Insurance

Sri Lanka

2014 Outlook: Sri Lanka Insurance Sector

Regulatory Changes Under Way
Outlook Report
Rating Outlook

S TABLE
(2013: STABLE)

Steady Fundamentals: Fitch Ratings stable outlook on the Sri Lankan insurance sector is
based on the view that most insurers will maintain stable financial fundamentals in 2014,
supported by market growth in a tempered yet growing economy.
Regulatory Reviews Positive: Fitch views the regulatory changes introduced in 2011 and
currently being implemented as positive to the industry. These include the risk-based capital
(RBC) capital regime, segregation of composites into life and non-life, an increase in minimum
regulatory capital and public listing. Fitch also recognises the uncertainty and operational
challenges insurers will face at implementation.
Room for Premium Growth: Fitch expects moderate top-line growth to continue, supported by
low penetration and a steady flow in vehicle insurance related to rising car ownership. The
moderation in gross written premiums (GWP) from their post-war growth spike (2010: 15.12%,
2011: 18.47%) to 11.03% in 2012 and 9.06% in H113 is likely to continue in the short to
medium term due to pressure on disposable income in a slowing economy.

Sector Outlook

S TABLE
(2013: STABLE)

Intense Competition in Motor: Intense pricing competition in the motor segment is likely to
hold the combined ratios in non-life above 100% and put pressure on the financial performance
of the more aggressive companies while challenging the market share of others. Fitch expects
poor underwriting discipline to intensify as companies strive to gain critical mass in both life and
non-life before the regulator-required split of composites.

Underpenetrated market offers

growth opportunities despite a
slowing economy

Foreign Investor Interest: Fitch views the entrance of foreign investors including a key Asian
insurer as a demonstration of confidence in the growth potential of the local insurance industry.

Fierce competition in motor continues

Market Consolidation: Fitch expects the higher minimum capital required, higher RBC and the
split of composites to encourage market consolidation. The agency believes that mergers and
acquisitions are likely to result only if the new and more stringent regulations are strongly
enforced. Consolidation, especially in relation to smaller insurers with low capital bases, would
be positive for the industry.

Major regulatory changes are under

way

Outlook Sensitivities
Weak Underwriting Discipline: Increased pricing competition in motor leading to weakening
technical results that constrain profitability could lead to a negative outlook for the sector.
Related Research
Other Outlooks

Weaker Capitalisation or Solvency: A sharp decrease in capitalisation/solvency ratios before

or after the composites split, or considerably weaker capitalisation in the post-split entities (life
or non-life) could lead to Fitch changing the outlook to negative.

www.fitchratings.com/outlooks
See Figure 6 for list of rated entities

Analysts
Nayantara Bandaranayake
+94 11 254 1900
nayantara.bandaranayake@fitchratings.com
Jeffrey Liew
+852 2263 9939
jeffrey.liew@fitchratings.com

www.fitchratings.com

High Risk in Investments: High capital market volatility leading to material investment losses
and significant capital erosion could lead to a negative outlook on the sector. High investment
risks through a greater exposure to equity (including non-core investments), could put pressure
on insurer ratings and the sector outlook.
Stronger Macroeconomic Environment: Significant growth in real GDP and disposable
income would be conducive for deeper penetration and lower pricing competition, and so
positive for the industry.

13 December 2013

Insurance
Key Issues
Premiums to Grow

Figure 1

Insurance Sector Growth

Gross written premiums
LKR
'000

Life

Non-life

100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
2008 2009 2010 2011 2012
Source: Insurance Board of Sri Lanka, Fitch

Twenty-two insurers in Sri Lankan

market
Twelve composites, seven non-life
and three life
Five largest insurers (total assets)
accounted for 85% of life GWP and
71% of non-life GWP in 2012

