Financial News: Global rating agency, Fitch Ratings says 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 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. More News