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Lack of regulatory mechanisms hinder micro-insurance growth in Sri Lanka

A major constraint hindering the growth of the microinsurance sector is the lack of policies and regulatory mechanisms to facilitate microinsurance, says a recent report produced by the International Cooperative and Mutual Insurance Federation (ICMIF) and the Institute of Policy Studies of Sri Lanka (IPS).

Reviews of available literature, as well as discussions with suppliers of micro-insurance providers agree that the lack of provisions in insurance law for microinsurance in Sri Lanka is a major concern.

The report entitled “ Country diagnostic on mutual and cooperative microinsurance in Sri Lanka” says that current regulatory requirements are arguably more suitable for traditional providers and could be considered too stringent in the case of smaller scale microinsurance providers. According to a study conducted by BASIX Consulting (2016), minimum capital and reinsurance requirements have prevented registered insurers from entering the microinsurance market.

Insurers which are currently involved in microinsurance also find these stringent regulations to be a disincentive to expanding these microinsurance activities. For example, additional high costs associated with recently introduced regulatory requirements such as Risk Based Capital (RBC) regulations, and the segregation of life and general insurance businesses were cited by microinsurance providers as key regulatory hurdles deterring them from expanding their low-premium business ventures. These concerns were shared by the formal cooperative and mutual microinsurance providers in Sri Lanka.

The prospects for insurance business expansion are rather limited for these micro-insurance organisations. A key reason for this is their reluctance to partner with formal insurance providers. Many informal, community-based organisations feel that the profit-maximising outlook of formal insurance companies is potentially damaging to their welfare-maximising endeavours.

The government’s presence in the microinsurance industry is also seen as to be a deterrent to expanding micro-insurance business. For example, AAIB, the main role of which is to provide agricultural insurance has now entered the motor insurance market as well, while the national reinsurer, NITF has also entered the market as an insurance provider. Insurance companies in the private sector find it difficult to compete with such government bodies that can provide services at subsidised prices.

Furthermore, low income households are habitually highly reliant on government assistance in times of disaster; they expect government aid as a matter of course, and thus are not motivated to purchase insurance to face possible risks.

In addition to the government’s assistance, low-income households were found to be highly reliant on community-based networks as a risk management strategy. The high level of social organisation in village communities points to the availability of room for growth for mutual and cooperative microinsurance providers, yet to be fully exploited.

The low demand for insurance among low-income households also contributes to impeding the growth of the microinsurance industry. A major reason for the low demand is the lack of insurance awareness among low income households. Additionally, these households express high levels of mistrust towards insurance companies due to past experiences.

Furthermore, the microinsurance industry targets the low-income households which can often be characterised by highly irregular and seasonal income patterns; the inability of such households to commit to periodical premium payments has also contributed to shrinking their demand for insurance.

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