Fitch expects premium growth to continue, supported by low penetration in an economy that is
still growing, albeit more slowly. The rate of growth is likely to be subdued due to pressure on
disposable income affecting life and low growth in vehicle registrations affecting non-life.
The sector has growth steadily for over a decade, except in 2009, when premiums contracted
due to a slowing local and global economy. Post-war growth spiked, supported by a sharp
increase in vehicle registrations (due to lowered customs duty) and increased trading activity.
In 2012 GWP growth slowed to 11.03% (2011: 18.47%), mainly due to a poorly performing
stock market affecting unit-linked life products. GWP growth for H113 was 9.06% (life: 10.11%,
non-life: 8.35%).
In 2013 the government sought to curtail vehicle imports by requiring a 100% cash margin to
open letters of credit for vehicle imports (except for buses, ambulances, lorries and trucks) and
also restricted bank funding for this purpose. The government budget 2014 kept customs duty
on vehicles largely unchanged. Measures to curtail vehicle imports in this slowing economy are
likely to result in low growth in vehicle imports and new vehicle registrations in the short term.

Growth Potential from Low Penetration

Fitch expects greater penetration to depend largely on increased disposal income in this
market, where insurance is viewed as a discretionary product by many.
Sri Lanka remains heavily under-penetrated by insurance, with a total premiums/GDP ratio of
1
1.15% (2011: 1.2%) compared with an average of 6.2% for Asia . Fitch believes a key reason
for the comparative under-penetration to be Sri Lankas low per capita income in relation to
some of its Asian counterparts.
The government of Sri Lanka provides free health services and education to all citizens and
also has a pension scheme for public sector employees. These schemes eliminate the need for
certain insurance products in the segment of the population that relies on government
services/schemes. A lack of full appreciation of the concept or benefits of insurance and a lack
of confidence in the industry also have a role in this gross comparative under-penetration.
Figure 2

Insurance Penetration
Total premiums/GDP (%)
Insurance density (total industry premium
income/population) (LKR)
No of life policies in force as a % of total
population
No of life policies in force as a % of the
labour force
GDP growth

2012
1.15
4,287.28

2011
1.20
3,761.11

2010
1.18
3,207.91

2009
1.19
2,814.33

2008
1.32
2,877.33

12.1

11.3

10.7

10.1

10.3

29.1
6.4

27.5
8.2

27.3
8.0

25.6
3.5

25.8
6.0

Source: Insurance Board of Sri Lanka (2012), annual report.

2014 Outlook: Sri Lanka Insurance Sector

December 2013

Source: Swiss Re. sigma No2/2011. This figure also includes countries in the Middle East.

Insurance
Motor Underwriting Profitability Under Pressure
As in most countries the motor segment is fiercely competitive, with competition mainly in the
form of price. Loss ratios in this segment are high, averaging around 65% in the last four years.
Unhealthy price competition has put pressure on underwriting profitability, and in the past
insurers have relied on high investment income to compensate for underwriting losses.

Figure 3

Loss Ratio - Non Life

Fire

Motor

Misc

Marine

(%)

90
80
70
60
50
40
30
20
10
0
2008

Fitch considers there to be an urgent need for better underwriting discipline through alternate
forms of competition such as differentiated/flexible products or better service to ensure
profitability even in low investment income periods.
Growth in the motor sector dropped to 16.49 % in 2012 (2011: 29.56%) due to a fall in imports
with increased customs duty and unfavourable exchange rate movements. Nevertheless, the
contribution of the motor segment in non-life remained high at 63.64% and will remain the
major GWP contributor in non-life.

Increased Emphasis on Alternative Distribution Channels

2009

2010

2011

2012

Source: Fitch

The life segment has traditionally relied on tied agents for distribution, but now there is an
increasing emphasis on alternative distribution channels such as bancassurance. This is in line
with similar developments in the region.
Most insurers are actively introducing web-based products. The popularity of these is very
limited and Fitch does not expect them to gain momentum as a significant distribution channel
in the medium term. In this context, tied agents are likely to remain the dominant distribution
channel in life for a considerable period.

