Sri Lankan non-life insurers’ capital to normalise after improving on lower claims

The regulatory risk-based capital (RBC) ratios of non-life insurers in Sri Lanka will normalise in the medium term with the resumption of dividend pay-outs to shareholders and a likely moderation in earnings, Fitch Ratings says.

RBC ratios of non-life insurers improved considerably in 2020 due to the low motor and medical insurance claims following pandemic-led lockdowns as well as insurers' high retention of profits. We estimate the regulatory available capital of Fitch-rated non-life insurers to have increased by 30% in 2020 compared to an increase of 6% in 2019. As a result, the average RBC ratio of rated non-life insurers rose to 278% in 2020 from 221% in 2019 (2018: 211%).

Claims from motor and medical insurance, which collectively accounted for well over 60% of the industry’s premiums and net claims, markedly reduced. Claims ratios of Fitch-rated non-life insurers improved to 49% in 2020 (2019: 66%), supporting underwriting profitability. In addition, a directive in 2020 by the Insurance Regulatory Commission of Sri Lanka for all insurers to suspend dividend distributions contributed to the insurers’ higher profit retention.

Fitch observes that most insurers have restarted dividend distribution in 2021 upon obtaining regulatory approval, although some insurers continue to cautiously retain a portion of profit to enhance capital buffers to weather any potential earnings volatility from Covid-19-related disruptions.

Fitch expects earnings to decline in 2021 with claims picking up from unusually low levels in 2020. Motor claims frequency is likely to gradually increase while a potential weakening of the rupee against major currencies may also raise claim costs. Fitch believes that a steady growth in non-life insurers’ exposure to medical insurance policies, which typically have higher claims ratios, may also contribute to profit normalisation in the medium term. We think the impact on claims ratios from the renewed travel restrictions from May 2021 will be limited unless these restrictions are extended or expanded to control the spread of the coronavirus.

In addition, we believe that investment incomes of most non-life insurers underwriting short-tail liabilities will soften in the near term due to their high exposure to short-term, fixed-income assets that will likely be repriced at a lower yield at maturity due to the low interest rate environment.

Growth in new non-life business volumes will also be limited by a reduction in new-vehicle registrations as a result of the government curbs on motor-vehicle imports to control currency depreciation. Fitch expects the ban on motor-vehicle imports to continue at least over the near term.

We also believe the high price competition in the domestic non-life industry will constrain insurers’ ability to pass on higher input costs through price increases to policyholders.
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However, the insurers’ efforts to digitise distribution and the gradual increase in exposure of some insurers to non-motor lines, such as medical, fire, property and micro insurance classes, should partially offset pressure on non-life business growth.

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