Sri Lanka’s motor insurance sector growth will slow as the recent excise duty increase and luxury taxes imposed from the budget presented in March will dent the demand for motor vehicles but the non-motor segment shows prospects for longer-term growth with the government support, said Fitch Ratings.
Until recently, Sri Lanka had a vibrant motor insurance sector contributing 60 percent to the total non-life insurance sector gross written premiums (GWP) and the sector’s dominance is unlikely to fade in the foreseeable future, due to the mandatory requirement for vehicle owners to at least have a third party motor insurance policy.
“The number of registrations of brand-new and pre-owned motor cars and three-wheelers was subdued over the past 12-24 months, due to the higher import duties and the cut in the upper band of loan-to-value ratios associated with vehicle leases.
The growth in motor insurance premiums slowed considerably as a result, to 13.7 percent in 2017, from 19.1 percent in 2015,” Fitch Rating stated in a brief note, which evaluated the impact of the recent tax changes on vehicle imports.
After opening the floodgates for all types of vehicle imports in 2015, in what could be termed as a deliberate policy error aimed at stoking the animal spirits of the economy.
But in the subsequent year, the government was forced to put the brakes on new imports to curtail the outflow of foreign exchange and reduce traffic congestion in cities, which became a malaise around the country.
On March 6, in further tightening the tax regime, aimed at curbing vehicle imports, the government raised excise duties on imports of fuel-powered and hybrid passenger motor vehicles based on their engine capacities.
Further, the government also introduced a luxury tax on vehicles with a cost, insurance and freight value exceeding Rs.3.5 million, Rs.4.0 million and Rs.6.0 million for fuel, hybrid and electric vehicles, respectively.
Fitch is of the belief that the higher motor insurance premiums, due to larger sum insured values after factoring the increased import duties, would be insufficient to offset the impact from lower import volumes.
“In addition, we expect the lag in the repricing of existing motor insurance policies to further hurt growth as import volumes decline.
Nevertheless, we believe the motor insurance class will remain the largest contributor to non-life GWP in the medium term, due to sustained consumer preference for comprehensive motor insurance policies amid the increasing frequency of road traffic accidents in Sri Lanka and the mandatory requirement for vehicle owners to obtain at least a third-party motor insurance policy,” the rating agency added.
Meanwhile, Fitch Ratings remains optimistic that the non-motor segments such as property, engineering, health and micro-insurance to revive in the longer term with the support programmes from the government.
The government proposed to support start-ups and SMEs through concessionary rate loans, broad measures to improve exports and proposed investments in several social and economic infrastructure facilities.
According to Fitch’s measures, non-motor insurance policies’ contribution to overall GWPs rose to 40 percent in 2017, from 38 percent in 2016.
Meanwhile, the government’s move in its recent budget to increase its premium contribution to the National Natural Disaster Insurance Scheme, managed by the National Insurance Trust Fund Board, by Rs.1.0 billion to Rs.1.5 billion, is also expected to contribute towards the growth of the non-motor insurance class in addition to supporting the viability of the scheme.