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Monday December 5th, 2022

Sri Lanka insurance premiums to fall amid import controls as new business sought: Fitch

ECONOMYNEXT – Sri Lanka’s general insurance premiums may fall as motor business stalls amid import controls and insurers seek new areas to grow in weak economic conditions, Fitch Ratings said.

Economic difficulties are also forcing customer to drop comprehensive coverage.

“Fitch believes that new business premiums from motor insurance – which accounted for around 60 percent of the non-life insurance industry’s gross premiums – will contract in 2020 with the reduction in new vehicle registrations,” the rating agency said.

“We believe the release of the limited new-vehicle stocks into the market will be insufficient to offset the contraction in new business premiums.

“In addition, some policyholders are switching to third-party insurance from comprehensive coverage and allowing policies to lapse due to the economic stress caused by the coronavirus pandemic, which will impede non-life insurers’ business growth.

Total non-life premiums had fallen by 8 percent and motor insurance was down 4 percent in the first half of 2020 from a year earlier from a year earlier, based on regulator data.

Growth in the industry’s motor premiums slowed to 2 percent in 2019 from 16 percent amid import controls imposed after liquidity injections pressured the currency.

In 2020 many imports including vehicles were halted after money printing in March and April drover the rupee close to 200 to the US dollar.

There have been calls to reform the central bank to curb its domestic operations and end monetary instability and currency collapse.

Private credit has since turned negative, compressing consumption and imports despite high levels of excess liquidity.

Non-life insurers will speed up their expansion into non-motor business lines to counter the impact from lower motor insurance sales, Fitch said.

“Some insurers already target to increase business exposure to non-motor lines, such as the fire, property, health and micro insurance classes,” Fitch said.

“However, we believe that the expansion will only partly offset the premium loss from motor insurance.”

The shock from import controls comes as underwriting profitability was already down for non-motor insurance.

“The three-year average claims ratio for non-motor lines was 77 percent, higher than the 61 percent for motor insurance business, which is generally aided by benefits from economies of scale,” Fitch said.

Fitch said regulatory capital of insurers could also come under pressure if profits fall, but average risk based capital ratio was 238 percent for the sector above the 120 percent required.

The regulator had also halted dividend payouts.

The full statement is reproduced below:

Competition in Sri Lanka Non-Life Sector to Rise as Premiums Fall

Mon 14 Sep, 2020 – 21:00 ET

Fitch Ratings-Kansas City-14 September 2020: Price competition among non-life insurers in Sri Lanka is likely to intensify as a ban on auto imports and an economic downturn hinder premium growth, Fitch Ratings says.

Fitch believes that new business premiums from motor insurance – which accounted for around 60% of the non-life insurance industry’s gross premiums – will contract in 2020 with the reduction in new vehicle registrations.

We believe the release of the limited new-vehicle stocks into the market will be insufficient to offset the contraction in new business premiums.

In addition, some policyholders are switching to third-party insurance from comprehensive coverage and allowing policies to lapse due to the economic stress caused by the coronavirus pandemic, which will impede non-life insurers’ business growth.

Total non-life premiums and premiums from motor insurance fell by 8% and 4% yoy, respectively in 1H20, data from the Insurance Regulatory Commission of Sri Lanka (IRCSL) showed.

Growth in the industry’s motor premiums slowed to 2% in 2019 from 16% in 2016 due to the government’s efforts to limit the outflow of foreign exchange by curtailing vehicle imports.

The recent ban on auto imports came in the wake of the pandemic as the government tried to control currency depreciation by supporting foreign-currency reserves.

Policymakers have recently indicated that this ban may continue at least over the near term given the economic stress caused by the pandemic.

The sluggish market growth will exacerbate competition among insurers. Underwriting profitability in Sri Lanka’s non-life industry has been dragged down by high price competition and the industry’s combined ratio has been above 100% in recent years.

We also expect the industry claims ratio for non-motor lines to remain high until insurers achieve meaningful growth in the non-motor premium base. The three-year average claims ratio for non-motor lines was 77%, higher than the 61% for motor insurance business, which is generally aided by benefits from economies of scale.

Fitch expects the constrained top-line growth, potential amplification of price competition as well as lower investment returns to put pressure on non-life insurers’ earnings, which will be softened by the temporary reduction in claims during the lockdown period, particularly from motor insurance.

Insurers’ regulatory capital positions could also come under pressure from potential stress in earnings, although the impact may be partly offset by a possible reduction in liability-risk capital charges from lower motor claims and IRCSL’s direction to insurers to suspend dividend distributions until further notice.

The non-life industry had satisfactory capital buffers, with an average risk-based capital ratio of 238% at end-June 2020, above the 120% regulatory minimum.

Fitch expects the non-life insurers to expedite their expansion into non-motor business lines to counter the impact from lower motor insurance sales. Some insurers already target to increase business exposure to non-motor lines, such as the fire, property, health and micro insurance classes. However, we believe that the expansion will only partly offset the premium loss from motor insurance.

Insurers’ expansion into non-motor lines will likely be gradual given the weaker economic environment, which could keep the near-term demand for less-essential insurance products in check.

Non-motor insurance lines’ contribution to industry non-life gross premiums rose marginally to 41% in 2019 from 38% in 2016.

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Paris Club proposes 10-year moratorium on Sri Lanka debt, 15 years of debt restructuring

ECONOMYNEXT — The Paris Club group of creditor nations has proposed a 10-year debt moratorium on Sri Lankan debt and 15 years of debt restructuring as a formula to resolve the island nation’s prevailing currency crisis, India’s The Hindustan Times reported.

