Ceylinco Life Insurance Limited
INTEGRATED ANNUAL REPORT 2016

BUSINESS MODEL

Operating Environment

Global life insurance industry

Strong Performance in 2016

Driven by strong performance in emerging markets, global life insurance premiums grew by 5.4% in 2016, compared to a 5% growth in 2015. In particular, emerging Asia was the main driver for the global life sector in 2016, with premium incomes projected to have grown by 20.1% in 2016, up from 13.2% in 2015. In advanced economies, premium growth has slowed down from 3.4% in 2015 to 2.0% in 2016.

The table below indicates the in-force real premium income growth for life insurance:

Country 2014
%
2015
%
2016E
%
2017F
%
2018F
%
US -1.7 4.3 1.6 1.7 1.7
Canada 7.6 3.5 3.0 3.6 3.7
UK -11.9 17.6 2.2 1.5 2.0
Japan 6.8 1.5 2.6 2.0 1.3
Australia 26.5 -7.4 -5.7 4.1 4.1
France 8.4 1.3 1.4 1.4 2.6
Germany 2.4 -2.7 -2.3 0.9 1.3
Italy 29.5 4.0 -2.1 0.2 1.1
Spain -2.5 3.4 23.9 1.5 0.9
Netherlands -4.6 -16.9 2.9 1.6 1.6
Advanced
Markets
4.0 3.4 2.0 2.1 2.1
Emerging
Markets
7.8 13.2 20.1 14.9 10.9
World 4.7 5.0 5.4 4.8 4.2

Source: Swiss Re Economic Research and Consulting
Note:
This table provides growth rates for Life business alone (i.e. excluding medex).

Following are some of the recent trends of the global life insurance industry:

Regulators across the globe introduced risk-based prudential regulations such as the Solvency II regulations for European insurers, which came into effect on 1 January 2016. The purpose was to move towards an economic valuation of insurers assets and liabilities to recognise the full cost of producing life insurance.

Additionally, life insurers are adjusting their product portfolios to boost profitability and reconfigure their Balance Sheets. This is because of the decline in the return on equity for the sector from 13% in early 2015 to 10% in 2016, due to weakened investment returns and increased pricing pressure. Simultaneously, they have shifted their focus from traditional savings to life protection business. The sale of biometric products such as term life or disability insurance has increased in advanced markets.

Although, investment portfolios remain predominantly focused on fixed income instruments, insurers are also increasing investments in non-traditional assets such as private equity, real estate equity and infrastructure debt. Furthermore, in-force management is increasingly recognised as an effective tool to improve profitability due to the high cost of acquiring new business.

Outlook in 2017 and 2018

Growth in real primary life insurance premiums is expected to be significantly higher than non-life premium growth. Emerging markets are expected to be the major driver for global life insurance industry, in particular with the expected robust growth of savings products. Insurance penetration is likely to be driven by economic growth, rising populations, urbanisation and rising middle class. Accordingly, global life real premium income is forecast to rise by 4.8% and 4.2% in 2017 and 2018 respectively. Advanced market premiums are expected to grow at a slower pace of 2.1% in both years. Emerging markets are forecast to grow at a faster pace of 14.9% in 2017 and by 10.9% in 2018.

At the same time, traditional life insurers would need to adapt their business models to embrace new technology and data science.

Emerging markets are expected to be the major driver for the global life insurance industry


Sri Lanka’s insurance industry

Overview

With Sri Lanka’s economic expansion over the past half decade, its insurance industry has grown apace to become a vibrant and competitive market. Accordingly, there has been a significant growth in gross written premiums, total assets and profitability of the long term insurance industry in the financial year 2015.

Given below are selected indicators of the life insurance sector:

Item End Jun. 2014 End Jun. 2015 End Dec. 2015 End Jun. 2016 (a) YoY Change (%)
Jun. 2015 Jun. 2016 (a)
Total Assets (Rs. Bn) 390.9 435.4 453.6 478.4 11.4 9.9
Total Income (Rs. Bn) (b) 65.8 69.1 152.1 82.1 4.9 18.9
Gross Premium Income (Rs. Bn) (b) 49.2 57.1 120.9 66.8 11.8 21.5
Investment Income (Rs. Bn) (b) 16.6 14.1 31.2 15.3 -15.3 8.8
Profit Before Tax (Rs. Bn) (b) 5.9 3.9 12.9 5.2 -33.9 33.3
Solvency Margin Ratio (Times) 8.7 9.3 7.6 9.3
Claims Ratio (%) 42.4 40.1 40.7 37.1
Combined Operating Ratio (%) 89.7 87.0 86.5 85.1
Return on Assets (%) 2.9 2.0 2.7 2.2

