. Only suggestions or forming rules do not serve the purpose.
Number of suggestions on the promotion of the insurance sector, have already been
made by the professional experts. The basic thing is to make sure their
implementation and continuity.

Using a sample of cross-sectional data from year 2000 to 2004 of companies

operating in the insurance industry in Sri Lanka, an attempt has been made to shed
some light on the issue of profit & competition in the general insurance business.

Companies offering products and services in the insurance market are believed to
trade under very competitive conditions. In order to test this widely-held claim the
study investigate whether firms' pricing policies reflect competitive or monopolistic
market features.
Ill
Under competitive conditions companies are forced to pass on any increase in costs in
prices and thus their revenues will rise pari passu should wages, underwriting costs or
other expenses increase. By contrast, a firm operating under monopolistic competition
responds to an increase in marginal and average costs by increasing price and
reducing output, resulting in a less than complete pass-through in revenue & profit
falls. This study is to apply the research methodology described above, to the general
insurance business in Sri Lankan insurance market.

Firms in this industry generate revenue through underwriting of insurance risks and
from investing their assets. As underwriting and capital markets are in general
segmented, empirical approach of this study is based on the insurance and portfolio
behaviour of firms and not on an integrated view of both. Previous investigations of
this kind have focussed on the banking industry in Sri Lanka. Contrary to widely held
views, this study find that competition is less than perfect.

IV
 ACKNOWLEDGEMENTS

This thesis is a culmination of the last two years of my MBA studies at University of
Moratuwa, Sri Lanka. At times, the research and work load appeared to never end. In
the mist of all this, so many people helped me to pull through the academic and
emotional challenges placed in front of me.

First and foremost, I would like to express my sincere thanks to my thesis supervisor,
Dr. Sarath Dasanayaka. Thank you for all the time and effort placed into the
completion of my thesis. His belief in my abilities was a strong driving force in my
studies & I really enjoyed working with him on this project. He made things possible
and helped to make my dream come true.

Mr. Dinesh Schaffter - Director of Janashakthi Limited and my boss Mr Ajith

Gunawardana (Director/CEO of Janashakthi Securities Limited) also has my complete
gratitude. Their experience and guidance played a very important role in finalising my
thesis.

I thank my parents for being right behind me in the pursuit of my master's degree. I
did it!! They kept me in touch with life in general when I was entrenched in studies &
their financial and spiritual support gave me strength to study at an advanced
academic level.

Mrs Priyani Herath my aunt, thank you for all the assistance given. If you were not
there in the University of Moratuwa library, all my efforts had been a failure in
obtaining reference material & study space.

I too wish to thank all my friends who were around me during good as well as bad
times. Thank you my friends for always being there for me. I certainly believe
"Friendship" gave me strength to climb the ladder of success.

Finally, I want to devote this thesis to the Lord Buddha for giving me courage, good
parents, financial strength, friends and advisors. If not for his grace it would not be
possible for me to complete this master's program.

