Insurance – problems and prospects

The insurance sector looks stable right now but cut-throat competition in motor insurance and volatile capital markets that cause investment losses could undermine that stability. The outlook could brighten, though, as incomes rise, given low penetration levels

By Echelon.

Published on January 07, 2014 with No Comments

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insurance numbersFrom the first quarter of 2014 insurance companies will be required to provide risk-based capital (RBC) in their quarterly reporting in tandem with the current solvency reporting. Having used fixed capital standards as a primary tool for monitoring the financial solvency of insurance companies, the regulator will move to RBC from 2016.
The RBC regime sets a minimum capital requirement for an insurer to support its operations and write coverage based on the types of risks to which it is exposed, providing early warning of capital deficiencies. This enables regulators to take timely corrective action to prevent insolvencies.
The valuation of assets and liabilities on the same market-consistent basis is likely to release reserves for some larger insurers, says Fitch Ratings Lanka in a new report on the insurance sector.
The rating agency forecasts a stable outlook for the sector despite intense price competition in the non-life motor insurance segment that has kept the combined ratios of many insurers above 100%. That means the firms are paying out more money in claims than they receive from premiums. Fitch sees forthcoming regulatory changes like the implementation of a risk-based capital regime, segregation of composites to life and non-life and increase in regulatory minimum capital as positive for the industry and resulting in market consolidation as smaller firms merge or are bought up by others. Sri Lanka, it notes, has “an excessive number of companies given the market size.”
The rating agency has flagged several concerns that could upset the current stability. These include limited availability of long-term investments that make maturity matching in the life fund challenging until financial markets mature considerably, hopefully with the tax breaks that promote corporate debt. Almost half of the assets of life business and one-fifth of non-life business are invested in government securities. Some insurers have made investments in property and infrastructure projects in an effort to increase exposure to long-term investments.
Increased pricing competition in motor leading to weakening technical results that constrain profitability could lead to a negative outlook for the sector, it warns.
Still, Fitch sees growth potential as Sri Lanka remains heavily under-penetrated by insurance. This is because of Sri Lanka’s low per capita income compared with other Asian nations. Greater penetration will depend largely on higher incomes since insurance is still seen as a discretionary product by many, and given the availability of free health services and a pension scheme for government servants.

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