Sri Lanka’s insurance industry expansion is likely to moderate in the near term, based on Fitch Ratings’ expectations of slower motor-insurance premium growth due to sustained tax rises on imported vehicles, intense price competition in the non-life market and a slower recovery in economic activity.
However, long-term momentum should be helped by Sri Lanka’s low insurance penetration, rising awareness of insurance and a gradual increase in the contribution from non-motor lines, such as property, health and micro insurance. Industry premiums rose by 13% in 2018, moderating from 15% in 2017, due to the slower growth of motor premiums, delays in renewing the state-sponsored health insurance policy for school children and subdued consumer affordability affecting life-insurance growth. What to Watch Profitability Pressure: Fitch expects Sri Lanka’s weakened currency and the higher tax liabilities of life insurers to cut insurers’ net profit in the near term.
The rupee depreciated by around 19% against the US dollar in 2018, which increased the claims paid by non-life insurers, particularly in relation to the higher cost of imported automotive components.
In addition, life insurance surpluses were taxed at an effective rate of 28% from April 2018; most life insurers paid lower taxes under the previous tax regime due to a lower tax base. Catastrophe Risk: We expect the increased frequency of weather-related events to remain the main source of long-term risk to non-life insurers’ capital.
However, most non-life insurers continue to moderate volatility in their profitability by using reinsurance protection and maintaining risk-based capitalisation ratios above the 120% regulatory minimum. Softer Investment Yields: The Central Bank of Sri Lanka imposed an interest-rate cap on bank deposits in April 2019.
This was followed by a 50bp cut in policy rates in May 2019 to stimulate economic growth. We expect this to somewhat increase insurers’ reinvestment risk, especially for non-life insurers with short portfolio duration. Continued M&A Activity: We regard Sri Lanka’s non-life market as crowded and ripe for consolidation due to intense price competition, which has kept the industry’s combined ratio high at around 100% in recent years.
There have been four M&As since 2014. Ratings Impact: Neutral Fitch expects the credit profiles of rated insurers to remain stable in the near term, supported by sustained capitalisation and financial performance.
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