Global ratings agency Fitch Ratings has given Sri Lanka’s insurance industry a stable outlook for 2016, despite the uncertainty over the new rules and dampened growth.
“Fitch ratings sees the outlook on Sri Lanka’s insurance sector as stable even though the split of composite insurers into life and non-life companies, which became mandatory effective February 2015, may create industry uncertainty,” a report said.
It said that this is because most industry players will maintain stable financial fundamentals during the year, supported by moderate sector growth.
In addition to the segregation of life and non-life businesses, insurance companies are required to list the companies by January 2016, increase minimum regulatory capital to Rs.500 million from Rs.100 million and replace rules-based solvency to risk-based capital.
While several companies have already begun moving towards their Initial Public Offerings, a handful has displayed no intention of doing so.
Some companies welcomed the rules as an avenue to discard their non-core operations, selling one of the life or non-life businesses to other parties, while some of those who intend to keep both their operations have been vocal about the new rules.
“Many regulatory changes are positive for the industry as they will promote efficient capital allocation, corporate governance and better risk management,” Fitch said.
However, doubling the number of insurance companies to regulate may place a strain on the government, despite listing on the bourse adding a new layer of regulations.
Meanwhile, Fitch said that while economic growth and under-penetration of insurance in Sri Lanka could increase the total gross written premiums, there will be no major growth in both life and non-life businesses.
“Fitch does not expect significant improvement in life penetration in the short term, due to the low disposable income of the population, and life premiums growth is likely to be moderate. Fitch expects non-life growth to slow as higher vehicle taxes may reduce new car registrations in 2016,” it said.
Intense pricing competition is likely to arise as companies which are expanding will have to fight for a pie of the same size.
“Intense pricing competition in the motor segment is likely to hold the combined ratios (sum of loss ratio and expense ratio) in non-life above 100 percent, which would put pressure on the financial performance of the more aggressive companies, while challenging the market share of others,” Fitch said.