The rating agency said growth could sustained with life insurance which was relatively under-penetrated.
"Also, there are improved prospects in the non-life segment, following a sharp increase in new vehicle registrations and higher trade activity, supported by better domestic growth prospects," Fitch said.
"Key challenges to local insurers remain that of maintaining underwriting profitability in the motor segment (given competitive pressures), and also in maintaining market shares in life and non-life insurance as new players enter the market."
The motor business has been growing amid lower import duties but competition is high and newer players have been eating into the market share of larger firms.
The claims ratios for the motor segment averaged 64.2 percent over 2007-2010, and are likely to remain high in 2011."As such, underwriting profitability remains under pressure with many companies posting combined ratios above 100 percent, and having to rely on investment income to compensate for underwriting losses.
"Fitch notes that the high investment returns earned in 2010 are unlikely to recur in 2011 and 2012."
Investment income had fallen to 10.8 percent of average assets in the first half of 2011 from 18.9 percent in 2011.
If competition in motor gets more intense and underwriting profitability is weakened due to higher claims ratio it could hurt the outlook for the sector, which was now stable. A weakening of capitalization or solvency could also hurt the outlook.
Fitch said fundamentals of insurers rated by the agency had healthy capitalisation and good profitability, supported by improved macroeconomic factors.
The regulator, Insurance Board of Sri Lanka had asked insurers to separate their life and general businesses by 2015, and increase the minimum capital requirements.
New licensees are expected to have 500 million rupees of minimum capital requirement (MCR) and existing players are expected to be asked to do the same in the "near-to-medium term".
"This could lead to some consolidation as many of the smaller players currently fall short of the requirement," the rating agency said.
"Fitch believes industry capitalisation should strengthen in the medium-term with higher MCR and mandatory listing requirements (deadline is 2016) providing companies with an added avenue to raise funds.
"However, for insurers who already meet the MCR, the separation of life and general segments and consequent re-allocation of capital may change the risk profiles of certain companies post separation."