Chilaw bus-stand submerged by recent floods (Pic by Deepal Warnakulasooriya)

Insurance claims arising from recent flooding in Sri Lanka are likely to be manageable for most local insurers due to low retention levels, but changing weather patterns raise long-term risks, says Fitch Ratings. The agency expects the sector’s underwriting profitability to weaken in 2016, although this is unlikely to threaten most insurers’ credit profiles.

A severe tropical storm in mid May caused flooding and landslides in several parts of the country, with areas along the Kelani River in the western province, northeast of the capital, Colombo, among the worst affected. National Insurance Trust Fund (NITF), the state-owned local reinsurer, estimates claims from the disaster of around LKR15.5bn (USD107m).

Fitch expects record high claims to worsen the combined ratio of non-life insurers in 2016, with higher reinsurance premiums raising future expense ratios. In addition, lower profitability, stemming from higher claims, could affect capitalisation of some lower capitalised insurers. Fitch says the credit profiles of rated entities, 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 Lankan non-life insurers have low retention in the non-motor segment, with more than two thirds of the fire class, which typically covers flood related policies, being reinsured. Fire class accounted for just 5% of total non life net written premium in 2015. Local regulations require insurers to cede 30% of their reinsurance to NITF, with the balance reinsured with the global reinsurance market. Natural catastrophe losses, such as floods, are covered under reinsurance treaties and excess of loss reinsurance covers.