ECONOMYNEXT – Higher taxes are likely to reduce profits of Sri Lankan life insurance companies, Fitch Ratings said in a new report on the sector.
Fitch said it expects changes in the Inland Revenue Act, which came into effect on 1 April 2018, to lower the net profits of life insurers.
Under the new law, surplus distributions to shareholders from policyholder funds and investment income of shareholder funds (less allowable expenses) are taxed at 28%.
Earlier, most of the life insurers paid lower taxes under the ‘investment income minus management fees’ method, which resulted in a lower tax base.
“In addition, distributions to participating life policyholders, which were not taxed previously, are now taxed at 14% and will be increased to 28% from 2021,,” Fitch Ratings said.
However, the rating agency said Sri Lankan insurers are likely to cope with extreme weather events whose increasing frequency has raised risks and industry growth will continue given low insurance penetration.
“Fitch Ratings expects the exposure of Sri Lanka’s non-life insurers to extreme weather-related events to be manageable due to extensive use of reinsurance,” the report said.
“However, reinsurers are seen to be reducing ceding commissions to reflect the increasing risk of catastrophes.”
Sri Lanka has seen a recurrence of extreme weather-related events – back-to-back floods in May 2018 and over the past two years, and a prolonged drought in several parts of the country.
Fitch Ratings said it believes these extreme weather events may raise long-term risks for insurers’ capital.
But Fitch expects the insurance sector to continue its growth momentum, driven primarily by the rising per capita income, growing awareness on insurance, and considerably lower insurance penetration supporting the growth potential.
(COLOMBO, June 06, 2018)