Elevated motor spare parts prices undermine motor insurers’ underwriting profits

• Weaker consumer prevents companies from repricing their policies to reflect new conditions 

Sri Lanka’s non-life insurers would face pressure on their underwriting profits, due to the rising cost of motor spare parts, stemming from currency devaluation and runaway inflation, according to Fitch Ratings. 

The insurers also remain hamstrung from passing down fully or partly of these pressures coming from the choppy economic conditions, as the sharp decline in customer disposable incomes prevents them from repricing their policies, the rating agency noted.

Sri Lanka’s rupee has depreciated by about 81 percent year-to-date against the United States dollar while inflation spiked to 70 percent in September, sending the prices of everything from essentials, to discretionary to durables through the roof. 

The cost of motor spare parts in most cases has risen by threefold or more from last year, due to a combination of factors. Acute shortage in foreign exchange, which poses many challenges in opening letters of credit, weaker rupee and general price pressures in the economy are key among them.

The higher taxes, including the twice raised Value-Added Tax from June onwards and the Social Security Contribution Levy, 

which came into force recently with broad base impact across supply chains, could further push the prices up.
In rating reports, which assessed the credit ratings of three insurance companies—Co-Operative Insurance Company PLC, People’s Insurance PLC and Continental Insurance Lanka Limited— Fitch Rating also highlighted the high investment risks and the stretched foreign currency liquidity facing these companies, after the country defaulted its foreign currency obligations to its creditors early this year. 

The heightened investment risks to the insurers stem from the weak credit profile of the Sri Lankan sovereign, which recently defaulted on its foreign currency obligations and the stress on the domestic banking system, as reflected by Fitch’s Rating Watch Negative (RWN) on most financial institutions it rates.  The investment portfolios of these companies have a larger tilt towards the government securities – denominated in both foreign currency and local currency, which is typical in the industry. Besides, they also have exposure to corporate bonds and term deposits with domestic financial institutions.  

For instance, at Continental Insurance Lanka Limited, 18 percent of its total investments were in Sri Lanka Development Bonds, with another 2 percent in sovereign bonds issued by the Sri Lankan government by the end of the first half of 2022.  Further 22 percent investments were in foreign currency deposits with local commercial banks. 

Meanwhile, the stretched foreign currency liquidity comes from these companies’ ability to meet foreign currency obligations such as premium payments to foreign reinsurers and claim obligations arising from foreign currency-denominated policies.