While the Paris Club has yet to formally reach out to India and China, Colombo has yet to initiate a formal dialogue with the Xi Jinping regime, the newspaper reported on Saturday December 03, inferring that the chances of the International Monetary Fund (IMF) approving its 2.9 billion dollar extended fund facility for Sri Lanka in December now ranges from very low to nonexistent.

“This means that Sri Lanka will have to wait for the March IMF meeting of the IMF before any aid is extended by the Bretton Woods institution,” the newspaper reported.

“Fact is that for Sri Lanka to revive, creditors will have to take a huge hair cut with Paris Club clearly hinting that global south should also take the same cut as global north notwithstanding the inequitable distribution of wealth. In the meantime, as Colombo is still to get its act together and initiate a dialogue and debt reconciliation with China, it will need bridge funding to sustain the next three month before the IMF executive board meeting in March 2023. Clearly, things will get much worse for Sri Lanka before they get any better—both economically and politically,” the report said. (Colombo/Dec04/2022)

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Sri Lanka’s Ceylon tea prices up amid low volumes

ECONOMYNEXT – Sri Lanka tea prices picked up at the last auction in November amid low volumes, brokers said.

“Auction offerings continued to record a further decline and totalled 4.2 million Kilograms, of which Ex-Estate offerings comprised of 0.6 million Kilograms. There was good demand,” Forbes and Walker Tea brokers said.

“In the Ex-Estate catalogues, overall quality of teas showed no appreciable change. Here again, there was good demand in the backdrop of extremely low volumes.”

High Growns

BOP Best Westerns were firm to 50 rupees per kg dearer. Below best and plainer types were Rs.50/- per kg easier on last.

Nuwara Eliya’s were firm.

BOPF Best Westerns were firm to selectively dearer. Below best and plainer teas declined by 50 rupees per kg.

Uva/Uda Pussellawas’ were generally firm and price variances were often reflective of quality with the exception of Select Best Uva BOPF’s which were firm and up to 50 rupees per kilogram dearer.

CTC teas, in general, were mostly firm.

“Most regular buyers were active, with perhaps a slightly more forceful trend from the local trade,” brokers said.

Corresponding OP1’s met with improved demand. Well-made OP/OPA’s in general were fully firm, whilst the Below Best varieties and poorer sorts met with improved demand. PEK/PEK1’s, in general, were fully firm to selectively dearer.

In the Tippy catalogues, well-made FBOP/FF1’s sold around last levels, whilst the cleaner Below Best and cleaner teas at the bottom appreciated. Balance too were dearer to a lesser extent.

In the Premium catalogues, very Tippy teas continued to attract good demand. Best were firm to selectively dearer, whilst the Below Best and cleaner teas at the bottom appreciated

Low Growns

Low Growns comprised 1.8 million Kilograms. Market met with improved demand, in general.

In the Leafy & Semi Leafy catalogues, select Best BOP1/OP1’s were fully firm, whilst the Below Best/bolder BOP1’s were barely steady.

Low-grown teas, farmed mainly by smallholders and exported to the Middle East and Central Asia, are the most sought-after and expensive Ceylon Teas.

Low-grown CTC prices have gained this week to 982.80 per kilogram this week from 934.76 per kilogram last week.

Few Select best BOP1s maintained, whilst best and below best were irregularly lower. Poorer types maintained.

BOPF’s in general, firm market.

FBOPF/FBOPF1’s select best and best increased in value, whilst the below best and bottom held firm.

Selected best BOP1’s maintained, whilst best and below best were irregularly lower.Poorer types maintained.

OP1’s selects best together with best and below best were firm to dearer. Poorer sorts were fully firm.

Medium Growns

BOPF’s, select best gained by 50 rupees per kilogram. Others maintained.

BOP1’s select best dearer by 100 rupees per kg whilst all others moved up by 50 rupees per kg.

OP1: select best gained by 100 rupees per kg whilst all others dearer by 100 rupees per kg.

OP/OPA’s in general, dearer by 50 rupees per kg whilst the poorer sorts were firm.

PEK’s Select best gained by 50 rupees per kg whilst all others maintained. PEK1: In general, dearer by 50 rupees per kg. (Colombo/Dec 04/2022)

 

 

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Sri Lanka Ports Authority East Terminal contractor paid: Minister

ECONOMYNEXT – Sri Lanka’s Ports Authority had paid a deposit for a gantry crane and made the required payment for the contractor to complete building the East Container Terminal, Minister Nimal Siripala De Silva said.

The East Container Terminal, a part of which is already built is being completed as a fully SLPA owned terminal at a cost of 480 million dollars Ports and Shipping Minister de Silva said.

“ECT we are funding with money available in the ports authority,” he said.

“Up to now we have paid an advance for the gantry crane. And for the construction we have paid all the money agreed with the contractor. So that is going on well.”

Sri Lanka is undergoing the worst currency crisis in the history of the island’s soft-pegged (flexible exchange rate) central bank which has created difficulties in funding the project.

“Every penny we collect as dollars we are keeping them separately and utilizing that for the Eastern Terminal work,” Minister de Silva said.

“We are confident that the ECT will be completed within the envisaged time. It is a difficult task in view of the dollar problem.

Banks were also not releasing the dollar deposits of the SLPA earlier but are now doing so, he said.

“Our deposits in banks they have utilized for urgent other national purposes,” he said.

“So they are releasing that money slowly. I am happy that they are releasing that money little by little. So with that we will be able to manage that.”

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