Fitch Ratings-Colombo, Sydney-07 June 2023: Weak operating conditions for Sri Lankan insurers raise near-term downside risks to their credit profiles, says Fitch Ratings. Operating risks have risen due to the sovereign’s deteriorated credit profile and the resultant lowering of the national ratings of some state-owned and private-sector institutions.

The negative rating actions on the Sri Lanka sovereign since 2022 and various financial institutions underscore the risks to domestic insurers, whose investment portfolios are dominated by fixed-income securities issued or guaranteed by the government, and deposits and securities issued by local banks, non-bank financial institutions and corporations.

We believe the sparse foreign-currency liquidity in the local banking system could limit insurers' ability to meet foreign-currency obligations.

We expect insurers’ earnings to come under pressure. Underwriting profit for non-life insurers will be squeezed by rising motor spare-part costs due to currency devaluation, while overall costs for both life and non-life insurers will climb with rising inflation. We expect insurers will have only a limited ability to reprice policies, due to a fall in customers' disposable incomes.

We believe the heightened investment risks and earnings pressure could affect insurers' regulatory capital profiles. A significant deterioration in the credit profiles of financial institutions could lead to lower regulatory risk-based capital (RBC) ratios, as investments will be subject to incremental risk charges according to local regulatory RBC rules.: Weak operating conditions for Sri Lankan insurers raise near-term downside risks to their credit profiles, says Fitch Ratings. Operating risks have risen due to the sovereign’s deteriorated credit profile and the resultant lowering of the national ratings of some state-owned and private-sector institutions.

The negative rating actions on the Sri Lanka sovereign since 2022 and various financial institutions underscore the risks to domestic insurers, whose investment portfolios are dominated by fixed-income securities issued or guaranteed by the government, and deposits and securities issued by local banks, non-bank financial institutions and corporations.

We believe the sparse foreign-currency liquidity in the local banking system could limit insurers' ability to meet foreign-currency obligations.

We expect insurers’ earnings to come under pressure. Underwriting profit for non-life insurers will be squeezed by rising motor spare-part costs due to currency devaluation, while overall costs for both life and non-life insurers will climb with rising inflation. We expect insurers will have only a limited ability to reprice policies, due to a fall in customers' disposable incomes.

We believe the heightened investment risks and earnings pressure could affect insurers' regulatory capital profiles. A significant deterioration in the credit profiles of financial institutions could lead to lower regulatory risk-based capital (RBC) ratios, as investments will be subject to incremental risk charges according to local regulatory RBC rules.