ECONOMYNEXT – Sri Lanka’s insurers have so far not been hit by Coronavirus mortality or healthcare costs unlike other countries but import controls will hit insurance growth due to controls on vehicle imports, while currency depreciation will also push up claims costs, a ratings analyst said.
Rishikesh Sivakumar, Senior Analyst Fitch Ratings, said Sri Lanka’s insurance companies have not seen claims from mortality rise unlike in other countries.
No Covid Claims
Nor have health claims come, with all cases being treated at state hospitals.
Sri Lanka has seen only 09 deaths in the Coronavirus crises.
Sri Lanka has been aggressively contact tracing and quarantining Coronavirus cases having completely ended the first Wave from China in January along with Vietnam and Cambodia.
Sri Lanka started to quarantine Second Wave arrivals from March, but there was a surge of domestic cases linked to Navy due to an initial reluctance to test frontline workers and random community test which allowed asymptomatic cases to grow.
Of the 900 cases about half are from the military. Most of the military contacts have also been rounded up. Amid random community testing which started two weeks ago, no new cases have turned up.
Vietnam has already opened the country, but Sri Lanka is still watching Colombo and Gampaha where most of the cases turned up.
But Sri Lanka’s economy has been hit by monetary instability and also uncertain fiscal policy after a steep tax cut in January.
Hit from Monetary Instability
Sri Lanka’s central bank also cut rates and printed money from just before the crisis hit, despite worsening deficits, de-stabilizing the rupee, which fell to 200 to the US dollar at one point.
The central bank then tightened exchange controls and then authorities also slapped 1970s era trade controls. Ministers told the public to grow kollu (horsegram).
Coronavirus curfews have led to fall in domestic consumption and private credit is also expected to slow to low single digits.
When private credit is weak, the rupee tends to stabilize, printed money is not loaned out by banks to create excess demand and pressure the rupee.
However there is still the risk that pressure will come from state salaries and expenses financed with printed money as deficits expands, analysts say.
Meanwhile Sivakumar said import controls will slow the growth of insurance market.
While the lockdown is in progress, accident claims may also fall, he said. But the falling rupee will hit claims negatively in the future.
The rupee is now at around 189 to the US dollar from around 182 before money printing began. A weaker rupee will also push up spare parts and repair costs, Sivakumar said.
In Sri Lanka insurance sector growth is sensitive to downturns unlike in some other Asian markets where insurance is not considered a discretionary item but essential, Sivakumar said.
Lower interest rate in 2020 could also hit profits of insurers. With stock market down, insurers will also be hit on their portfolios.
Sri Lanka’s stocks were already hit last year after the rupee collapsed and domestic consumption was hit, leading to bad loans in banks. Analysts had warned in 2018 that monetary policy errors would lead to instability just as the economy recovered.
Fitch had already downgrade state-run Sri Lanka Insurance after the soveriegn rating was cut.
Analysts had warned that a downgrades were inevitable unless the central bank was reformed to and its ability to generate monetary instability was blocked.
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Analysts and classical economists have called for the reform of the central bank, to stop currency depreciation and monetary instability which had held the country back from 1951. (Colombo/May15/2020)