Regulator suspends shareholder dividend payments by insurance firms

• Measure aimed at softening impact on capital as premium incomes slow 
• Premium deferrals allowed to prevent policy lapses as virus impaired policyholders’ incomes  
• Moderation of claims likely to offset near-term liquidity pressure of insurers 

Sri Lanka’s insurance regulator has suspended dividend payments to the shareholders of insurance companies to minimise any potential near-term impact on insurers’ capital levels due to disruptions to their business by way of loss of premium income and thereby their earnings.

According to Fitch Ratings, which evaluated the regulatory response of the Asia Pacific (APAC) nations to the coronavirus-induced challenges, to help insurers confront risks as well as to safeguard policyholder interests during and aftermath of the coronavirus pandemic, Sri Lanka’s insurance regulator and India’s have directed their insurance companies to temporarily halt dividend payments, to soften the impact on their capital levels. 

“The regulators in India and Sri Lanka have required all insurers to suspend dividend distributions as a near-term measure to minimise capital erosion,” Fitch Ratings said in a special report. 

In a similar move, the Central Bank, the banking sector regulator, in late March restricted the cash dividends of banks, which were yet to meet their minimum capital levels, while instructed others to refrain from distributing dividends or declaring bonuses, making use of the relaxed capital rules.

Halt on dividends was among a host of other measures the Insurance Regulatory Commission of Sri Lanka (IRCSL) has taken to soften the impact on the sector from the economic fallout triggered by the pandemic.

To provide relief to insured and also to ward off the potential impact on the insurers, the IRCSL in April advised the latter to grant a three-month deferral on premium payments on both general and life policyholders, to prevent policy lapses.

“Fitch thinks that premium deferrals may result in some insurers facing near-term pressure in liquidity due to the temporary reduction in premium inflow,” the rating agency said.

However, in the same vein, Fitch noted that risk could be offset by the moderation of claims in some business lines and access to sufficient liquid assets by most APAC insurers. 
Sri Lanka’s motor insurance claims may have fallen sharply during April through May as mobility was significantly halted due to curfews.

Among other measures to provide relief to policyholders, the IRCSL has also asked to extend the coverage of policies and the government has proposed to double benefits to employees engaged in controlling the spread of the virus under the state sector health scheme, ‘Agrahara’. 

In a further measure to help companies manage capital, insurers were also allowed to remove risk charges on uncollected premiums, as a result of offering grace periods on premiums, Fitch Ratings said. 

However, the rating agency believes both the regulators and insurers have heightened their commitment on their risk management to counter the evolving risks posed by the pandemic. To this effect, the IRCSL has increased the frequency of regulatory capital reporting by the companies. 

While Fitch Ratings believes the prompt response by most insurance regulators across the APAC region would help insurers weather some of the key business risks caused by the coronavirus, the rating agency expects further regulatory action by way of additional policy measures to soften the implication of the pandemic, as the industry evolves.