Weak rupee, higher taxes to prune profits of Sri Lankan insurers
ECONOMYNEXT – Sri Lanka’s insurance industry growth is likely to slow down and profits reduced owing to a weakened rupee and higher taxes, Fitch Ratings has said in a new report.
“Fitch expects Sri Lanka’s weakened currency and the higher tax liabilities of life insurers to cut insurers’ net profit in the near term,” the rating agency said.
Fitch Ratings expects Sri Lanka’s insurance industry expansion is likely to moderate in the near term given slower motor-insurance premium growth due to sustained tax rises on imported vehicles, intense price competition in the non-life market and a slower recovery in economic activity.
“However, long-term momentum should be helped by Sri Lanka’s low insurance penetration, rising awareness of insurance and a gradual increase in the contribution from non-motor lines, such as property, health and micro insurance,” the report said.
Industry premiums growth slowed to 13 percent in 2018, from 15 percent in 2017, due to the slower growth of motor premiums, delays in renewing the state-sponsored health insurance policy for school children and subdued consumer affordability affecting life-insurance growth.
Fitch Ratings believes the profitability of insurances firms is under pressure.
The rupee depreciated by around 19 percent against the US dollar in 2018, which increased the claims paid by non-life insurers, particularly in relation to the higher cost of imported automotive components.
Life insurance surpluses were taxed at an effective rate of 28 percent from April 2018 compared with lower taxes paid by most life insurers under the previous tax regime due to a lower tax base.
Fitch Ratings said the increased frequency of weather-related events remains the main source of long-term risk to non-life insurers’ capital.
“However, most non-life insurers continue to moderate volatility in their profitability by using reinsurance protection and maintaining risk-based capitalisation ratios above the 120 percent regulatory minimum.”
Investment yields of insurers are also likely to soften, the rating agency said.
The Central Bank of Sri Lanka imposed an interest-rate cap on bank deposits in April 2019, followed by a 50bp cut in policy rates in May 2019 to stimulate economic growth.
“We expect this to somewhat increase insurers’ reinvestment risk, especially for non-life insurers with short portfolio duration,” Fitch said.
Fitch Ratings sees Sri Lanka’s non-life market as crowded and ripe for consolidation due to intense price competition, which has kept the industry’s combined ratio, a measure of profitability, high at around 100 percent in recent years.
There have been four mergers and acquisitions since 2014.
Fitch said it expects the credit profiles of rated insurers to remain stable in the near term, supported by sustained capitalisation and financial performance.
(COLOMBO, 28 June, 2019)
Economic Intelligence Unit of the Ceylon Chamber of Commerce
Jehan Perera - Executive Director National Peace Council