In the South Asian region, Sri Lanka was the first country to commence financial sector reforms. The broad idea of implementing such reforms was to enhance economic growth, while improving financial market efficiencies to generate more benefits to the general public. An efficient and healthy financial system is a vital and necessary component for faster economic development. Economic history contains many examples of linkages between financial sector development and economic growth. Financial sector development includes both financial widening and financial deepening. Financial widening refers to the expansion of financial services and growth of financial institutions, while financial deepening refers to either an increase in the per capita amount of financial services and institutions or an increase in the ratio of financial assets to income (Ahmed and Ansari, 1998).
The Sri Lankan financial sector is one of the well-structured sectors with a lot of institutions and instruments. The financial sector under the Central Bank of Sri Lanka consists of licensed commercial banks, licensed specialized banks, registered finance companies, specialized leasing companies and other financial institutions, such as primary dealers, unit trusts, insurance companies and superannuation funds. However, the contribution of Sri Lankan insurance sector is the lowest among the different constituents of the financial sector.
Table 1 shows that the Sri Lankan insurance sector constituted over and above 3 % of the total assets of the financial sector during 2005-2008. While the banking sector enjoyed the lion’s share in the total assets of the financial sector with 69.1% in 2008, the non-banking companies, specialized financial institutions and contractual savings institutions accounted for 4.6%, 4.8% and 18.3% of the total assets of the financial sector. The Sri Lankan economy has lot of expansionary scope, especially in the agricultural sector and service sector, which should move ahead with the growth of the insurance sector.