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Pandemic boosts life insurance and industry digitalisation 

25 Jul 2021

By Naomi Wickremarathna  While the pandemic wreaked havoc across many sectors and industries, to some sectors the pandemic was, in fact, a blessing in disguise; the telecommunications, electronics, online delivery, and life insurance sectors are a few amongst them. Death associated with Covid-19 has more or less driven people to hurriedly sign up for life insurance, as fear is always a prime factor in life policy sales. While a couple of countries state that they do not see any major growth in life insurance after the pandemic hit, Sri Lanka’s life insurance sector has witnessed an increasing interest by people to get life insurance. The life insurance industry managing to grow by 16% last year while the country’s growth contracted, is a testament to this upward local trend.  According to First Capital Holdings, Sri Lanka’s insurance industry is still at an early stage of its life cycle despite the recent growth momentums. The industry can be segregated into life insurance and non-life insurance, and as per the IRCSL (Insurance Regulatory Commission of Sri Lanka) and the CBSL (Central Bank of Sri Lanka), 27 insurance companies are operating in the country as of 31 December 2020. Under Section 53 of the Insurance Industry (Amendment) Act, No. 3 of 2011, it was made compulsory to segregate composite insurance companies into the two categories of insurance on or before February 2015.  Almost all of the composites separated their life and non-life businesses into two separate companies, except for Sri Lanka Insurance and MBSL Insurance Company Ltd. First Capital projects life insurance to show a strong growth in Gross Written Premium (GWP) and to appear lucrative over non-life business. To discuss the impressive growth and potentials of the industry, First Capital Holdings organised an equity forum recently. According to the research done by First Capital, a revival in private credit is expected and government borrowing is likely to mount pressure on bond yields from 2H2021E resulting in nearly a 50bps shift upwards. However, First Capital expects life insurers to benefit from rising interest rates due to the higher investment returns, as asset allocation in life insurance is skewed towards fixed income-earning assets. Government securities represent the main investment due to the regulatory requirement to invest a minimum of 30% of the life fund assets. The balance of the fund, after investing the minimum 30%, can be invested in other investments, subjected to a particular threshold. Coming back to this article’s opening remark, the pandemic has driven people to buy life insurance and this can be explained by the growth in life insurance following the first, second, and third waves of the virus locally in March 2020, October 2020, and April 2021, respectively. First Capital notes that in the midst of the Covid-19 pandemic, life insurers have seen higher demand, as the pandemic caused more people to reconsider health insurance needs coupled with life insurance needs. “We believe that increased awareness in the post-pandemic environment to augur well with low penetration in Sri Lanka. Being a country largely characterised by collectivism and dependency where the need for a life insurance is yet to be realised, the industry in Sri Lanka still remains underpenetrated compared to regional peers,” First Capital added.  Among Asian countries, Sri Lanka is expected to clock a growth of 20% in 2021 as Sri Lanka’s insurance market is still one of the least developed in the region. Growth in the Asian region is expected to be a further sweetener for Sri Lanka’s growth trajectory. Talking at the forum, Softlogic Life Insurance Managing Director (MD) Iftikar Ahamed stated that last year, despite the country having a negative growth, life insurance went up by 16% for the first time in the industry's history. The industry cost hit an important milestone of Rs. 100 billion in GWP and he added that on the back of this, for the first three months of 2021 what they have also seen is that the industry is up by 34%.  “We were (at) Rs. 21.7 billion GWP last year, (and) we have gone up to Rs. 29.1 billion in the first quarter of 2021. The first wave of the pandemic came towards the end of March last year so there can be a dislocation or distraction of this number. For the first half of this year, the number will go up substantially and if you just annualise the number that has been seen in the first quarter, I think the growth rate First Capital has forecasted, i.e. 20% for the industry, is probably on track.” Ahamed added that life insurance has been traditionally sold by advisors or agents who actually visit customers. There is usually a fairly rigorous sales process behind that and at the end of the day it is a face-to-face meeting in which an advisor convinces a customer to actually take up an insurance policy. Now, this insurance policy tends to be very customised based on the requirement of the individuals, and that is why it requires face-to-face interaction, and there is a considerable amount of time that is spent in actually achieving that sale. In the first two waves, he added that they saw an immediate drop in new businesses that were coming and by the second wave, they saw that adoption to the new normal had already started to occur. “For example, at Softlogic Life, all advisors now do have a digital device. All proposals are sent digitally and I think all other companies are doing similar procedures. In the month of June, there were only six working days but we hit 100% of our budget which means all the networking, all the prospecting, all the execution had moved onto digital channels and things have gotten efficient in terms of the industry and in terms of a lot of players adopting digital methodologies, and, I think, the industry is in a very good state. Covid has also led people in the discipline to look at our expenses and costs, and digitalisation and being efficient is a key element that has actually taken place.”  In the wake of Covid-19, life insurance companies in Sri Lanka have introduced various technological platforms, which has led to an emergence of alternative distribution channels recently. As insurers have moved to make use of alternative distribution channels, life GWP per agent has seen an increasing trend in Sri Lanka during the recent past. Digitisation has also led to a decline in the expense ratio of the life insurance industry. First Capital expects that Sri Lanka has further potential to reduce the expense ratio up to 38% by 2025E with the use of technology which is currently at 45%. Meanwhile, Janashakthi Chairman Prakash Schaffter, during the forum, noted that they were able to shift to work-at-home arrangements pretty quickly, but the real challenge was customer interaction, as customers are used to agents calling them and collecting premiums. “From a digital perspective, insurance companies were nimble. Renewal premiums did not see as much of an impact as during the first wave of Covid. Going forward, as far as Sri Lanka is concerned, I see further digitalisation happening, and insurance will continue innovating in this space. But I doubt whether it will impact a new business in the shorter term, but in the longer term it will certainly help and I think insurance needs to focus on digital channels for selling insurance. The increase in interest rates could have a different impact on insurance; depending on how they are structured, it would be company specific. Digital products should be made available.” Historical data shows that life insurance GWP indicates a positive correlation with real GDP growth. However, even though Sri Lanka recorded a negative GDP growth of 3.6% in 2020, Gross Written Premium has grown even higher at 16.0% YoY (year-on-year). Sri Lanka’s GDP is estimated to grow at 3.2% in 2021E and 3.8% in 2022E and First Capital expects a recovery in GDP growth to provide a strong impetus for the life insurance industry thriving the demand for life insurance in coming years. Moreover, the S curve drawn between GDP per capita and life insurance penetration demonstrates the interrelationship between per capita income of a country and the extent of its insurance penetration. Sri Lanka is currently ranked at a considerably low position in the S curve due to low per capita income and low penetration. However, with the country aiming to reach an annual per capita income of $ 5,000 by 2025, the premium per capita as a % of GDP per capita is expected to reach a higher position in the curve in the medium term. “We also believe that demographic changes in Sri Lanka are further conducive for life insurance business. Non-communicable diseases (NCDs) have shown an increasing trend and currently accounts for 83% of total deaths. In line with this, people have become more aware of risks of NCDs and looking for health/life covers – which augurs well with the life insurance industry growth,” First Capital’s research further noted. First Capital, in conclusion, noted that a potential upward trend in interest rates is expected to have a positive effect on life insurers. Additionally, increased demand for health and life insurance, together with increased industry efforts to offer digitised access and solutions, have culminated in the life insurance sector, finding positive growth through the ongoing Covid-19 pandemic. Furthermore, it noted that investing in the life insurance industry is a valuable investment because the insurance industry is comparatively under-penetrated compared to regional peers. Rising interest rates are a lifeline for life insurance. 


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