Non-life insurers brace for declining profits amid continued import controls on vehicles

• Their earnings to decline in 2021 with claims picking up from unusually low levels in 2020
• Motor claims frequency to gradually increase; potential weakening of rupee to raise claim costs

The non-life insurers, which saw their profits improving in 2020, due to record low claims among other favourable performance matrices, are poised for a decline in profits from the rising claims from both motor and medical sectors, while the weakening rupee could also add to the pressures by way of raising claim cost. 

Sri Lanka’s insurance industry emerged stronger in 2020, with higher gross written premiums, higher profitability and strengthened capital profiles. But the industry appears to be facing difficulties with the persistent controls on consumer activity, which could dampen people’s incomes, rising claims and the persistent ban on vehicle imports, which acts as a deterrent to business expansion in the motor sector.   

According to a fresh report on the non-life insurance sector by Fitch Ratings, the sector players improved their profitability and thereby their regulatory capital buffers in 2020, due to the low motor and medical insurance claims and high profit retention, due to the suspension on dividends but the same could not be expected in 2021, as claims will increase and the insurers restarted dividend distribution after obtaining the regulatory approval. 

The rating agency does not expect the claims to remain at the levels seen in 2020, despite the current travel restrictions, unless these restrictions are further extended or expanded to stem the virus spread. “Fitch expects the earnings to decline in 2021 with claims picking up from unusually low levels in 2020.

Motor claims frequency is likely to gradually increase while a potential weakening of the rupee against major currencies may also raise claim costs,” the rating agency said.  Meanwhile, the steady growth in non-insurers’ exposure to the medical insurance policies could also contribute to profit normalisation in the medium term, as medical insurance typically carries higher claim ratios. 

Motor and medical insurance claims together account for well over 60 percent for industry premiums and net claims but the claim ratios of the Fitch-rated insurers improved to 49 percent in 2020, from 66 percent in 2019, supporting underwriting profitability, as reduced travel and mobility resulted in less motor claims. 

Meanwhile, the investment incomes of these insurers would also soften, due to a large amount of their financial assets, which are in short-term fixed income assets, will likely get repriced at lower yield at maturity, due to the low interest rates prevailing in the market. 

Further, due to the extremely high competition in the market for pricing, the industry is also unable to pass on their higher costs to the policyholders, narrowing their ability to expand their profits.

However, Fitch believes their gradual shift to digital distribution and the gradual increase into non-motor segments such as medical, fire, property and micro-insurance classes, could partially offset pressure on the sector profits and business growth in the medium term, albeit near-term pressures remain.