Fitch welcomes scaling back of National Reinsurance Trust Fund

Fitch Ratings said recently that it welcomed the announcement of the finalised plans for the Sri Lankan National Reinsurance Trust Fund. When plans for the fund were first announced in the November 2006 budget, Fitch said in a statement that it was concerned that they would reduce the credit quality of Sri Lankan primary insurers; however, the recent announcement has allayed this fear.

The original proposal was for 50% of all reinsurance premiums ceded to be paid into a national reinsurance fund underwritten by the Sri Lankan government. Such a fund would have been of lower credit quality than many Sri Lankan insurers' existing reinsurers, as the International Scale credit rating of as Sri Lanka is 'BB- (BB minus)'. The establishment of a fund along these lines concerned Fitch, as the Sri Lankan insurance market relied heavily on reinsurance to support it through the loses from the 2004 tsunami, and most likely would do so again in the event of a similar natural disaster, the statement said.

The latest proposals for the National Insurance Trust Fund, to take effect from January are a marked watering down of the initial proposal. The chief differences are:

- Cessation of 20% of ceded premiums into the National Insurance Trust Fund; this will apply to non-life lines only

- The National Insurance Trust Fund itself will retrocede its liabilities with a panel of international insurers

Fitch said it also understands that the reinsurance of several high-risk lines may not be passed to the fund but will rather continue to be covered by international commercial reinsurers. These lines could include – Terrorism, Sri Lankan Airlines (fleet), Global placements of multinationals, Kidnap/ransom and Overseas medical.

These proposals, especially the backing of the fund by major commercial reinsurers, give Fitch renewed confidence in the relative strength of Sri Lankan primary insurers. It is now envisaged that no insurance ratings in Sri Lanka will be affected by the introduction of the fund.