Financial Times

Tsunami prompts insurance re-rating
Sri Lanka faces the prospect of its insurance risk being re-rated by international insurers to cover earthquakes resulting in higher premiums.

This came as the business community called for a moratorium on political activity, the apparel industry appealed for duty free access to key markets and the government began talks with the US on long term support for the rebuilding effort.

Over a billion dollars worth of aid has already been pledged to help with immediate relief work as well as reconstruction of damaged infrastructure. Damage has been limited to infrastructure, tourism and fisheries with other sectors, especially the crucial agriculture sector, being spared.

International loss adjusters now in the island on behalf of re-insurers to evaluate insurance claims resulting from the damage caused by the tsunami will also re-rate the country taking into consideration the new risk of earthquakes. Until now Sri Lanka was not considered to be within an earthquake prone region but analysts said this may change fast.

Chandra Jayaratne, managing director, Eagle Insurance told journalists last week that re-insurers are re-assessing the country risk for earthquakes and studying the situation with scientists.

Analysts said a re-rating will swell insurance premiums up to 30 to 40 percent. "After the island's main airport was attacked in 2001 there was an increase of 20 percent on ships and aircraft premiums and it will be the same scenario for earthquakes," an analyst said.

Dimuthu Abeyesekera, CEO, Asha Phillip Securities Ltd., said if the country is re-rated for earthquakes and other possible disaster covers, the premiums would go up considerably.

Buddhika Piyasena, Assistant Vice President, Fitch Rating Lanka said though the premium cost will inflate, it is still uncertain whether it will be added on to policies this year, because the reinsurance renewal contracts have been prepared.

"The insurance plans for 2005 have already been drafted by the insurers with their re-insurers," he said, adding the higher premiums will kick in by next year. Presidential advisor and chairman of the Task Force to Rebuild the Nation (TAFREN) Mano Tittawella said the government was holding talks with lenders on debt relief and that aid funds pledged by donors amount to over a billion dollars.

“This is an opportunity for Sri Lanka to now put in place new infrastructure and systems that will meet international standards and attract significant long term investments, both locally and internationally," Tittawella told a news conference.

Asked about the growing US military role in helping Sri Lanka recover from the disaster, Tittawella said the US was playing a significant role in disaster relief and that talks had begun on long-term US support for the reconstruction effort.

"The US has made available to Sri Lanka equipment and logistical support. The US taking a very active role in clearing debris and the immediate repair of roads and some 30 bridges. This type of assistance is crucial for the rest of the relief work to take place."

A US official said talks had begun on long-term support. Preliminary estimates of the damage caused by the tsunami has indicated that the cost of relief, rehabilitation and reconstruction this year alone will amount to $1.3-1.5 billion, Central Bank governor Sunil Mendis said last week.

"That's the cost for 2005 but more funds would be needed in the next two years," he told a news conference. "This means not only for repairs but improvement to infrastructure as well."

Tittawella said the reconstruction effort will kick off by January 15 and while most of the damage, such as to houses, could be repaired within six months, infrastructure that was destroyed like the southern railway line would take longer to rebuild.

According to latest figures, 93,507 houses were totally wrecked while 21,700 were partially damaged in the tsunamis. Central Bank governor Sunil Mendis said the cost of housing and township reconstruction alone will amount to about $900 million.

TAFREN was set up to help co-ordinate the reconstruction work with donors, line ministries and other organisations and would help implement the government's draft action plan.

However, its composition was criticised by Surath Wickremesinghe, president of the Chamber of Construction Industries Sri Lanka. "It is not a properly formulated one because it consists mostly of corporate sector personalities. If it is to be a forward-oriented task force they must work along with a multi-disciplinary professional group."

A draft bill would be presented to parliament soon to convert the task force into the Authority for Rebuilding the Nation. Meanwhile, the government has called on America and Europe to remove punitive tariffs imposed on apparel exports in order to help the country rebuild after the tsunami disaster.

Apparel exports to the US, the biggest market, face a 20 percent import tariff while in the EU the duty is 12 percent. The industry is seeking duty free access to compete with cheaper exports from China, which is expected to increase its share of the world's clothing market to 50 percent with the phasing out of textile quotas on December 31, 2004.

The Joint Business Forum has called for a "united concerted effort" from all citizens and more importantly, the political leadership, to ensure that the country is brought back to normal as soon as possible.

"The President should endeavour to form a Government of National Reconciliation and Reconstruction," J-Biz chairman Kingsley Bernard said in a statement. "All political parties (must) voluntarily agree to place a moratorium on all political activities during the first half of 2005."

Although the damage caused by the tsunami will affect economic growth in the first two quarters of 2005, the huge amount of aid pledge by donors and the reconstruction effort will give a fillip to the economy, ease pressure on the rupee and help improve the balance of payments.

"The situation is much better," Central Bank governor Sunil Mendis said. "There's a huge amount of aid pledged by donors which has already had an impact on the exchange rate. So the rupee has appreciated in the last few days and we expect it to appreciate further."

Mendis said exporters need not fear their competitiveness will be eroded as the effective exchange rate is down by about three percent while competing currencies have appreciated against the dollar.

IMF is ready to grant an emergency loan of around $150 million which will be available in four weeks or so and defer current loan repayments which was $350 million this year, Mendis said. "This will help the balance of payments. It will have a big impact by the year's end."

Cash outflow in the first half of the year on account of petroleum imports will substantially be reduced because of lower oil prices and more availability of hydropower. "We see an improvement in oil prices which have declined in recent times. The CPC import price for September was $42.83 per barrel, in November $38.33 and it should be down in December too."

The hydro-reservoir capacity which was 33.5 percent at end-2003 has gone up to 61.5 percent which again should help the economy. "About 60 percent of the oil imported is used for thermal power generation," Mendis said. "So we need to import less oil this year."

The fisheries and tourism sectors are expected to bounce back relatively quickly but rebuilding infrastructure, which was badly affected, will take longer, at least 1-2 years, Mendis said. "It is important to remember that other sectors like tea, rubber and apparels were not affected. So there's very minimal impact on export revenue," Mendis said.

Fisheries Minister Chandrasena Wijesinghe said according to a rough estimate the fishing industry had suffered a loss of Rs 49 billion in terms of destroyed boats and damage to harbours.

Companies closely involved with farmers said the tsunami does not appear to have inflicted much damage on agriculture in the east since the 'rice belt' is about 5-6 km inland. "Initial reports were a little worrying but the impact on agriculture appears to be very marginal," said Hayleys director Rizvi Zaheed. "Even in the south the effect on agriculture is not that great."

Reports from company officials who visited affected areas and from dealers indicate that most of the agricultural land was not affected and the damage confined to only coastal areas. Floods caused by recent heavy rains had inundated significant areas of paddy land in Amparai which accounts for about 10 percent of the current Maha season but with the crop fairly mature no lasting damage is anticipated if the waters recede now.

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