Insurance sector near-term growth to moderate; long-term prospects intact: Fitch

• Higher taxes on vehicle imports, price competition and sluggish economy key reasons 
• Earnings to be hampered by weakened currency and higher tax liabilities of life insurers

Sri Lanka’s insurance industry is set to grow modestly in the near term amid slower motor insurance premium growth due to higher taxes on vehicle imports, intense price competition in the general insurance market and slower recovery in economic activity, according to Fitch Ratings. 

However, the rating agency opined that the long-term momentum of the industry should be helped by Sri Lanka’s low insurance penetration, rising awareness of insurance and a gradual increase in the contribution from non-motor lines, such as property, health and micro insurance. 

Insurance industry premiums rose by 13 percent in 2018, moderating from 15 percent in 2017, due to the slower growth of motor premiums, delays in renewing the State-sponsored health insurance policy for school children and subdued consumer affordability affecting life-insurance growth. 

Meanwhile, Fitch expects Sri Lanka’s weakened currency and the higher tax liabilities of life insurers to cut insurers’ net profit in the near term. 

The rupee depreciated by around 19 percent against the US dollar in 2018, which increased the claims paid by non-life insurers, particularly in relation to the higher cost of imported automotive components. 

In addition, life insurance surpluses were taxed at an effective rate of 28 percent from April 2018. Most life insurers paid lower taxes under the previous tax regime due to a lower tax base.  

On the industry risks, Fitch said weather related events to remain the main source of long-term risk to non-life insurers’ capital.

“However, most non-life insurers continue to moderate volatility in their profitability by using reinsurance protection and maintaining risk-based capitalisation ratios above the 120 percent regulatory minimum.” 

The rating agency also predicted softer investment yields for the sector stemming from lower interest rates. 

“The Central Bank imposed an interest-rate cap on bank deposits in April 2019. This was followed by a 50 basis point cut in policy rates in May 2019 to stimulate economic growth. We expect this to somewhat increase insurers’ reinvestment risk, especially for non-life insurers with short portfolio duration” Fitch said. 

Meanwhile, stressing its previously announced stance, the rating agency said Sri Lanka’s overcrowded non-life market is ripe for consolidation due to intense price competition 
We regard Sri Lanka’s non-life market as crowded and ripe for consolidation due to intense price competition, which has kept the industry’s combined ratio high at around 100 percent in recent years. 

There have been four insurance industry M&As since 2014.  

Fitch expects the credit profiles of rated insurers to remain stable in the near term, supported by sustained capitalisation and financial performance.