NITF is set to face significant losses from Cyclone Ditwah, Fitch Ratings reports, as other Sri Lankan insurers are largely protected by reinsurance. The state-run fund’s exposure highlights weaknesses in retrocession cover and risk management.
NITF exposed to Cyclone Ditwah losses while other insurers benefit from reinsurance
Sri Lanka’s state-run National Insurance Trust Fund (NITF) is expected to bear the brunt of insurance losses from Cyclone Ditwah, while other local insurers benefit from substantial reinsurance protection, according to Fitch Ratings. The assessment underscores structural vulnerabilities within NITF and highlights the resilience of privately operated insurers.
Cyclone Ditwah caused widespread flooding and localized landslides, claiming 643 lives and impacting over 70,000 people. Homes, small businesses, and road networks suffered significant damage, prompting urgent insurance claims. Early industry estimates indicate that large commercial losses, along with clusters of motor claims, will comprise the majority of insured losses. Operational challenges, including limited accessibility and overwhelmed assessment facilities, may delay complete loss assessments.
Fitch notes that most non-life insurers in Sri Lanka maintain low retention levels for non-motor lines. The majority of fire- and flood-related risks are ceded to reinsurers under proportional treaties, with natural catastrophe losses further mitigated through excess-of-loss arrangements. Consequently, most insurers are expected to absorb the financial impact without jeopardizing credit profiles.
However, NITF’s situation is markedly different. As the country’s sole domestic reinsurer, NITF was mandated to receive 30 percent of reinsurance cessions from all domestic non-life insurers. Its inwards reinsurance business is particularly exposed due to the lack of retrocession cover following the expiry of key arrangements in January 2023. While regulatory measures introduced in July 2024 restrict NITF from accepting facultative reinsurance, the fund’s capitalisation and risk-management practices remain weak, Fitch reports.
The fund’s rating also reflects delays in renewing reinsurance contracts, attributed to procedural bottlenecks within government procurement processes. Fitch highlights that without these regulatory restrictions, NITF’s exposure would have been considerably higher, further intensifying the impact of Cyclone Ditwah.
Despite these challenges, Fitch anticipates that the cyclone may positively influence insurance penetration in non-motor segments. Increased awareness of property and business-interruption risks is likely to drive higher uptake among households and businesses. Similarly, motor insurance segments may experience growth as consumers shift from basic third-party coverage to comprehensive policies, fueled by heightened understanding of flood risks and the growing prevalence of electric vehicles.
The broader insurance sector is expected to remain resilient. Most Fitch-rated insurers possess strong reinsurance programmes and satisfactory capital buffers, mitigating the financial stress from natural disasters. Additionally, losses from landslides are typically excluded from standard fire and property policies unless purchased as an add-on, further limiting potential claims. Fire and property risks constitute only a small portion of non-life net written premiums, with motor insurance accounting for the largest share.
Fitch also emphasizes that while underwriting profitability may come under pressure in 2025 due to increased motor claims and reinsurance reinstatement premiums, the overall impact on insurers’ capital positions is manageable. The agency concludes that, although NITF faces heightened risk, the Sri Lankan insurance sector remains well-positioned to navigate the post-cyclone claims landscape.
The report underscores the importance of strengthening retrocession cover, improving risk-management practices, and streamlining contract renewals for NITF. As natural disasters continue to pose risks in the region, the need for robust reinsurance frameworks and proactive industry reforms becomes increasingly critical to safeguard financial stability and protect policyholders.