Source: Recent economic developments highlights of 2016 and prospects for 2017 – CBSL.
(a) Provisional
(b) During the period
(c) Introduced in lieu of solvency margin ratio since 2016

Year ended 31 December 2011 2012 2013 2014 2015
Gross Written Premium (Rs. Mn) 35,162 37,477 41,676 44,596 53,575
Growth Rate in Total Premium (%) 17.62 10.48 10.22 5.44 16.12
Gross Domestic Product (Rs. Bn*) 7,219 8,732 9,592 10,448 11,183
GDP Growth Rate (%)* 8.4 9.1 3.4 4.9 4.8
Penetration (%) (Total Industry Premium as a % of GDP) 1.14 1.04 1.04 1.01 1.09
Penetration (%) (Premium of Long Term Insurance
Business as a % of GDP)
0.49 0.43 0.43 0.43 0.48
Insurance Density (Total Premium Income/Population) (Rs.) 3,934 4,440 4,857 5,074 5,838
Population ’000 (Mid Year)* 20,869 20,424 20,579 20,771 20,996

Source: Central Bank of Sri Lanka and Department of Census and Statistics.
**Reinsurance premium income represents the compulsory cession of reinsurance premium of General Insurance Business ceded to NITF.
(a) Reinstated Audited figures
(b) Reinstated Audited figures (Except NITF)
(c) Provisional figure

National Vision and the Life Insurance Sector

The national vision is to establish Sri Lanka’s insurance industry to be a pillar of the financial sector, as our nation moves forward to be a middle income country.

Several measures have been implemented to increase the operational efficiency and strengthen the Balance Sheets of insurance companies to meet customer requirements. In addition, steps have been taken to increase insurance penetration in Sri Lanka as well.

Long Term Insurance Industry

Generating a GWP income of Rs. 54 Bn, Sri Lanka’s long term insurance industry recorded a notable performance in 2015. This is the highest growth ever in the last five years as evidenced by the 20.1% increase in GWP in 2015; significantly higher than the 7.0% growth in 2014. The growth in premiums is mainly attributable to the effective marketing efforts and the successful ‘Life Insurance Awareness Month’ held during September 2015.

Ceylinco Life has maintained its leadership in the long term insurance industry by generating GWP of Rs. 13.4 Bn in 2015 (2014 – Rs. 12.0 Bn), securing a market share of 25.1% of total GWP.

Total Assets

Total assets of the long term insurance industry increased by 23.8% to Rs. 306 Bn as at 31 December 2015 (year end 2014 – Rs. 247 Bn). Ceylinco Life held the second largest asset base in the life insurance industry, accounting for 26.3% of the total life industry asset base.

Number of Insurance Policies Issued and Policies in Force

Long term insurance market recorded the highest number of policies in force in year 2015 compared to the last five years. A total of 2.8 Mn policies was in force in 2015; significantly higher than the 2.6 Mn policies in force in 2014. As a result, the percentage of long term insurance policies in force as a percentage of the labour force has increased by 3.1% to 29.6% in 2015.

Gross Domestic Product

The Sri Lankan economy reached an annual real GDP growth of 4.8% in 2015, marginally lower than the 4.9% growth recorded in 2014. This slowdown is attributed to a slowing export sector and capital outflows, prompted by a strengthening US economy. All three sectors of the economy contributed towards economic growth, with the services sector making the largest contribution, benefiting from the favourable interest rate conditions. The industrial sector experienced a slowdown, largely due to contractions in the mining and construction sector. The agricultural sector, greatly benefited from the favourable weather conditions.

The Penetration of Long Term Insurance

Insurance penetration reflects insurance premium as a percentage of GDP. The penetration of long term insurance in 2015, increased by 8% YoY to 1.09% of GDP. This however, is low, compared to other economies in the Asian region.

Insurance Density

Insurance density reflects the premium income per person of the population. As a result of the higher increase in premium income, compared to population growth, Sri Lanka’s insurance density increased by 15.1% to Rs. 5,838 in 2015.

Industry Attractiveness and Competitiveness

Ceylinco Life recognises the importance of fully understanding the existing industry conditions and continuous evaluation of its attractiveness. We have used Michael Porter’s Five Forces Model in analysing the attractiveness and competitiveness of the life insurance industry in Sri Lanka.

This analysis indicates that the life insurance industry in Sri Lanka is fairly attractive with prospects for future growth.

