Fitch Ratings has indicated that a new directive requiring Sri Lankan non-life insurers to remit 100% of motor insurance strike, riot, civil commotion, and terrorism (SRCCT) premiums to the state-owned National Insurance Trust Fund Board (NITF) is expected to benefit NITF while potentially worsening the underwriting profitability of non-life insurers.
Prior to this directive, industry practice involved remitting only 12% of SRCCT premiums to NITF under a reinsurance arrangement, despite a 2008 government gazette requiring full remittance. The SRCCT segment had been highly profitable in recent years due to low claim incidence, although significant claims arose in May 2022 during anti-government protests.
NITF’s failure to renew its reinsurance cover with international reinsurers for the SRCCT segment after its expiration in July 2023 may lead to increased volatility in its capital position and earnings, particularly in the absence of retrocession cover for its inwards reinsurance business. These factors contributed to Fitch Ratings’ decision to downgrade NITF’s rating in October 2023.
The directive is expected to impact non-life insurers’ profitability and risk-based capital adequacy ratios, particularly for those with higher exposure to motor insurance. Fitch estimates that the new requirements for SRCCT premiums may add 5pp-10pp to the non-life sector’s combined ratio, before accounting for premium price adjustments and commissions from NITF.
However, Fitch anticipates improvement in Sri Lanka’s economic conditions in 2024, which could support vehicle demand and enable motor insurers to raise premiums faster than inflation. This would moderate the impact on profitability from full remittance of SRCCT premiums to NITF, although higher prices may dampen demand growth for SRCCT policies.
Investment and liquidity risks are expected to remain key downside risks for Fitch-rated Sri Lankan insurers in the near term, with poor profitability and capitalization metrics potentially weighing on ratings over time. Most Fitch-rated insurers had their Outlooks revised to Stable in October 2023 following the upgrade of Sri Lanka’s Long-Term Local-Currency Issuer Default Rating.