Foreign Investment Implies Confidence

AIA Insurance acquired the number-three composite insurer by assets and two overseas
development funds have acquired minority stakes in a smaller (but aggressively growing)
company. Fitch views these acquisitions as a demonstration of confidence in the growth
potential of the sector, but believes long-term attractiveness will depend on macroeconomic
stability and real growth that would allow deeper penetration.
Figure 4

Figure 5

Concentration of Assets 2012- Life

Concentration of Assets 2012-Non life

Cash & cash

equivalents Other assets
13%
1%
Corporate debt
Equities & unit
3%
trusts
Reinsurance receivable
24%
5%
Premium receivable
from policyholders and
intermediaries
9%
Deposits
Land,
10%
Bldgs, PPE
12%
Source: IBSL, Fitch

Cash & cash

equivalents Other assets
7%
Land & bldg 1%
3%

Corporate debt
7%
Equities & unit trusts
11%

Govt debt
securities
23%

Govt debt
securities
54%

Deposits
17%
Source: IBSL, Fitch

Limited Availability of Long-Term Investments

Maturity matching in the life fund is challenging due to the limited availability of longer-term
investment assets in this relatively underdeveloped Sri Lankan market. The government is
keen to improve the corporate debt market and has actively promoted the listing of corporate
debt through tax incentives. Fitch believes insurers will be challenged in asset-liability
management until financial markets mature considerably.
At end-H113, 46.24% of the assets of life business and 19.93% of those of non-life business
were invested in government securities. In 2012 the life sector investment yield from
government securities dropped to 11.9% (2011: 13.6%) and rates have been comparatively low
so far in 2013. This is likely to remain unchanged in the short term

2014 Outlook: Sri Lanka Insurance Sector

December 2013

Insurance
The equity investment in life and non-life was 10.47% and 23.15%, respectively, and the
investment yield from this segment has been volatile. There has been an increase in
investment in non-core subsidiaries by some insurers, which could prove credit negative. Some
of these investments have been made in property/infrastructure projects in an effort to increase
exposure to long-term investments. Fitch expects the RBC regime to create a culture of risk
recognition and management in the investment function by requiring capitalisation to be in line
with asset risk.

Adequate Capitalisation
Most insurance companies in Sri Lankan meet local solvency requirements. Nevertheless, the
impending business separation will result in many more, smaller life or non-life only entities,
some of which are likely to post weaker capital positions than the composites they are a part of
at present. This could encourage market consolidation in the medium term, which would be
beneficial to the industry, as there is an excessive number of companies given the market size.
Once introduced, RBC will be a more comprehensive indicator of the capital position of the
insurers than the current regulation due to the better matching of the regulatory required
minimum capital to the risk of the assets and liabilities of each individual business. RBC is likely
to strengthen the case for consolidation of smaller/thinly capitalised entities, provided there is
strong enforcement of new regulation.

Evolving Regulatory Framework

The Insurance Act was amended by the Regulation of Insurance Industry (Amendment) Act,
No.3 of 2011, with significant revisions introduced in relation to capitalisation, and separation of
life and non-life businesses. The industry would face operational challenges at implementation
due to factors such as a dearth of actuarial expertise locally, increased cost in relation to
duplication of some functions after the split and the long-drawn-out nature of legal procedures
required in effecting the split.

RBC Reporting to Start

From Q114 companies will be required to provide RBC in their quarterly reporting in tandem
with the current solvency reporting, and RBC will be the primary tool for capital regulation from
2016. Insurers have the option of early adoption of RBC from Q214. In 2013 RBC was piloted
with 18 companies, and the Insurance Board of Sri Lanka has now provided finalised rules. The
valuation of assets and liabilities on the same market-consistent basis is likely to release
reserves for some larger insurers.

