Most Sri Lankan non-life insurers should be able to absorb near-term volatility and the effects of adverse weather-related events given extensive use of reinsurance, says Fitch Ratings.
However, frequent occurrence of major catastrophic floods could affect insurers’ capital, especially that of state-owned local reinsurer, National Insurance Trust Fund Board (NITF, AA-(lka)/Stable).
Changing weather patterns have increased the frequency and severity of errant rainfall, raising long-term risks for insurers and highlighting the need for more rigorous pricing and assessment of such risks in Sri Lanka’s highly competitive non-life sector. Reinsurance premiums paid by primary insurers are also likely to increase. 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.
NITF estimates claims of around Rs 4 billion from the May 2017 floods, which mainly affected suburban and rural areas, significantly lower than claims of around Rs17 billion from the May 2016 floods, which predominantly affected industrial areas, with a handful of large commercial claims accounting for a large share of the total. 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 billion-0.6 billion, mainly from retention and reinstatement costs.
These costs were likely to have added around 70bp to non-life insurers’ loss ratios in 2016. Local regulations require 30% of all non-life reinsurance be ceded to NITF, with the balance ceded to the international reinsurance market.
NITF’s reinsurance portfolio is protected via retrocession cover, which has helped contain losses from the record-high flood-related primary insurer claims.
NITF has provided the Sri Lankan government with natural disaster cover since April 2016 - the National Natural Disaster Insurance Scheme (NNDIS) - which covers all households, small businesses and relief work stemming from natural disasters.
Cover was increased to Rs15 billion for 2017-2018, from Rs10 billion, with total claims of around Rs3.8 billion in 2016 and Rs 1.6 billion in 2017. NITF recovered Rs 2.6 billion in 2016 via NNDIS’s reinsurance cover that was in place for 2016-2017; that is, after a deductible of Rs 0.5 billion, which was retained by the company, as well as NITF’s share of claims on NNDIS’s reinsurance cover.
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