SL’s insurance sector outlook stable – Fitch
View(s):Fitch Ratings sees the outlook on Sri Lanka’s insurance sector as stable even though the split of composite insurers into life and non-life companies, which became mandatory effective February 2015, may create industry uncertainty. This is based on the view that most insurers will maintain stable financial fundamentals in 2016, supported by moderate sector growth, a Fitch media release said.
“Fitch views the many regulatory changes as positive for the industry as they will promote efficient capital allocation, corporate governance, and better risk management. Minimum regulatory capital has been increased to Rs. 500 million from Rs. 100 million risk-based capital (RBC) which will replace the current rules-based solvency regime by 2016, and insurance companies – with few exceptions – are required to list by 2016.”
Intense pricing competition in the motor segment is likely to hold the combined ratios (sum of loss ratio and expense ratio) in non-life above 100 per cent, which would put pressure on the financial performance of the more aggressive companies, while challenging the market share of others, the release said.
The agency expects economic growth and under-penetration in the market to support the growth of total gross written premiums (GWP) and does not expect significant improvement in life penetration in the short term, due to the low disposable income of the population, and life premiums growth is likely to be moderate. The release added that the agency expects non-life growth to slow as higher vehicle taxes may reduce new car registrations next year. The report said that eight of the 12 composites have so far split by end-June 2015. Fitch said it may revise the sector outlook to negative if the split of the composites caused a major drop in capitalisation and solvency ratios.
Weaker risk capital due to profit volatility or higher equity exposure in investments will be negative for issuer ratings, according or the Fitch report. “Severe price competition in motor, leading to weak technical results and / or significant reduction in investment income due to falling interest rates that result in sustained losses would be negative for the non-life industry,” it said, adding that significant growth in real gross domestic product and disposable income that is conducive to deeper penetration will be positive for the industry.