Sri Lanka insurance firms seen under pressure as interest rates fall

Jan 06, 2010 (LBO) – Sri Lankan insurance firms face difficulties in maintaining margins as interest rates fall with most funds in risk-free government securities, RAM Ratings Lanka said. With interest rates falling, however, companies will be challenged to maintain their margins, RAM Ratings said.

Although investments are an integral part of insurance companies, investment management remains fairly rudimentary.

As investment income bolsters financial performance, decisions have been based more on the yields of the investment portfolio rather than the risks it entails, the rating agency said.

As such, we observe that many players in the industry do not have fine-tuned investment policies.

RAM Ratings Lanka said the lack of suitable financial assets is a constraint against diversifying the industry’s investment portfolio.

Furthermore, it said insurance companies lack variety in their long-term investments in relation to matching the long-term liabilities arising from life policies.

Life funds are presently invested in short-term investments and returns on these funds are linked to volatile interest rate fluctuations.

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