EconomyNext – Sri Lankan insurers are looking to expand their profitable life insurance through acquisitions and some considering shedding non-life businesses where competition is high, Fitch Ratings agency said.
New rules that require insurers to separate life and non-life segments early next year will lead to consolidation, Fitch Ratings Lanka said in a report on the sector outlook in 2015.
"Fitch expects the more stringent regulation to promote market consolidation due to higher compliance and administrative costs. Consolidation would be a positive development, especially for insurers with low capital bases."
Insurance firms are likely to maintain their financial fundamentals, supported by moderate market growth and under-penetration, despite regulatory reforms, including the requirement that composite insurers separate their life and non-life businesses, Fitch says.
"Sri Lanka remains heavily under-penetrated by insurance with a total premium/GDP ratio of just 1.09 percent," Fitch said.
It noted that it does not expect any drastic increase in penetration of life insurance in the short to medium term as disposable income levels are still low.
Also, there is a lack of awareness and appreciation of the concept and benefits of insurance, and lack of confidence in the industry.
Fitch expects the separation of the life and non-life businesses in January 2015 to provide greater focus and transparency, and enhance policy holder protection.
However, it added, some insurers may face operational uncertainties as a result.
The risk-based capital regime tested this year is expected to replace the current solvency regime by 2016 while the minimum capital requirement for each line of business – life and non-life – has been increased to 500 million rupees from 100 million rupees.
Insurers are also expected to list in the Colombo Stock Exchange by 2016.
Fitch expects underwriting losses of many non-life entities to continue in the short to medium term, driven by price competition.
"The smaller companies will strive to achieve critical mass, with each segment of business having to operate separately from early 2015," the report said.
"Fitch expects falling interest rates to affect the investment income of many insurers who are accustomed to higher returns that in the past counterbalanced poor underwriting performance in the non-life segment."
The rating agency said the sector outlook could be revised to negative if the split of composites leads to a significant decrease in capitalisation and solvency ratios.
"Any weakening in risk capital due to profit volatility or higher equity exposure in investments will be negative to issuer ratings," it said.
"Severe price competition in motor insurance, leading to weak technical results, and/or significant reduction in investment income due to falling interest rates that result in sustained losses would be negative for the non-life industry."
Significant growth in real gross domestic product and disposable income that is conducive to deeper penetration will be positive for the industry, the rating agency said.