Insurance claims arising from recent flooding in Sri Lanka are likely to be manageable for most local insurers due to low retention levels, but changing weather patterns raise long-term risks, says Fitch Ratings. 

The agency expects the sector’s underwriting profitability to weaken in 2016, although this is unlikely to threaten most insurers’ credit profiles.

A severe tropical storm in mid-May caused flooding and landslides in several parts of the country, with areas along the Kelani River in the western province, north-east of the capital, Colombo, among the worst affected. National Insurance Trust Fund (NITF), the state-owned local reinsurer, estimates claims from the disaster of around Rs. 15.5 billion (US$ 107 million).

Fitch expects record-high claims to worsen the combined ratio of non-life insurers in 2016, with higher reinsurance premiums raising future expense ratios. In addition, lower profitability, stemming from higher claims, could affect capitalisation of some lower-capitalised insurers. Fitch says the credit profiles of rated entities, Sri Lanka Insurance Corporation Limited (AA(lka)/Stable), HNB General Insurance Limited (A(lka)/Stable) and Continental Insurance Lanka Limited (A-(lka)/Stable), are likely to remain intact despite these challenges.

Sri Lankan non-life insurers have low retention in the non-motor segment, with more than two thirds of the fire class, which typically covers flood-related policies, being reinsured. Fire class accounted for just 5 percent of total non-life net written premium in 2015. Local regulations require insurers to cede 30 percent of their reinsurance to NITF, with the balance reinsured with the global reinsurance market. Natural catastrophe losses, such as floods, are covered under reinsurance treaties and excess-of-loss reinsurance covers.

Fitch says the foods are likely to raise awareness and increase demand for non-life insurance. Sri Lanka’s uninsured population is high, with non-life penetration at around 0.6 percent of GDP. The non-life insurance market is dominated by motor insurance (65 percent of gross written premiums in 2015). Motor is covered under excess-of-loss reinsurance covers in the event of natural catastrophe.
Changing weather patterns, leading to increased frequency and severity of errant rainfall, raise long-term risks and highlight the need for insurance and proper pricing of such risk, as well as robust flood defence mechanisms, Fitch says. In early April 2016, the government obtained its first natural disaster cover from NITF, insuring itself against Rs.10 billion, with the first claim coming just six weeks later from the May floods.

The Government of Sri Lanka Disaster Management Centre says the May floods, reportedly the worst in 25 years, affected over 300,000 people, leaving 203 dead or missing and over 5,000 houses damaged. Production and storage facilities of several large companies were damaged and business has been interrupted. According to NITF, a handful of large commercial claims are expected to account for over half of total claims.