Split of Life and Non-life

Fitch views the split of life and non-life business from 2015 positively, due to the greater
transparency and policyholder protection it will promote. The Insurance Board of Sri Lanka has
provided guidelines clarifying the position regarding shared services, common infrastructure,
distribution and use of agents after the split, following dialogue with the industry.
Although the groundwork for the split is under way, the level of preparation varies among
insurers, with some larger companies better equipped to effect the change due to their existing
quasi separation of the two segments, better resource availability including technical expertise,
and ability to absorb resulting cost increases.
The proposed government budget for 2014 has declared a tax neutral position for the split,
which addresses a major concern for the industry.

Public Listing
The mandatory public listing by 2016 will promote greater transparency and encourage better
governance. Tax incentives for listing provided in the 2014 budget may prompt some insurance
companies to speed up the process of listing.

2014 Outlook: Sri Lanka Insurance Sector

December 2013

Insurance
Minimum Capital Requirement
The increased minimum capital requirement of LKR500m (previously LKR100m) for each line
of insurance business could lead to consolidation within the sector in the short to medium term,
provided there is strong enforcement by the regulators.

Convergence to IFRS
In 2012, Sri Lankan companies adopted new accounting standards, starting a process of
convergence to International Financial Reporting Standards. This affected insurers financial
statements, especially in the area of financial investments. The process of convergence will
continue, with new standards coming in to force in stages.

2013 Review
Total industry premiums grew by 9.06% yoy in H113. The total assets of insurance companies
grew to LKR345bn by H113, a yoy increase of 23.95%.
There were no significant credit events during the year. Preparatory work to meet the new and
more stringent regulatory requirements began.
Figure 6

Issue Ratings
Sri Lanka Insurance Corporation
Limited
HNB Assurance PLC
Asian Alliance Insurance PLC

National IFS Rating

AA(lka)

Outlook
Stable

IFS Rating
BB

Outlook
Stable

A(lka)
BBB+(lka)

Stable
Stable

NR
B

Stable
Stable

Source: Fitch

2014 Outlook: Sri Lanka Insurance Sector

December 2013

Insurance
Appendix
Figure 7
Figure 8

Interest Rate (2008 2013)

Colombo Stock Exchange, All Share Price Index

(Interest rate %)

(All share price index)

25

9,000
20

8,000

15

7,000
6,000

10

5,000

4,000
3,000

Source: Fitch

Aug 13

Sep 12

Oct 11

Oct 10

Nov 09

Dec 08

Jan 08

2,000
1,000
0
Jan 09
Source: Fitch

Oct 09

Aug 10

Jun 11

Apr 12

Feb 13

Dec 13

Figure 9

Key Financials of Seven Largest Insurers by Total Assets

IFS
National IFS
Total assets (LKRbn)
Market share by premium non-life
(%)
Market share by premium life (%)
Regulatory solvency margin,
non-life
Regulatory solvency margin, life
Equity/assets (%)

Sri Lanka
Insurance
Corporation Ltd
BB/Stable
AA(lka)/Stable

Ceylinco
Insurance
PLC
n.a.
n.a.

AIA
Insurance
Lanka PLC
n.a.
n.a.

Union
HNB
Assurance
Janashakthi Assurance Asian Alliance
PLC Insurance PLC
PLC Insurance PLC
n.a.
n.a.
n.a.
B/Stable
n.a.
n.a. A(lka)/Stable BBB+(lka)/Stabl
e
25.67
15.84
7.02
5.71
8.9
11.6
3.3
2.3

120.14
24.9

66.95
21.0

40.95
4.3

19.7
3.42

28.9
1.13

17.3
3.78

13.6
2.1

5.4
2.24

4.0
3.48

5.4
2.37

11.01
30.6

10.31
14.9

2.53
9.8

2.96
15.8

4.08
21.3

2.28
26.6

1.88
25.0

Data as of end-December 2012

Source: Insurance Board of Sri Lanka, companies and Fitchs calculations

2014 Outlook: Sri Lanka Insurance Sector

December 2013

Insurance

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2014 Outlook: Sri Lanka Insurance Sector

December 2013