May floods could threaten small insurers’ capital levels: Fitch

14 July 2016 09:44 am - 0     - {{hitsCtrl.values.hits}}

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Higher flood-related claims could affect some of the lower capitalised insurers and the situation could be further threatened by weaker profitability driven by intense competition in the non-life business – specially in motor insurance, according to Fitch Ratings Lanka. The recent floods in May – the worst in 25 years – wreaked havoc in many parts of the country, affecting both personal and commercial properties, brought production activities to a partial halt.

The state-owned reinsurer, the National Insurance Trust Fund (NITF) estimated the total claims from the disaster to be around Rs.15.5 billion or US $ 107 million. “Fitch expects weaker profitability, driven by intense competition, especially in motor, to threaten the capitalization of some lower-capitalized insurers. The capitalization of some lower-capitalized insurers could also be affected by lower profitability stemming from flood-related claims,” the rating agency said. Sri Lanka, in 2016, migrated into a Risk- Based Capital (RBC) model after running it parallel for two years from the earlier solvency regime. Meanwhile, the minimum capital level of all insurers was also raised to Rs.500 million from Rs.100 million. However, Fitch in its insurance market dashboard released for the second half of the year pointed out that some of the small players had in fact failed to meet this regulatory minimum by end-2015 even under the old capital regime. “According to the Insurance Board of Sri Lanka, out of all 18 non-life insurers, four small players collectively accounting for 9 percent of industry gross written premiums in 2015 had failed to meet the regulatory minimum under the previous solvency regime by end-2015,” the note said. Fitch sees the ongoing regulatory changes positive for the industry as they will promote efficient capital allocation and improve corporate governance.

Meanwhile, the rating agency said the record high flood claims could worsen the combined ratio – net claims and net expenses ratio – of non-life insurers, impacting their profitability. “Higher reinsurance premiums will also raise expense ratios, once reinsurance contracts are renegotiated upon renewal for 2017.” Further, the underwriting profitability is also likely to weaken during the second half of the year. However, the recent floods could raise the risk appetite of the Lankan insurers, which will lead to increase demand for non-life insurance, which is industry positive. “Changing weather patterns, leading to increased frequency and severity of errant rainfall, raise long-term risks and highlight the need for insurance and proper pricing of such risk, as well as robust flood defence mechanisms,” Fitch said in an earlier note.

Sri Lanka’s uninsured population remains high with the non-life penetration remaining woefully low at 0.6 percent of the gross domestic product (GDP). Sri Lanka’s non-life insurance market is dominated by motor insurance, which accounted for as much as 65 percent of gross written premiums in 2015. The fire policy, which typically covers floodrelated claims, accounted for only 5 percent of total non-life net written premiums in 2015. Fitch however said claims arising from the floods in May are expected to be manageable for most local insurers due to low retention levels.

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