ASSESSING FINANCIAL SOUNDNESS OF SRI LANKAN LIFE INSURANCE COMPANIES: A CARAMELS MODEL APPROACH

Abstract

This study examines the financial stability of life insurance market of Sri Lanka and assesses important financial soundness metrics unique to the sector using the CARAMELS model. The current study has gathered data relevant to the period from 2016 to 2023 during which the country experienced a visible economic downturn, high degree of economic volatility, from a sample of 13 life insurance companies that are currently active in the Sri Lankan life insurance market. The study primarily aims at assessing the financial stability of the life insurance market in Sri Lanka and in determining how the relevant indicators affect the industry's financial stability. In-depth insights are derived from the data through descriptive statistics, correlation analyses, and sub-analyses; nevertheless, the panel data regression model is mostly used to offer deep and perceptive information on the financial landscape of the industry. The findings reveal that the statistically significant financial soundness metrics of capital adequacy and earnings/profitability have a significant impact on Return on Assets (ROA). The financial situation of the companies is determined by the sub-analysis that is carried out to classify public and private limited enterprises, using the financial data relevant to the previous eight years. It is found that compared to their rivals, companies with a larger market share are in better financial condition. This study offers vital recommendations for life insurers and regulators to promote financial soundness, and protect public confidence by highlighting the importance of adhering to better risk management practices and effective oversight, capital adequacy rules, and investment strategies. The findings clearly highlight the primary forces that ensure the financial soundness, and these insights could be vital in promoting the long-term viability and ensuring the expansion of the life insurance market of Sri Lanka.