Losses from SL riots manageable for insurers; gross losses to exceed LKR1bn: Fitch Ratings

Sri Lanka’s state-owned National Insurance Trust Fund Board’s (NITF, A+(lka)/Rating Watch Negative) Strike, Riot, Civil Commotion and Terrorism (SRCCT) fund will bear the brunt of losses stemming from recent riots in the country, with primary insurers experiencing little impact, says Fitch Ratings.

We believe gross losses from the riots are likely to exceed LKR1 billion. However, NITF’s net loss will be limited to this amount due to the protection provided by its excess of loss reinsurance cover. We expect NITF to have sufficient liquid assets to meet its claim obligations.

Widespread riots broke out in Sri Lanka following an attack on anti-government protests in Colombo on 9 May. Rioters set vehicles on fire and destroyed property; including houses belonging to politicians, according to reports. It is too early to estimate losses from the event, although NITF has started to receive claims from primary insurers.

The SRCCT fund, which is managed by NITF, provides cover against losses to property due to strikes, riots, civil commotion and terrorism. Primary insurers provide such cover as an add-on to their non-life products. Technical advisory and working committees, comprising industry participants, oversee the management of the SRCCT fund. Regulation requires NITF to administer the SRCCT fund separately from its other business lines.

Primary insurers have net retention of LKR2.5 million per policy for motor claims under the SRCCT cover, subject to an aggregate amount of LKR10.0 million, with additional losses passed on to NITF. Non-motor claims are fully passed on to NITF, subject to any excess borne by the policyholder. Once total losses exceed LKR1 billion, NITF is able to recover additional losses under its excess of loss reinsurance cover up to a maximum of LKR10 billion. NITF’s reinsurance cover for SRCCT, which is placed with international reinsurers, is effective from February 2022 to July 2023.

NITF’s net assets exceeded LKR14 billion at end-2020, while the SRCCT line recorded a net profit of LKR5 billion for the year. The fund’s assets were predominantly invested in local-currency denominated securities issued by the government of Sri Lanka. We affirmed Sri Lanka’s Long-Term Local-Currency Issuer Default Rating at ‘CCC’ on 19 May, as the government has continued to service local-currency debt and we assume this will continue, despite defaulting on its foreign-currency debt obligations.

We believe the SRCCT fund could see elevated losses in the near-term as a result of the ongoing civil unrest amid Sri Lanka’s weak economic conditions. Cover provided by the SRCCT fund saw an increased uptake following the Easter Sunday terrorist attacks in 2019, with annual premiums rising to LKR6.1 billion in 2020, from LKR4.6 billion in 2018. SRCCT is NITF’s most profitable business line, with a loss ratio of less than 2% in the past five years, except in 2019, when the loss ratio reached 12%.

We do not expect claims from the recent riots to affect NITF’s capital position. However, weakness in its non-SRCCT business lines could affect the rating, as reflected in the Rating Watch Negative. We recently placed the National Ratings of all rated Sri Lankan insurers, including NITF, on Rating Watch Negative, due to elevated investment and liquidity risks, pressure on regulatory capital positions and a likely worsening in financial performance.

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