Fitch Ratings expects losses from Cyclone Ditwa floods to be limited for most Sri Lankan insurers due to low non-motor vehicle retention and reinsurance rates.
However, the country’s only local reinsurer, the National Insurance Trust Fund Board (NITF), is more vulnerable to losses due to a lack of retrocession.
The agency expects the industry’s underwriting profitability to come under pressure in 2025, although this is unlikely to threaten the credit profiles of most rated insurers.
While reinsurance is expected to absorb a significant portion of non-auto insurance losses, an increase in auto insurance claims and the cost of reinsurance to restore premiums will have a negative impact on underwriting results.
Given the widespread damage caused by the floods, Fitch expects insured losses to exceed all previous records.
Cyclone Ditwa caused severe flooding and localized landslides in Sri Lanka, killing 643 people and affecting more than 70,000 people. Homes, small businesses and roads suffered significant damage.
Fitch-rated non-life insurers expect insured losses to come mainly from large commercial claims and high volumes of auto claims. Full damage assessments are expected to be delayed due to limited access to affected areas and operational capacity overload at assessment facilities.
Nonetheless, the agency believes its rated insurers will be able to cope with the overall impact as they have satisfactory capital buffers and strong reinsurance programs.
In addition, insurers’ exposure to the event was limited due to stricter policy terms introduced after the 2016 floods. Analysts also learned that damage from landslides is typically not covered by standard fire and property policies unless purchased as an add-on, further limiting insurers’ potential losses.
Fitch-rated non-life insurers have lower non-motor insurance retention rates, ceding much of their fire and flood risk to reinsurers through proportional treaties.
Natural disaster losses can often be mitigated by excess loss arrangements covering the entire portfolio, both auto and non-auto. In 2024, fire will account for only 6% of the industry’s total net non-life written premiums, while motor insurance will account for 63%.
“We believe NITF’s inward reinsurance business will be adversely affected, exacerbated by the lack of retrocession coverage in the unit beyond the January 2023 expiry,” Fitch said.
Adding: “Capitalization in the sector remains weak. NITF, as the only domestic reinsurer in Sri Lanka, must obtain a 30% reinsurance subsidy from all domestic non-life insurance companies.
“NITF’s risk arises primarily from proportional and non-proportional treaty arrangements, the extent of which is mitigated by retention limits and reinstatement premiums from major insurers. The risk would have been greater were it not for regulatory measures introduced in July 2024 that restricted NITF’s ability to accept temporary reinsurance (covering larger individual risks) until adequate retrocession was in place.”
NITF’s ratings reflect its weak risk management practices, including delays in reinsurance renewal due to delays in government procurement. Fitch expects recent hurricanes to increase demand for non-auto insurance (property and business interruption coverage) and drive a shift from third-party to comprehensive auto insurance due to increased public awareness of flood and electric vehicle risks.
