Reuters logo
Fitch: Reinsurance Keeps Sri Lankan Insurers Afloat Amid Floods
September 11, 2017 / 3:14 AM / in 3 months

Fitch: Reinsurance Keeps Sri Lankan Insurers Afloat Amid Floods

(The following statement was released by the rating agency) COLOMBO/HONG KONG, September 10 (Fitch) Most Sri Lankan non-life insurers should be able to absorb near-term volatility and the effects of adverse weather-related events given extensive use of reinsurance, says Fitch Ratings. However, frequent occurrence of major catastrophic floods could affect insurers' capital, especially that of state-owned local reinsurer, National Insurance Trust Fund Board (NITF, AA-(lka)/Stable). Changing weather patterns have increased the frequency and severity of errant rainfall, raising long-term risks for insurers and highlighting the need for more rigorous pricing and assessment of such risks in Sri Lanka's highly competitive non-life sector. Reinsurance premiums paid by primary insurers are also likely to increase. The credit profiles of Sri Lanka's non-life insurers - Sri Lanka Insurance Corporation Limited (AA+(lka)/Stable), HNB General Insurance Limited (A(lka)/Stable) and Continental Insurance Lanka Limited (A(lka)/Stable) - are likely to remain intact despite these challenges. Sri Lanka experienced back-to-back floods and landslides in May 2016 and May 2017. NITF estimates claims of around LKR4 billion from the May 2017 floods, which mainly affected suburban and rural areas, significantly lower than claims of around LKR17 billion from the May 2016 floods, which predominantly affected industrial areas, with a handful of large commercial claims accounting for a large share of the total. However, despite these large claims, we estimate the net impact on non-life insurers due to the May 2016 floods to have been around LKR0.5 billion-0.6 billion, mainly from retention and reinstatement costs. These costs were likely to have added around 70bp to non-life insurers' loss ratios in 2016. The floods, which left hundreds dead, damaged homes and disrupted businesses, were the country's worst natural catastrophe since the 2004 south-Asian tsunami. Local regulations require 30% of all non-life reinsurance be ceded to NITF, with the balance ceded to the international reinsurance market. NITF's reinsurance portfolio is protected via retrocession cover, which has helped contain losses from the record-high flood-related primary insurer claims. NITF has provided the Sri Lankan government with natural disaster cover since April 2016 - the National Natural Disaster Insurance Scheme (NNDIS) - which covers all households, small businesses and relief work stemming from natural disasters. Cover was increased to LKR15 billion for 2017-2018, from LKR10 billion, with total claims of around LKR3.8 billion in 2016 and LKR1.6 billion in 2017. NITF recovered LKR2.6 billion in 2016 via NNDIS's reinsurance cover that was in place for 2016-2017; that is, after a deductible of LKR0.5 billion, which was retained by the company, as well as NITF's share of claims on NNDIS's reinsurance cover. However, a delay in government approval meant NITF's reinsurance cover for NNDIS for 2017-2018 only came into effect after the May 2017 floods, resulting in a LKR600 million loss, as the deductible (company retention) was raised to LKR1 billion. NITF, as a state-owned entity, must go through a state procurement committee to obtain reinsurance, which can be time consuming. NITF has satisfactory capital buffers to absorb flood-related net losses of LKR2.2 billion for 2016 and LKR3.1 billion for 2017, with a high regulatory risk-based capital ratio of 558% at end-March 2017. However, capitalisation could come under pressure if NITF continues paying high dividends to the government. NITF paid LKR3.2 billion in 2016 and LKR3 billion in 2015, which accounted for 103% and 70% of profit, respectively. Sri Lanka's non-life insurers have low retention in the non-motor segment, with over 80% of the fire class, which typically covers flood-related policies, being reinsured. Fire class accounted for around 2% of total non-life net written premiums (NWP) in 2016. Insurers also provide flood protection for the motor class (75% of NWP in 2016), but motor-related claims were smaller than under the fire class. Natural catastrophe losses, such as floods, are covered under reinsurance treaties and excess-of-loss reinsurance covers. Contact: Kanishka de Silva, CFA Analyst +941 1254 1900 Fitch Ratings Lanka Ltd. 15-04, East Tower, World Trade Center Colombo 1, Sri Lanka Jeffrey Liew Senior Director +852 2263 9939 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below