January - Actuarial Society of India

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28 The Actuary India
REGULATION HANGES AND IMPLIATIONS IN SRILANKA S ince Q1 2011 the Sri Lankan Insurance industry has faced some important changes to regulations. This article provides a summary of those changes and the resulting regulatory environment. Regulatory Changes: In Q1 of 2011, the valuation of assets saw some changes. Government securities were divided into those backed by the Central Bank of Sri Lanka (CBSL and those backed by a foreign government. Securities backed by the government of Sri Lanka were required to be valued at the most nearest selling price indicated by the weekly Economic Indicators published by the CBSL, whereas those backed by a foreign government were to be valued at the nearest buying price as certied by the respective country. Corporate debt was divided into Quoted and Unquoted corporate debt. Quoted corporate debt was required to be valued at the prevailing market price as per the last traded stock determined by the Colombo Stock Exchange (CSE. Unquoted corporate debt did not see any change in valuation, being taken at cost after adjusting for amortization of premiums or accretion of discounts allocated on a systematic basis to maturity. Industry Impact: The Sri Lankan insurance industry faced an asset-liability valuation mismatch as a result of the above changes, because liabilities continued to be valued on a by Frank unro net premium valuation (NPV basis. In particular, the industry as a whole faced a signicant risk of rising interest rates devaluing the statutory assets while the liabilities remained fairly static. This issue was discussed between the Insurance Board of Sri Lanka (IBSL and the industry throughout 2011 and culminated in the IBSL in arch 2012 issuing an industry letter stating it would not take any action towards companies if a technical insolvency arose purely due to interest rate movements. Remedial Action: The IBSL and industry met several times over the course of 2011-12 to agree on a way forward to the valuation mismatch issue. Several options were considered: Reversion to the previous asset valuation methodology Implementation of a gross premium valuation (GPV of liabilities Implementation of a risk-based capital (RBCframework It was agreed that a reversion to the previous asset valuation methodology was not the ideal way forward, rather that the method of valuation of liabilities should be upgraded in line with the asset valuation changes. Similarly, a GPV approach was not favored since it may lead to under-reserving in the absence of a risk-based capital requirement. Hence, the IBSL and industry agreed that the best way forwards would be to expedite the delivery of a proposed RBC framework whilst retaining the current valuation basis of assets and liabilities in the interim. As of ecember 2012, a technical steering committee is being formed between the IBSL and the industry with a view to nalizing the RBC framework during 2013. Although the formal adoption of RBC is set at 201, early adoption may be possible for companies keen to avoid the aforementioned asset liability basis mismatch. This approach was considered optimum in an industry where actuarial resource is relatively scarce, and therefore, implementation of RBC remains a challenge for many companies. About the Author Frank.unroavivandb.com Frank unro FIA is the Chief Actuary of AVIVA NB Insurance and the Secretary of the Actuarial Association of Sri Lanka. REPORT COUNTRY Success does not depend on making important decisions quickly, but it depends on taking quick action on important decisions. The Actuary India 29
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January - Actuarial Society of India

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