Dec 13, Colombo: Fitch Ratings Lanka in a new report has said that its Outlook for Sri Lanka's insurance sector is Stable.
The stable outlook means that most insurers will maintain their financial fundamentals, supported by market growth as the economy, although at a slower pace, continues to expand, the Fitch Rating said Thursday.
Intense price competition in the non-life motor insurance segment has kept the combined ratios of many insurers above 100%. Fitch expects poor underwriting discipline to continue as insurers strive to gain critical mass in both the life and non-life segments before rules requiring the separation of these two businesses are implemented. This will pressure the financial performance of the more aggressive players while challenging the market shares of others.
Fitch views the many regulatory changes - implementation of a risk-based capital (RBC) regime, segregation of composites to life and non-life, increase in regulatory minimum capital and public listing - introduced in 2011 and currently being put into effect, as positive for the industry while recognizing the uncertainty and operational challenges insurers will face at implementation.
The new regulations of higher minimum capital required (MCR), RBC and the split of composites are expected to encourage market consolidation if there is strong enforcement of the more stringent regulations. Fitch views such consolidation - especially of the smaller insurers with low capital bases - as positive to the industry.
The entry of foreign investors to the market demonstrates confidence in the growth potential of the Sri Lankan insurance industry, where the penetration levels are very low compared to the rest of Asia. Fitch believes that greater penetration will depend largely on an increase in disposable income in this market where insurance is viewed as a discretionary product by many.
A sharp decrease in capitalization/solvency ratios before and after the composites split, or considerably weaker capitalization in the post-split entities could lead to Fitch changing the outlook to Negative. High capital market volatility leading to material investment losses and significant capital erosion or high investment risks through a greater exposure to equity (including non-core investments), could put pressure on insurer ratings and the Sector Outlook. Increased pricing competition in the motor segment leading to weakening technical results that constrain profitability could lead to a Negative Outlook for the sector.
Significant growth in real GDP and disposable income would be conducive for deeper penetration and lower pricing competition, and so positive for the industry.
The report, entitled '2014 Outlook: Sri Lankan Insurance Sector', is available at www.fitchratings.com.