Kumari Ekanayake
V
 TABLE OF CONTENTS

Abstract HI

Acknowledgements V

List of tables & figures IX

List of abbreviations XI

Chapter 1: Introduction 1

1.1 Research focus area 2

1. 2 The importance of the study 3

1. 3 Objectives of the study 4

1.4 Methodology 6

1.4.1 Sampling design 6

1.4.2 Research design 7

1.4.3 Data collection 7

1. 4. 4 Data analysis 8

1. 5 Organisation of the study 8

1. 6 Limitations of the study 10

Chapter 2: Literature Review 12

2. 1 Insurance - What it is all about 12

2. 1. 1 General Insurance at a glance 13

2 . 1 . 2 Who is a competitor in business 16

2 . 1 . 3 Why monitor competitors 18

2. 1. 4 The five forces analysis 18

2. 1. 5 Theory of competition 20

2. 2 Impacts of the Asian Tsunami on Sri Lanka insurance industry 21

2. 3 Selected insurance markets in Asia 22

2. 4 Global insurance market 27

VI
Chapter 3: Growth & the present situation of the Insurance Industry 28

3. 1 Insurance Industry in Sri Lanka - History 28

3 . 1 . 1 Development of the Sri Lankan insurance industry 28

3. 1. 2 Insurance legislation and the nationalization of insurance 29

3. 2. Insurance Industry in Sri Lanka - Present 31

3. 2. 1 Nature of the Sri Lankan insurance industry 32

3. 2. 2 Insurance regulation 34

3. 2. 3 Powers, duties and functions of the IBSL 36

3. 2. 4 Solvency and capitalization 36

3 . 2 . 5 Asset exposure 37

3. 2. 6 Reinsurance environment 38

3. 2. 7 Safeguarding interests of policy holders 39

3. 3 Insurance Industry in Sri Lanka - Future 40

Chapter 4: Analysis of profit & competition in Sri Lankan insurance industry.42

4 . 1 Competitor analysis 43

4. 1. 1 Competitors' vision & mission statements 43

4. 1. 2 Competitors' strategies and objectives 45

4 . 1 . 3 Strength of the non-life insurance market 46

4. 2 Division of market share 48

4. 3 Overall performance of the insurance industry 50

4. 3. 1 Performance of the general insurance business 50

4. 3. 2 Distribution of gross written premium 51

4. 3. 3 Performance of insurance brokers 52

4. 4 Financial analysis 53

4. 5 Country report & economic indicators 56

VII
Chapter 5: Summary, Findings, Conclusions & Policy implications 57

5. 1 Summary 57

5. 2 Findings 59

5. 2. 1 Key success factors 59

5. 2. 2 Insurance malpractices 60

5. 2. 3 Resulting pressures on insurers 61

5. 2. 4 Future developments needed 64

5. 3 Conclusions 65

5. 3. 1 Recommendations for the future 67

5. 4 Policy implications 68

5. 5 Agenda for further research 70

References 71

Wold wide web sites 72

Appendix 1 - Competitors' company profiles 73

Appendix 2 - Summary of each competitors products 78

Appendix 3 - Union Assurance Limited 81

Appendix 4 - Ceylinco Insurance Company Limited 86

Appendix 5 - Janashakthi Insurance Company Limited 89

Appendix 6 - Eagle Insurance Company Limited 92

Appendix 7 - Heyleys AIG - News 95

Appendix 8 - Questionnaire 96

VIII
 I

LIST OF TABLES

Table 1.1 - No of players in the insurance industry 2

Table 2. 3 - Non-life insurance premiums as a percentage of GDP 24

Table 3 . 1 - Sri Lanka insurance market - Key milestones 28

Table 3. 2 - Registered companies under the insurance act 31

Table 4. 1 - Competitors' capacity & strength 43

Table 4. 2 - Analysis of premium written - non-life insurance 47

Table 4. 3 - Premium income 50

Table 4. 4 - G W P & market share - Company-wise 51

Table 4 . 5 - Distribution of Gross Written Premium - GI 51

Table 4 . 6 - Contribution of insurance brokers - non-life insurance 53

Table 4. 7 - Financial indicators 53

Table 4. 8 - Profitability of leading Sri Lankan non-life insurers 53

Table 4 . 9 - Non-life insurance - Retention as a % of gross premium 54

Table 4. 10 - Key economic indicators 56

Table 4 . 1 1 - Key insurance industry indicators 56

IX
 LIST OF FIGURES

Figure 2. 1 - Major categories of non-life insurance policies 13

Figure 2. 2 - How indemnity is provided 14

Figure 2. 3 - Indemnity 15

Figure 2. 4 - Porters five forces model 19

Figure 2. 5 - SCP framework 20

Figure 2 . 6 - Global insurance market growth 27

Figure 2 . 7 - Statistics for global insurance market 27

Figure 3.1 - Investment exposure of six leading insurers ( non-life ) 38

Figure 4. 2 - Division of market share 49

Figure 4. 5 - General Insurance Class-wise Distribution 52

X
 LIST OF ABBREVIATIONS

ICSL Insurance Corporation of Sri Lanka

NICL National Insurance Corporation Limited
SLIC Sri Lanka Insurance Corporation Ltd.
IBSL Insurance Board of Sri Lanka
IASL Insurance Association of Sri Lanka
EICL Eagle Insurance Company Limited
UAL Union Assurance Limited
JICL Janashakthi Insurance Company Limited
CICL Ceylinco Insurance Company Limited

EICL Eagle Insurance Company Limited

COICL Co-operative Insurance Company Limited
AAICL Asian Alliance Insurance Company Limited
HAIGCL Hayleys AIG Insurance Company Limited
HNBAL HNB Assurance Limited
ATL Amana Takaful Limited
GWP Gross Written Premium
GI General Insurance
GDP Gross Domestic Production
NWP Net Written Premium