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Insurance and its relevance to global economy

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“The trade of insurance gives great security to the fortunes of private people, and by dividing among a great many that loss which would ruin an individual, makes it fall light and easy upon the whole society. In order to give this security, however, it is necessary that the insurers should have a very large capital.” (Wealth of Nations by Adam Smith, Scottish Economist – 1776).

The history of insurance traces the development of the modern business of insurance. Insurance is the oldest method of transferring risk, and is deemed to be one of the oldest in the field of economics. The first activities like insurance appeared nearly 4000 years ago and is as old as the historical society.

The so-called “bottomry” contracts were known to merchants of Babylon as early as 4000–3000BC. Bottomry was also practiced by the Hindus in 600 BC and was well understood in ancient Greece as early as the 4th century BCE.

[Bottomry, referring to the ship’s bottom or keel, is a maritime transaction, where the owner of a vessel borrows money and uses the ship itself as collateral. If the money with interest is not paid at the time appointed at the ship’s safe return or if the ship sinks, the owner forfeits the ship itself to the creditor.

While insurance can be traced back thousands of years, it is only in the last half century that we have come to a comprehensive and deep understanding of this most vital, yet complex, economic institution. To really understand insurance, it takes a deep knowledge of the subtleties of risk and probability, of how rational (and not so rational) people behave when faced with risk; of how insurance companies can be structured to cope with risk; of how governments can effectively intercede when insurance markets fail to deliver

Whether in the past periods or in the modern period the main goal of insurance is protecting health and assets of the people. Insurance is the main element in the operation of sophisticated national economies throughout the world today. Insurance stimulates business activities to operate in a cost-effective manner, by managing risks which associated with business activities are assumed by third parties. As we know, risks and bad accidents can happen always in life. These risks affect people badly and negatively every time. But insurance protects people from these risks. We can say that insurance is a measure, which people take in advance to risks which can happen every time and at any time.

The importance of insurance, like other financial institutions such as banking and the stock market, is vital for the sustainable economic growth of any country. The risk is inherent in every human activity ranging from social life to economic activities. The huge contribution of insurance to the economy as a whole, promotes a greater sense of security, peace of mind, reduction in anxiety and fear among individuals, businesses and governments.

The insurance industry is part of the services sector and is deemed to be a secondary branch of economic activity. Its effect is essentially indirect and intangible, because it deals with consequences of economic activity that would occur if insurance did not exist. Insurance serves production and consumption, international and interpersonal trade, payment and credit transactions, as well as the conservation of existing and creation of new wealth. However, the insurance industry has developed differently across industrialized countries due to differences in regulatory legislations by various regimes.

To individuals, insurance purchase enables an individual to sustain continuous consumption of his property in the case of theft or damage or due to other endangerments and perils.

With regard to corporate institutions, insurance enables businesses to operate in a cost-effective manner by providing risk transfer mechanisms.

To the Government, on the other hand, expenditure on damages caused by natural disasters such as fire, flood and other natural disasters is reduced, if not eliminated, with the help of insurance.

In developed countries, insurance has become a vital part of the economy and they make it a point to insure all assets with reputed insurance companies. Insurance lets people as well as businesses protect themselves against certain potential losses and financial hardship at a reasonable acceptable rate. In modern times there are certain specialized insurances which play great roles in the economy of countries.

The importance of the insurance-growth nexus is growing due to the increasing share of the insurance sector in the aggregate financial sector in almost every emerging and mature market economy.

The main intention of this article is to add to the understanding of the role of the insurance sector in the finance-growth nexus – whether and how insurance influences economic growth. The rationale behind this notion is twofold: on the one hand, the importance of the insurance sector within total financial intermediation has risen over time, including the magnitude and intensity of links between insurance, banking and capital markets. Thus the likely impact of insurance on the economy, consequently, increases.

The literature on finance and growth does not, however, pay sufficient attention to the important and rising role played by non-banking financial intermediaries such as insurance companies. While the actuarial processes for insurance have been in continuous development, it really took till the second half of the twentieth century for a modern theory of insurance economics to emerge. This laid out a model of an optimal insurance contract between risk-averse consumers and an insurance company capable of diversification.

In this ever growing field of enquiry, in which rational consumers and rational insurers come together in a mutually beneficial trade of risk, it deepened the understanding of how people come to share risk in an insurance market, and the natural frictions that occur (particularly the conflicting incentives of the policyholders and insurers); there was growing dissatisfaction with a theory that ignored the quirkiness of actual behavior; in real life people might not be quite so rational and raised questions like: “How would insurance market work in a world of limited rationality”?

