Fitch Ratings says losses from Sri Lanka’s riots to exceed Rs 1b; manageable for insurers

Sri Lanka
By Editor_1
Anti-government demonstrators set fire on the house owned by minister Sanath Nishantha of resigned Prime Minister Mahinda Rajapaksa's cabinet after ruling party supporters stormed anti-Govt protest camp, amid the country's economic crisis, in Arachchikattuwa, Sri Lanka, on Monday (9) –Stringer/REUTERS
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COLOMBO –Gross losses from riots following the May 9 attack on peaceful protesters by Mahinda Rajapaksa loyalist are likely to exceed Rs 1 billion, Fitch Ratings said on Thursday (26), but expected the Strike, Riot, Civil Commotion and Terrorism (SRCCT) fund of the state-owned National Insurance Trust Fund (NITF) to have sufficient liquid assets to meet its claim obligations.

It also said the NITF’s net loss will be limited to Rs 1 billion due to the protection provided by its excess of loss reinsurance cover.

Widespread riots broke out across Sri Lanka following an attack on anti-government protests in Colombo on May 9, with rioters setting vehicles on fire and destroying property; including houses belonging to politicians.  Fitch in a non-rating action commentary, said it was too early to estimate losses from the event, although NITF has started to receive claims from primary insurers.

Noting that the SRCCT fund, which is managed by NITF, provides cover against losses to property due to strikes, riots, civil commotion and terrorism, the rating agency said primary insurers provide such cover as an add-on to their non-life products and that technical advisory and working committees, comprising industry participants, oversee the management of the SRCCT fund. Regulation requires NITF to administer the SRCCT fund separately from its other business lines, it added.

Primary insurers have net retention of Rs 2.5 million per policy for motor claims under the SRCCT cover, subject to an aggregate amount of Rs 10.0 million, with additional losses passed on to NITF. Non-motor claims are fully passed on to NITF, subject to any excess borne by the policyholder. Once total losses exceed Rs 1 billion, NITF is able to recover additional losses under its excess of loss reinsurance cover up to a maximum of Rs 10 billion, Fitch said, noting that NITF’s reinsurance cover for SRCCT, which is placed with international reinsurers, is effective from February 2022 to July 2023.

The rating agency  also noted that NITF’s net assets exceeded Rs14 billion at end-2020, while the SRCCT line recorded a net profit of Rs 5 billion for the year, with the Fund’s assets predominantly invested in local-currency denominated securities issued by the government of Sri Lanka.

Fitch affirmed Sri Lanka’s Long-Term Local-Currency Issuer Default Rating at ‘CCC’ on May 19, on the assumption that the government would continue to service local-currency debt, despite defaulting on its foreign-currency debt obligations.

“We also believe the SRCCT fund could see elevated losses in the near-term as a result of the ongoing civil unrest amid Sri Lanka’s weak economic conditions,” Fitch said, noting that cover provided by the SRCCT fund had seen an increased uptake following the Easter Sunday terrorist attacks in 2019, with annual premiums rising to Rs 6.1 billion in 2020, from Rs 4.6 billion in 2018. SRCCT is NITF’s most profitable business line, with a loss ratio of less than 2% in the past five years, except in 2019, when the loss ratio reached 12%.

Fitch said it did not expect claims from the recent riots to affect NITF’s capital position, but warned that weakness in its non-SRCCT business lines could affect the rating, as reflected in the Rating Watch Negative. The rating agency recently placed the National Ratings of all rated Sri Lankan insurers, including NITF, on Rating Watch Negative, due to elevated investment and liquidity risks, pressure on regulatory capital positions and a likely worsening in financial performance.
-ENCL

 

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