Government weakness heightens Sri Lankan insurers' risks: Fitch

Earnings are expected to be under pressure, and costs are higher due to currency devaluation.

The operating risks for Sri Lankan insurers have intensified due to unfavourable conditions, according to Fitch Ratings' special report.

The country's weakened credit profile has contributed to the escalation. 

Sri Lankan insurers' investment portfolios primarily consist of government-issued or guaranteed fixed-income securities, as well as deposits and securities from local banks, non-bank financial institutions, and corporations. Limited foreign-currency liquidity in the local banking system poses challenges for insurers in meeting foreign-currency obligations. 

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Additionally, insurers' earnings are expected to be under pressure. Non-life insurers will face squeezed underwriting profits due to increased motor spare-part costs resulting from currency devaluation. 

Both life and non-life insurers will experience higher overall costs due to rising inflation. However, insurers will have limited ability to adjust policy prices as customers' disposable incomes decline.

The heightened investment risks and earnings pressure may impact insurers' regulatory capital profiles. 

A significadt deterioration in the credit profiles of financial institutions could lead to lower regulatory risk-based capital ratios. 

According to local regulatory rules, investments will be subject to additional risk charges, further affecting insurers' capital positions.