Modern financial theory has another set of fascinating implications for those interested in insurance. Uncertainty is at the heart of insurance. This is already manifested in our limited knowledge about observable past events. All our activities depend on uncertain and unknown circumstances beyond the control of a single individual. Unambiguous, deterministic cause-effect relationships are replaced by ambiguity in the perception of the economic environment. With respect to the future, uncertainty looms still larger. Insurance is, however, of particular importance for risks with negative consequences.

What does “risk” mean in insurance parlance?

Usually risk is understood to mean as the danger of incurring a loss. This danger can materialize in different ways in a disaster-stricken community, ranging from complete loss, impairment or reduction of value of an asset, to the disruption of business, to the loss of a limb or even loss of life.

What is meant by the colloquial use of the word – “insurance”?

The pertinent literature gives various definitions of insurance. Problems arise because the term originates from business practices.

Individuals seek to protect themselves against irregular but probabilistic shocks impinging on their assets “health”, “wealth”, and “wisdom” by employing one or several tools of risk management, mainly by purchasing insurance. Therefore, the importance of insurance presumably increases with growth in the value of these assets. In step with the growth in general wealth, the concentration of assets has also increased, leading to so-called catastrophic risks.

It will expose us to modern financial theories such as asset pricing theory and option theory and, in doing so, will expose us to such exotic financial instruments as catastrophe bonds. It will take us deep into public policy and the welfare state and into the challenges of operating universal health insurance programs; and it will face us with the challenges of a world where new and unpredicted risks are appearing and for which normal insurance mechanisms may not function; where such catastrophes are either triggered by human failure as a result of man-made disasters; or by nature (natural disasters).

Disasters with the largest financial consequences fall into the category of natural disasters. We have also witnessed that the more recent disasters are also the more severe ones. This gives rise to the conjecture that increasingly, natural disasters are in fact man-made, caused notably by environmental pollution through Carbon-dioxide – GreenHouse Gases, causing global warming, and the latest Coronavirus – Covid -19 pandemic, pushing mankind into a state of extreme, irremediable, ruin and misfortune.

These challenges will lead to the expectation that the demand for insurance will tend to increase in the future. To achieve this, the industry has to be prepared for the unexpected and to be able to timely respond to the challenges laid before them; insurers and reinsurers must know and follow the trends and dynamics that characterises the global insurance and reinsurance industry.

ZULKIFLI NAZIM

[The writer counts over 50 years in the insurance industry and is an Associate of the Chartered Insurance Institute [London] and also holds the title of Chartered Insurance Practitioner; as well as an Associate of the Insurance Institute of India.]



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Opinion

Pot calling the kettle black?

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Doctor Upul Wijayawardhana (eminent physician), posed a riddle for us. He wrote about that island Sri Lanka as ‘ this little dot in the ocean’ when deriding the remark of President Dissanayake who had said that Sri Lanka was a hunduva , a term that indicated a small volume: me hunduve inna puluvan da? (Can you live in this restricted space?) Most sensible people, even uneducated, judge that the volume of a little drop (of whatever) is smaller than that of a hunduva; so is weight. When the learned doctor emphatically maintains ‘….we are not a hunduva’ but ‘… a little dot in the ocean…’, is the pot calling the kettle black or worse?

Physically and population wise, Sri Lanka is neither ‘a little dot’ nor ‘a hunduva. This is all in the rich imaginations of Dissanayake and Wijayawardhana. I once counted that there were more than 50 members of the UN who were smaller than Sri Lanka in physical and population size. England was a sizeable island with a small population in the northwest corner of Europe in late 18th century when it began to become what China, with 1.3 billion people and jutting out to the Pacific, is now. From about 1850, when the population of Great Britain was about 20 million, less than that of Sri Lanka in 2026, it ruled more than half the world. Besides, do not forget Vanuatu, Kiribati, Cook Islands, Antigua and Barbuda, Barbados, Lesotho and New Zealand (who habitually beats us at cricket). New Zealand with 5 million population played against 1.5 billion population India (1:300) for the T20 cricket championship a few weeks ago. I quietly wished New Zealand would win; so much for crap about dots in the Indian Ocean or the south Pacific.

