Sri Lanka: Reinsurance cushions insurers from weather losses
Source: Asia Insurance Review | Oct 2017
Most Sri Lankan nonlife insurers should be able to absorb near-term volatility and the effects of adverse weather-related events given extensive use of reinsurance, said Fitch Ratings. However, frequent occurrence of major catastrophic floods could affect insurers’ capital. Reinsurance premiums paid by primary insurers are also likely to increase.
Sri Lanka experienced back-to-back floods and landslides in May 2016 and May 2017. The state-owned local reinsurer, National Insurance Trust Fund Board (NITF) estimates claims of around LKR4 billion (US$26 million) from the May 2017 floods, which mainly affected suburban and rural areas, significantly lower than claims of around LKR17 billion from the May 2016 floods, which predominantly affected industrial areas, with a handful of large commercial claims accounting for a large share of the total.
However, despite these large claims, Fitch estimated the net impact on non-life insurers due to the May 2016 floods to have been around LKR0.5 billion-0.6 billion, mainly from retention and reinstatement costs. These costs were likely to have added around 70bp to non-life insurers’ loss ratios in 2016.
Sri Lanka’s non-life insurers have low retention in the non-motor segment, with over 80% of the fire class, which typically covers flood-related policies, being reinsured. Local regulations require 30% of all nonlife reinsurance be ceded to NITF, with the balance ceded to the international reinsurance market. A