Outlook for insurance sector stable - Fitch Ratings

Fitch Ratings Lanka in a new report has said that its Outlook for Sri Lanka’s insurance sector is stable.

Fitch considers the credit fundamentals of agency-rated issuers to be underpinned by their healthy capitalisation and good profitability, supported by improved macroeconomic factors. Key challenges to local insurers remain that of maintaining underwriting profitability in the motor segment (given competitive pressures), and also in maintaining market shares in life and non-life insurance as new players enter the market.

Sri Lanka’s insurance sector recorded a 20 percent yoy growth in 2010, following a contraction in the previous year, from a slowdown in non-life insurance.

Fitch views the premium growth of 11 percent in H111 to be sustainable in 2012 given growth potential in the life segment, which is still relatively underpenetrated.

Also, there are improved prospects in the non-life segment, following a sharp increase in new vehicle registrations and higher trade activity, supported by better domestic growth prospects.

Revised regulations by the Insurance Board of Sri Lanka require insurance companies to separate their life and general businesses by 2015, and increase the minimum capital requirements (MCR) for each business line.

Although the revised MCR of LKR500m (from LKR100m) only applies to new licences, this is likely to be extended to existing players in the near-to-medium term.

This could lead to some consolidation as many of the smaller players currently fall short of the requirement. Fitch believes industry capitalisation should strengthen in the medium-term with higher MCR and mandatory listing requirements (deadline is 2016) providing companies with an added avenue to raise funds.

However, for insurers who already meet the MCR, the separation of life and general segments and consequent re-allocation of capital may change the risk profiles of certain companies post separation.

Price competition remains high in the motor segment, and newer players have been eating into the market share of larger and more established companies. The claims ratios for the motor segment averaged 64.2 percent over 2007-2010, and are likely to remain high in 2011.