Dr. Wijayawardhana also wrote about history and about ‘The achievements of Hunduwa’. The massive reservoirs and extensive irrigation systems in rajarata and ruhuna as well as the stupa are indeed tremendous works of irrigation and bear witness to superior ingenuity and organising ability, for the time they were built. They compare very well among structures elsewhere in the ancient world. Terms like ‘granary of the East’ must be taken with more than a grain of salt. Facile use of such terms does not take account of whatever shreds of evidence there is of adversity in those times. Monsoon Asia over the ages has more or less regularly suffered from floods, droughts and consequent famines. The last dire famine was in Bengal in 1944. The irrigation works in Lanka were a magnificent response to those phenomena. The modern response has been scientific agriculture making India a major grain exporter, from near famine conditions in 1973-74. Recall Indira Gandhi’s garibi hatao (eliminate poverty) speech to the General Assembly of the UN, that year.

The bhikkhu who wrote down the tripitaka in aluvihara did so because there was the threat of a severe famine in the course of which learned bhikkhu might have come to harm. Buddhist thought over centuries had been passed from generation to generation vocally (saamici patipanno bhagavato savaka (listener) sangho) and the departure from that tradition must have required a major threat of famine. There are stories of bhikkhu from Lanka fleeing from dire straits. In the same vein, while the mahavamsa speaks of kings and their valiant deeds, there is little account of the large mass of little people who lived then. Sensible teaching of the history of a people must include the history of as much of the people as possible and some idea of the history of other peoples in comparable times to avoid feeling dangerously smug and arrogant, which we have seen many times over.

Usvatte-aratchi

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Opinion

Ministerial resignation and new political culture

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Kumara Jayakody

The resignation of Energy Minister Kumara Jayakody comes after several weeks of controversy over his ministerial role. The controversy sharpened when the minister was indicted by the Commission on Bribery and Corruption for a transaction he was involved in ten years ago as a government official in the Fertiliser Corporation. The other issue was the government’s purchase of substandard coal from a new supplier. Minister Jayakody’s resignation followed the appointment of a Special Presidential Commission of Inquiry to investigate coal and petroleum purchases. The minister who resigned, along with the Secretary to the Ministry of Energy, Udayanga Hemapala, stated that they did not wish to compromise the integrity of the investigation to be undertaken by the Commission of Inquiry.

The government’s initial resistance to holding the minister accountable for the costly purchase was based on the argument that the official procedure had been followed in ordering the coal. However, the fact that the procedure permitted a disadvantageous purchase which has come to light on this occasion suggests a weakness in the process. The government’s appointment of the Special Presidential Commission of Inquiry to examine purchases as far back as 2009 follows from this observation. In this time 450 purchases are reported to have been made, and if several of them were as disadvantageous as this one, the cost to the country can be imagined. The need to investigate transactions since 2009 also arises from the possibility that loopholes in official government procedures in the past would have permitted private enrichment at a high cost to the country.

Concerns have been expressed in the past that the purchase of coal and petroleum, often on an emergency basis, enabled the use of emergency procurement processes which do not require going through the full tender procedures. The government has pledged to eradicate corruption as its priority. As a result, the general population would expect it to do everything within its power to correct those systems that permitted such corruption. Accountability is not only forward looking to ensure non-corrupt practices in the present, it is also backward looking to ensure that corrupt practices of the past are discontinued. This would be a matter of concern to those who headed government ministries and departments in previous governments. Those who have misapplied the systems can be expected to do their utmost to resist any investigation into the past.

Politically Astute

One of the main reasons for the government’s continuing popularity among the general population, as reflected in February 2026 public opinion poll by Verité Research, has been its willingness to address the problem of corruption. Public opinion studies have consistently shown that corruption remains one of the top concerns of citizens in Sri Lanka. The arrests and indictments of members of former governments have been viewed with general satisfaction as paving the way to a less corrupt society. At the same time, the resignations of Minister Kumara Jayakody and Secretary Udayanga Hemapala are an indication that not even government members will be spared if they are found to have crossed red lines. This is an important signal, as public confidence depends not only on holding political opponents to account but also on demonstrating fairness and consistency within one’s own ranks.

There appears to be a strategy on the part of the opposition to target government leaders and allege corruption so that ministers will be forced to step down. Organised protests against other ministers, and demonstrations outside their homes, are on the rise. The government appears not to want to give in to this opposition strategy and therefore delayed the resignation of Minister Jayakody until it had itself established the Special Presidential Commission of Inquiry. It enabled the minister to step down without it seeming that the government was yielding to opposition pressure. In political terms, this was a calibrated response that sought to balance the need for accountability with the need to maintain authority and coherence in governance.

