Business Times

Economic and North East growth adds up to insurance gains : RAM

Ratings agency RAM has issued an update on Sri Lanka's Insurance industry which concludes that gains made in both the general and life segments during the first half of 2010, a result of what the update terms "general improvements in macroeconomic conditions", will "keep up this positive trend, supported by more robust economic growth and greater penetration in the northern and eastern regions." This strong 2010 for general insurance came after a contraction in 2009, while double-digit growth was experienced in life insurance premiums in 2010, following from a flat 2009.

However, putting this in context, the update stated the "insurance sector accounted for a relatively small portion of the domestic financial industry, making up only 3.2% of the entire system’s financial assets as at end-December 2009. Moreover, the insurance penetration rate is also lower than those of other Asian countries, with total premiums per capita coming up to a mere US$ 30.10 as of end-December 2009 (end-December 2008: US$ 29.40)."

The update also noted that, while revamped rules requiring listing and classification of solvency margins as well as permitting foreign currency investments, would be positive overall; "the new regulations will expose insurers to operational and foreign exchange risks." Meanwhile, the update also indicated that "general insurance claims have remained relatively stable, hovering at around 62% for the general segment. Additionally, the combined ratio for this segment has been kept above 100%, signifying that general insurance companies have been incurring underwriting losses. Consequently, they have been relying on investment returns for profits." However, it was suggested that "most general insurance companies in other South.

Asian markets are also reporting underwriting losses." And, as such, "claims in the general segment are expected to increase due to the heavy floods in 2010 and early this year. At the same time, we note that its impact on insurers’ bottom lines may be offset by an expansion in premiums, supported by the more conducive economic climate."

It said that at the same time, "the life segment has experienced an increase in claims among RAM Ratings’ rated companies as well as listed companies. This has been mainly due to policy lapses brought on by the harsh economic landscape. Unlike the general segment, most life insurers are currently earning underwriting profits as the life market has yet to mature and claims will only arise over the long-term. Given the low penetration rate in the life insurance market, we believe that there is still room for growth. We expect claims in this segment to ease over the medium term, as the sector expands against the backdrop of the improving economic conditions while replenishing maturing contracts." Wrapping up, the update reveals that insurance companies have been shifting their investments to the booming equity market to maintain their investment income as interest rates taper... In the medium term, overheads may experience upward pressure as insuance companies seek to expand their branch networks into the northern and eastern provinces of Sri Lanka."

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