President Mahinda Rajapakse, who is also the island's finance minister, proposed to set up a new domestic re-insurance firm in his 2007 budget speech last year, in an attempt to retain capital within the country.
Fitch Ratings, which affirmed Sri Lanka Insurance Corp (SLIC) AA- rating with a stable outlook said the government’s move will push too much re-insurance risk to be concentrated on one geographical location.
Sri Lankan insurance firms currently spread about 30 percent of their risks, by re-insuring with overseas partners.
The war-torn island, which is in the midst of an ethnic conflict that has claimed over 60,000 lives since 1972, also runs its own Strike Riot & Terrorism Fund, to help local insurers who find it difficult to place their risks overseas.
As the capital base of local insurance firms expand, companies need to place their risks outside the country to counter future risks.
"As the Sri Lankan sovereign rating is 'BB-' (negative outlook), a government-su