Sri Lankan insurers maintain fundamentals, Fitch says
View(s):Sri Lankan insurers are likely to maintain their financial fundamentals, supported by moderate market growth and under-penetration, Fitch Ratings Lanka has said.
This, the agency notes in a new report, is despite the many regulatory reforms, including the requirement that composite insurers separate their life and non-life businesses in early 2015.
Sri Lanka remains heavily under-penetrated by insurance with a total premium/GDP ratio of just 1.09 per cent. “Fitch does not expect any drastic increase in the penetration of life insurance in the short to medium term as disposable income levels is still low. In addition, there is a lack of awareness and appreciation of the concept and benefits of insurance, and lack of confidence in the industry,” the report said.
Most composite insurers are likely to split their life and non-life businesses in January 2015. Fitch expects the separation of the businesses to provide greater focus and transparency, and enhance policy holder protection. However, some insurers may face operational uncertainties as a result.
In 2014, the regulator tested the risk-based capital (RBC) regime and companies will report RBC ratios as well as solvency ratios to the regulator in 2015. The RBC regime is expected to replace current solvency regime by 2016. The minimum capital requirement for each line of business – life and non-life – has been increased to Rs.500 million from Rs. 100 million and insurers are expected to list in the Colombo Stock Exchange by 2016, subject to certain exemptions.
“Many established insurers are striving to grow their profitable life businesses inorganically and some are considering divesting their non-life businesses, competition for which is intense. Fitch expects the more stringent regulation to promote market consolidation due to higher compliance and administrative costs. Consolidation would be a positive development, especially for insurers with low capital bases,” it said.
Fitch expects underwriting losses of many non-life entities to continue in the short to medium term, driven by price competition. The smaller companies will strive to achieve critical mass, with each segment of business having to operate separately from early 2015. Fitch said it expects falling interest rates to affect the investment income of many insurers who are accustomed to higher returns that in the past counter-balanced poor underwriting performance in the non-life segment.
The sector outlook could be revised to negative if the split of composites leads to a significant decrease in capitalisation and solvency ratios. Any weakening in risk capital due to profit volatility or higher equity exposure in investments will be negative to issuer ratings. Sever e price competition in motor insurance, leading to weak technical results, and/or significant reduction in investment income due to falling interest rates that result in sustained losses would be negative for the non-life industry.
Significant growth in real gross domestic product and disposable income that is conducive to deeper penetration will be positive for the industry.