Home Bias

Nov 22, 2006 (LBO) – Government attempts to retain more re-insurance at home may reduce the quality of the cover available from the industry and concentrate too much risk in one geographical location, an international risk analyst has warned. Top local firms were now placing risks with re-insurers with ratings of A- or higher, but Sri Lanka’s sovereign ceiling is BB with a negative outlook.

I understand the desire to retain capital at home, says Mark Nicholson, an insurance analyst from Fitch Ratings, London.

But a local firm would not have a rating higher than BB-.

The Sri Lankan government proposed that 50 percent of risk be ceded to a new domestic re-insurance firm that would be set up, to retain capital within the country.

But the current re-insurance regime has served the country well, says Nicholson.

It was re-insurance that got the industry out of jail from tsunami losses.

Of the insurance claims paid in Sri Lanka after the tsunami in December 2004, 90 percent companies was recovered from re-insurers.

At one time Sri Lanka had a compulsory ceding regime where risks were asked to be placed with the then National Insurance Corporation, but it was later abandoned.