Reinsurance keeping Lankan insurers afloat amid floods, says Fitch

Sri Lanka’s general insurance companies are likely to be able to cope with the increased number of claims resulting from flood damages due to adequate reinsuring, credit ratings agency Fitch Ratings said yesterday.

“Most Sri Lankan non-life insurers should be able to absorb near-term volatility and the effects of adverse weather-related events given the extensive use of reinsurance,” Fitch said.

However, it said that the frequency of floods could affect the capital of insurers—especially that of the state-owned reinsurer, the National Insurance Trust Fund Board (NITF), which reinsures 30 percent of local non-life insurance and provides the National Natural Disaster Insurance Scheme (NNDIS) for all households and small businesses.

Fitch said that due to the changing weather patterns there could be a need for revisiting risk assessments and the pricing of insurance services, while the back-to-back landslides and floods in May 2016 and May 2017 would put upward pressure on reinsurance premiums paid by the primary non-life insurers.

“The credit profiles of Sri Lanka’s non-life insurers – Sri Lanka Insurance Corporation Limited (AA+(lka)/Stable), HNB General Insurance Limited (A(lka)/Stable) and Continental Insurance Lanka Limited (A(lka)/Stable) – are likely to remain intact despite these challenges,” Fitch added. According to the NITF, the 2016 floods saw claims being made for Rs.17 billion due to the effect the floods had on major industrial areas, while the 2017 floods saw approximately Rs.4 billion in claims.

“However, despite these large claims, we estimate the net impact on non-life insurers due to the May 2016 floods to have been around Rs.0.5-0.6 billion, mainly from retention and reinstatement costs. These costs were likely to have added around 70 basis points to non-life insurers’ loss ratios in 2016,” Fitch said.

Fitch however noted that due to the delays in the government approvals for reinsuring the NNIDS for 2017-2018, the NITF had to incur Rs.600 million in losses, which pushed the NITF’s company retention to Rs.1 billion.

The ratings agency said that while the NITF has satisfactory capital buffers to absorb flood-related net losses, continued payment of high dividends to the government could put pressure on the NITF’s capitalization.