Asset risk at Sri Lankan insurers has increased due to the sovereign’s weaker credit profile and the consequent lowering of national ratings of some state-owned and private-sector institutions, says Fitch Ratings in a report published today. The increased asset risk, however, will not greatly affect the regulatory capital ratios of most Fitch-rated Sri Lankan insurers due to the limited rise in risk charges according to local risk-based capital (RBC) rules.
The local regulatory RBC rules exempt debt securities issued or guaranteed by the government from charges on credit and concentration risk in the calculation of the regulatory capital ratio. In addition, some of the recent negative national rating actions were within the same national rating category and therefore not subject to additional credit risk charges according to these rules.
Fitch downgraded Sri Lanka’s sovereign rating to ‘CCC’, from ‘B-’, in November 2020 due to the country’s increasingly challenging external-debt repayment position over the medium term. We estimate that as at end-June 2020 Fitch-rated insurers had invested around 55% of their fixed-income portfolios in direct government securities, such as treasury bills, bonds, Sri Lanka development bonds, repos and unit-trust assets backed by government securities, and around 16% in deposits and debt securities issued by state-owned enterprises, including banks, non-banking financial institutions and corporations.
Fitch recalibrated the national rating scale following the sovereign downgrade, resulting in the downward revision or downgrade of the national ratings of some state-owned and private-sector institutions. We estimate that around 12% of the fixed-income investment portfolios of Fitch-rated insurers, or around 28% of deposits and debt instrument portfolios, were invested in these entities.