Rs 4 bln insurance claim from May 2017 floods much lower than earlier flood claim

Insurance claims from the May 2017 floods are estimated at around Rs. 4 billion from affected Sri Lankan businesses but this is significantly lower than the estimated Rs.17 billion claimed from the May 2016 floods, according to Fitch Rating.

“However, despite these large claims, we estimate the net impact on non-life insurers due to the May 2016 floods to have been around Rs. 0.5 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. The floods, which left hundreds dead, damaged homes and disrupted businesses, were the country's worst natural catastrophe since the 2004 south-Asian tsunami,” the rating agency said last week.

It noted that most Sri Lankan non- life insurers should be able to absorb nearterm volatility and the effects of adverse weather-related events given extensive use of reinsurance. However, frequent occurrence of major catastrophic floods could affect insurers' capital especially that of state- owned local reinsurer, National Insurance Trust Fund Board (NITF), the rating agency said in a media release.

Changing weather patterns have increased the frequency and severity of errant rainfall, raising long-term risks for insurers and highlighting the need for more rigorous pricing and assessment of such risks in Sri Lanka's highly competitive non- life sector. Reinsurance premiums paid by primary insurers are also likely to increase. The credit profiles of Sri Lanka's non- life insurers - Sri Lanka Insurance Corporation Ltd ( SLIC), HNB General Insurance Ltd ( HNB) and Continental Insurance Lanka Ltd (CILL) - are likely to remain intact despite these challenges.

Local regulations require 30 per cent of all non-life reinsurance be ceded to NITF, with the balance ceded to the international reinsurance market. NITF's reinsurance portfolio is protected via retrocession cover, which has helped contain losses from the record- high flood- related primary insurer claims. NITF has provided the Sri Lankan government with natural disaster cover since April 2016 - the National Natural Disaster Insurance Scheme (NNDIS) - which covers all households, small businesses and relief work stemming from natural disasters. Cover was increased to Rs. 15 billion for 20172018, from Rs. 10 billion, with total claims of around Rs. 3.8 billion in 2016 and Rs. 1.6 billion in 2017. NITF recovered Rs. 2.6 billion in 2016 via NNDIS's reinsurance cover that was in place for 2016- 2017; that is, after a deductible of Rs. 0.5 billion, which was retained by the company, as well as NITF's share of claims on NNDIS's rein- surance cover.

“However, a delay in government approval meant NITF's reinsurance cover for NNDIS for 2017- 2018 only came into effect after the May 2017 floods, resulting in a Rs. 600 million loss, as the deductible ( company retention) was raised to Rs. 1 billion. NITF, as a state-owned entity, must go through a state procurement committee to obtain reinsurance, which can be time consuming. NITF has satisfactory capital buffers to absorb flood-related net losses of Rs.2.2 billion for 2016 and Rs. 3.1 billion for 2017, with a high regulatory risk-based capital ratio of 558 per cent at end- March 2017. However, capitalisation could come under pressure if NITF continues paying high dividends to the government. NITF paid Rs. 3.2 billion in 2016 and Rs. 3 billion in 2015, which accounted for 103 per cent and 70 per cent of profit, respectively,” the release added.