The demand by opposition parties to focus attention on the coal problem could also be seen as an attempt to shift the national debate from the corruption of the past to controversies in the present. The opposition’s endeavour would be to take the heat off themselves in regard to the corruption of the past and turn it onto the government by making it the focus of inquiries into corruption. The decision to set up a Special Presidential Commission of Inquiry accompanied by the resignation of the minister and the ministry secretary was a politically astute way of demonstrating that the government will have no tolerance for corruption. It will also help to remind the general public about the rampant corruption of past governments which prevents the opposition’s corruption accusations against the government from gaining traction amongst the people.

New Practice

The resignation of a government minister who faces allegations but has not been convicted is still a relatively new practice in Sri Lanka. The general practice in Sri Lanka up to the present time has been for those in government service, if found to be at fault, to be transferred rather than removed from office. This is commonly seen in the case of police officers who, if found to have used excessive force or engaged in abuse, are transferred to another station rather than subjected to more serious disciplinary action. A similar pattern was seen in the case of former minister Keheliya Rambukwella, who faced allegations of corruption in the health field but was reassigned to a different portfolio rather than removed from government.

Against this background, the present resignation assumes greater importance. It signals a willingness to break with past practices and to establish a higher standard of conduct in public office. However, a single instance does not in itself create a lasting change. What is required is the consistent application of the same principle across all cases, irrespective of political affiliation or convenience. This is where the government has an opportunity to strengthen its credibility. By ensuring that the same standards of accountability are applied to its own members as to those of previous governments, it can demonstrate that its commitment to good governance is not selective.

The establishment of the Special Presidential Commission of Inquiry, the willingness to accept ministerial resignation, and the recognition of systemic weaknesses in procurement are all steps in the right direction. The challenge now is to ensure that these steps are followed through with determination and consistency. If the investigations are conducted impartially and lead to meaningful reforms, the present controversy could mark a turning point. The resignation of the minister should not be seen as an isolated event but as the beginning of a new practice. If it becomes part of a broader pattern of accountability, it can contribute to a new political culture and to restoring public trust in government.

by Jehan Perera

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Opinion

Shutting roof top solar panels – a crime

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The Island newspaper’s lead news item on the 12th of April 2026 was on the CEB request to shut down rooftop solar power during the low demand periods. Their argument is that rooftop solar panels produce about 300 MW power during the day and there is no procedure to balance the grid with such a load.

We as well as a large academic and industrial consortium members have been trying to promote solar energy as a viable and sustainable power source since the early 1990’s. We formed the Solar Energy Society and made representations to Government politicians about the need to have solar power generation. This continuous promotional work contributed to the rapid increase in PV solar companies from three in the early 1990’s to over 650 active PV solar companies established today in the country. These companies have created tens of thousands of high-quality jobs, as well as moving in the right direction for sustainable development.

However, all these efforts appear to have been in vain since the CEB policy makers have continuously rejected solar energy as a viable alternative. Their power generation plans at that time did not include solar energy at all but only relied on imported coal power plants and diesel power generation. Even at the meetings where CEB senior staff were present, we emphasised the importance of installation of battery storage facilities and grid balancing for which they have done nothing at all over the past three decades. Now they have grudgingly accepted the need to include solar energy, which was an election promise of the present government. The government policy is that Sri Lanka should go for renewables to satisfy 70% of its energy needs by 2030 and soon move towards the green hydrogen technology by using solar and wind energy.

The question is why the diesel generators and hydropower stations cannot be shut off one by one to accommodate the solar power generated during the daytime. Unlike a coal-fired plant, diesel generators and hydro power plants can be shut off in a relatively shorter period of time. Norochchalai Lakvijaya power plant produces around 900 MW of power while the total country requirement is 2500 MW on a daily basis. The remainder is provided by diesel generators, hydro and other renewable energy sources.

The need for work to achieve this goal of grid balancing should be the primary responsibility of the CEB. Modern grid balancing systems are in operation in countries such as Germany where around 56% of its energy come from renewable sources. They also plan to increase this to reach 80% of the energy required through renewables by 2030. Our CEB is hell bent on diesel power plants. Who benefits from such emergency power purchases is anybody’s guess?

The Government and the CEB should realise that all roof top solar plants are privately financed through personal funds or bank loans with no financial burden on the Government. It is a crime to request them not to operate these solar panels and get the necessary credits for the power transmitted to the national grid. It appears that the results of CEB’s lack of grid balancing experience and unwillingness to learn over three decades have now passed to the privately-funded rooftop solar panel owners. It is unfortunate that the Government is not considering the contributions of ordinary individuals who provide clean power to the national grid at no cost to the Government. Over 150,000 rooftop solar panels owners are severely affected by these ruthless decisions by the CEB, and this will lead to the un-popularity of this new government in the end.

by Professors Oliver Ileperuma and I M Dharmadasa

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