Floods increase general insurance claims

Claims in the general insurance segment are expected to increase due to the heavy floods in 2010 and early this year, RAM Ratings Lanka said.

RAM Ratings Lanka insurance sector update said its impact on insurers' bottom lines may be offset by an expansion in premiums, supported by the more conducive economic climate.

The life segment has experienced an increase in claims among RAM Ratings' rated companies as well as listed companies. This has been mainly due to policy lapses brought on by the harsh economic landscape.

Unlike the general segment, most life insurers are currently earning underwriting profits as the life market has yet to mature and claims will only arise over the long-term. Given the low penetration rate in the life insurance market, we believe that there is still room for growth.

We expect claims in this segment to ease over the medium term, as the sector expands against the backdrop of the improving economic conditions while replenishing maturing contracts, RAM Ratings said.

The industry's general insurance claims have remained relatively stable, floating around 62 percent for the general segment.

The combined ratio for this segment has been kept above 100 percent, signifying that general insurance companies have been incurring underwriting losses. Consequently, they have been relying on investment returns for profits.

In terms of financial performance, insurance companies have been shifting their investments to the booming equity market to maintain their investment income as interest rates taper.

Traditionally, investment income has mainly stemmed from fixed-income securities, buoyed by the previously high interest rates. With regulations permitting a wider range of investments, investment appraisal and monitoring will play a greater role within each company.

In the medium term, overheads may experience upward pressure as insurance companies seek to expand their branch networks into the northern and eastern provinces of Sri Lanka.

There were several new players in the insurance arena last year. At the same time, the more established players have shifted from price-based competition to focus more on service quality.

With the industry poised for growth, the Insurance Board of Sri Lanka (IBSL) is in the process of enforcing a new regulatory. Composite insurance companies will be required to split their existing general and life businesses into separate legal entities.

Listing on the capital market will also be made mandatory, with the current and new entrants given a respective five years and three years to comply. Meanwhile, the rules on solvency margins have been revamped, with a view to broadening the classification of assets recognized as admissible. Through these initiatives, the regulator intends to bring the local insurance sector more in line with international norms and support a more vibrant investment market. (C de S)