Fitch expects import controls on vehicles to remain at least in part in near term

The vehicle import ban, which has been in effect since March last year, is expected to remain in place at least in part in the near term, although there are expectations that some mechanism would be created to relax the controls by the government, considering the impatience and dissatisfaction growing by the day among the vehicle aspirants.

“Fitch expects the curbs, at least in part, to continue over the near term,” the rating agency said last week. Central Bank Governor Ajith Nivard Cabraal, who from the very beginning showed keenness in relaxing vehicle import controls by the end of this year, a fortnight ago said they were expecting to make representations to the government to find a viable mechanism, without significantly straining the already dampened foreign exchange situation in the country. 

He was looking at the merits of a proposal floated by a certain segment to allow vehicle imports paid via foreign exchange along with the applicable duties paid in foreign currency, which doesn’t weigh on the fledgling foreign exchange. 

However, at the same time, the Central Bank is also keen on addressing what is seemingly a bubble being formed in the vehicle prices in the domestic market, due to the soaring prices of pre-owned and used vehicles changing hands between the existing users.  

According to Fitch Ratings, as a result of the subdued vehicle market in the aftermath of the import suspension, vehicle insurers have diversified into non-vehicle products.

According to a rating report on People’s Insurance PLC released last week, “the agency expects the growth in the insurer’s motor insurance premiums, which account for over 80 percent of its gross premiums, to be limited by the government’s curbs on motor- vehicle imports to preserve foreign currency reserves”, Fitch Ratings said.  
“The insurer is gradually increasing the contribution from non-motor insurance lines to mitigate the slowdown in premium growth,” it added. 

Fitch Ratings affirmed People’s Insurance at A+, with a Stable outlook on its moderate business profile, compared with other non-life insurers and the company’s satisfactory capital and financial position, where the company’s regulatory risk-based catalo ratio by 1H21 was at 282 percent, whereas the regulatory minimum is 120 percent. 
Meanwhile, the financial performance measured by the combined ratio has improved to 83 percent in 2020, from 97 percent in 2019, “resulting mainly from the reduced motor claims following COVID lockdowns”. 

However, by 1H21, the ratio has moderated to 91 percent and Fitch Ratings expects further normalisation in the ratio, with the likely increase in the frequency of motor claims with the gradual relaxing of the travel restrictions.