Competition among non-life insurers to intensify as premiums fall: Fitch

• Lid on vehicle imports & economic stress from pandemic cited as key reasons 
• Motor insurance accounts for 60% of total non-life business gross premiums 
• Insurers expected to expedite expansion into non-motor biz as motor business falters 

Price competition among non-life insurers is projected to intensify in the short-term amid the slowing down of new vehicle registrations, but the sector is expected to speed up expansion into non-motor business to make up for the lower motor insurance sales.  

Sri Lanka’s non-life insurance sector is largely reliant on the motor insurance business, which accounts for 60 percent of the industry gross premiums and it thrived predominantly on the growing stock of vehicle imports year-over-year. 

But with the government suspending personal vehicle imports since March, as part of its broader curbs on non-essential imports to preserve foreign exchange at the onset of the pandemic, the non-life insurers have been struggling to find growth from motor 
insurance business.  

As a result, the sector’s share of motor insurance is expected to fall with the reduction in new vehicle registrations, Fitch Ratings said in a report on the sector.  

“We believe the release of the limited new-vehicle stocks into the market will be insufficient to offset the contraction in new business premiums,” the rating agency added. 

Authorities have indicated that the current ban on imports on vehicles could persist at least over the near term until the country passes the worst of the economic stress caused by the pandemic.

According to the government, Sri Lanka has in possession a vehicle stock sufficient for the next two years as imports continued at an unsustainably faster pace during the last five years. 
The present government has also shown greater desire to improve public transport. Hence, any relaxation to vehicle imports could be both gradual and may coincide with the development of the road infrastructure.  

Meanwhile, what added to the pressures of the insurers was the loss of regular premium incomes during the pandemic as the regulator granted a three-month deferral on premium incomes to prevent policy lapses. 

While this may have caused some short-term liquidity pressures, the moderation in claims during lockdowns could offset some of these pressures.

“Fitch expects the constrained top line growth, potential amplification of price competition as well as lower investment returns to put pressure on non-life insurers’ earnings, which will be softened by the temporary reduction in claims during the lockdown period, particularly from motor insurance,” the rating agency said. 

Sri Lanka’s insurance regulator has suspended dividend payments to shareholders until further notice to soften the potential near term impact on insurers’ capital caused by the pandemic-driven business disruptions. 

Fitch said non-life industry had satisfactory capital buffers, with an average risk-based capital ratio of 238 percent at end-June 2020, above the 120 percent regulatory minimum. 
Meanwhile, some policyholders are also seen switching to third party insurance from comprehensive coverage and allowing policies to lapse due to the economic stress caused by the pandemic, impeding non-life insurance growth. 

The industry data showed that total non-life premiums and premiums from motor insurance had fallen by 8 percent and 4 percent respectively, during the 1H20 compared to the same period last year. 

Fitch believes that this may prompt non-life insurers to expedite their expansion into non-motor business lines to counter the impact from lower motor insurance sales. 

“Some insurers already target to increase business exposure to non-motor lines, such as the re, property, health and micro insurance classes. However, we believe that the expansion will only partly offset the premium loss from motor insurance,” the rating agency added.