Fitch says losses from riots manageable for Lankan insurers

Sri Lanka’s State-owned National Insurance Trust Fund Board’s (NITF, A+(lka)/Rating Watch Negative) Strike, Riot, Civil Commotion and Terrorism (SRCCT) fund will bear the brunt of losses stemming from recent riots in the country, with primary insurers experiencing little impact, says Fitch Ratings.

“We believe gross losses from the riots are likely to exceed Rs. 1 billion. However, NITF’s net loss will be limited to this amount due to the protection provided by its excess of loss reinsurance cover. We expect NITF to have sufficient liquid assets to meet its claim obligations,” Fitch said. 

It said widespread riots broke out in Sri Lanka following an attack on anti-Government protests in Colombo on 9 May. Rioters set vehicles on fire and destroyed property; including houses belonging to politicians, according to reports. It is too early to estimate losses from the event, although NITF has started to receive claims from primary insurers.

The SRCCT fund, which is managed by NITF, provides cover against losses to property due to strikes, riots, civil commotion, and terrorism. Primary insurers provide such cover as an add-on to their non-life products. 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.

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. NITF’s reinsurance cover for SRCCT, which is placed with international reinsurers, is effective from February 2022 to July 2023.

NITF’s net assets exceeded Rs. 14 billion at end-2020, while the SRCCT line recorded a net profit of Rs. 5 billion for the year. The fund’s assets were predominantly invested in local-currency denominated securities issued by the government of Sri Lanka. We affirmed Sri Lanka’s Long-Term Local-Currency Issuer Default Rating at ‘CCC’ on 19 May, as the Government has continued to service local-currency debt and we assume this will continue, despite defaulting on its foreign-currency debt obligations.

“We 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. Cover provided by the SRCCT fund saw 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. 

Fitch does not expect claims from the recent riots to affect NITF’s capital position. However, weakness in its non-SRCCT business lines could affect the rating, as reflected in the Rating 

Fitch 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.