National vision is to establish Sri Lanka’s insurance industry as a pillar of the financial sector


Force Strength of the Force
Threat of New Life Insurers Moderate
The IBSL has imposed rigid requirements for new life insurance registrations. e.g. Minimum capital requirement of Rs. 500 Mn. These regulatory requirements demotivate new entrants. Further, a new entrant will also find it difficult to compete with the established brands and acquire specialised staff (e.g. actuaries, underwriters). Despite the deterrents, a few financially stable companies are entering into the industry.
Bargaining Power of Policyholders Low
The industry mainly serves individual policyholders who have significantly low bargaining power. High switching costs, for example surrender penalties, discourage customers from switching to other life insurers.
Threat of Substitutes Low
Life insurance products have only a few substitutes, such as pension plans and savings plans offered by a few banks. However, they are not direct substitutes to life insurance products since they do not feature substantial life insurance elements.
Bargaining Power of Suppliers Moderate
Vendors and service providers have lower bargaining power as a life insurer can shift from one supplier to another quite easily. Reinsurers and actuaries have higher bargaining power since they are mostly international firms and the volume of business they have with Sri Lankan clients is insignificant. Their expertise and know-how is also unique.
Rivalry among Existing Life Insurers Moderate
Demand for life insurance grows when the economic conditions improve and when disposable income rises. Although competition is high, the life insurance penetration remains low (2015 – 0.48% of GDP), which means that companies can still penetrate the untapped markets. There is potential for market growth. High exit barriers for existing insurers due to regulations.

Future Outlook

Sri Lanka’s life insurance penetration is the lowest in the Asian region, based on GWP. It is expected that Sri Lanka would concentrate on the more profitable life segment in the future. Additionally, many insurers are expected to consolidate by way of mergers and acquisitions, in the medium and long term, due to the overcrowded insurance sector in the Nation.

Opportunities and Threats

The operating environment poses a significant effect to the Company. Hence, it is imperative that we assess the environment in which we operate in order to develop and implement effective strategies to achieve our business objectives.

Given below is a brief analysis of the political, economic, social, technological, environmental and legal aspects in the context of the insurance industry and life insurance in particular:

Highlights of the Year Impact on Life Insurance Industry
Political Opportunities
Overall budget deficit as a percentage of estimated GDP declined to 3.5% during the first seven months of 2016 from 4.4% in the corresponding period in 2015 Government targets to reduce the budget deficit to 3.5% of GDP by 2020. (Source: CBSL, Recent Economic Developments)
Moreover, when Government borrowings decline, crowding-out effect will be low and the Bank will be in a position to provide more funds to the private sector. This will stimulate economic activities and increase disposable income
Increase in salaries paid to public sector employees Increase in disposable income of an easily accessible market segment, which will boost premium income
Threats
Proposal to define the nature of allowed management expenses in life insurance taxation
Such re-definition of the management expenses would impact the profit after tax of the industry
Unexpected changes in tax policies (e.g. VAT) and delays in implementation This adversely affects the ability of the industry in business planning and strategy implementation Life insurance premiums are priced based on assumptions made on tax rates. When tax rates change, life insurers will have to re-price premium, which will make life insurance policies less affordable to the public
Economic Threats
Inflation, measured by the National Consumer Price Index (NCPI), increased from 112 index points in January 2016 to 118 in December 2016 (5.4% increase). (Source: CBSL press release)
Increase in inflation implies a rise in the general price levels. This leads to a decrease in disposable income, which will lower demand for life insurance products
Increase in interest rates on Government Securities. One-year Treasury Bill rates have increased by 287 basis points during 2016. (Source: CBSL) Decrease the market value of investments in fixed income securities Increase in market interest rates will reduce the attractiveness of life insurance for those who view life insurance as an investment
Social Opportunities
Growth in aging population. (from age 55 and above has increased from 8% in 1946 to 17.9% in 2012)
Demand for retirement planning products and health insurance products will increase
Widespread use of social media and wider access to Internet Opportunity to expand awareness of insurance products and a low-cost medium of advertising
Threats
Subjective judgement of medical practitioners determines the validity of life insurance claims and the possibility of such judgement being unauthentic
Increase in fraudulent claims and costs associated with investigation
Technological Opportunities
Digital distribution channels and digital intermediation
Wider market reach and lower cost of policy servicing
Threats
Security concerns on IT servers, databases and data privacy
Loss of sensitive information and increased IT security costs
Ecological Opportunities
Growth in critical illness (e.g. cancer, diabetes, chronic kidney disease)
Increased demand for life insurance coverage for such diseases
Threats
Adverse weather conditions could badly affect agricultural market segment
Difficulty in generating regular business in agricultural market segments
Legal Opportunities
Adoption of Risk-Based Capital (RBC) regime
RBC will regulate the financial prudence of the industry. RBC will also link the solvency of life insurers to level of risks assumed and the movements in the market variables. This will also require life insurers to invest more on human, technological and financial capitals to monitor, track and forecast RBC levels to meet compliance
Threats
Uncertainties emerging from frequent amendments to taxation
Such frequent amendments impair the ability of the industry to engage in effective tax planning