Weak operating conditions challenge Sri Lankan insurers

Written by Dan McGrath

13/6/2023

Weak operating environments for Sri Lankan insurers raise near-term downside risks to their credit profiles, according to Fitch Ratings.

Due to the sovereign’s deteriorated credit profile and resultant lowering of the national ratings of some state-owned and private-sector institutions, operating risks have subsequently risen.

The American credit rating agency said they believe that the sparse foreign-currency liquidity in the local banking system could limit insurers’ ability to meet foreign-currency obligations.

They continued to say that they expect insurers’ earnings to come under pressure, with underwriting profit for non-life insurers being squeezed by rising motor spare-part costs due to currency devaluation.

Furthermore, the company will expect overall costs for both life and non-life to climb with inflation.

Therefore, Fitch Ratings said that insurers will only have a limited ability to reprice policies, due to a fall in customers’ disposable incomes.

With the heightened investment risks and earnings, Fitch Ratings have said that pressure could affect insurers’ regulatory capital profiles, with a significant deterioration in the credit profiles of financial institutions leading to lower regulatory risk-based capital (RBC) ratios, as investments will be subject to incremental risk charges according to local regulatory RBC rules.

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