Fitch Ratings expects most Sri Lankan insurers’ losses from Cyclone Ditwah flooding to be limited due to low non-motor retention and reinsurance.
However, the National Insurance Trust Fund Board (NITF), the country’s sole local reinsurer, is more exposed to losses due to a lack of retrocession.
The agency expects the sector’s underwriting profitability to come under pressure in 2025, although this is unlikely to threaten most rated insurers’ credit profiles.
While reinsurance is expected to absorb a significant portion of non-motor losses, the underwriting performance will be negatively impacted by both increased motor claims and the cost of reinsurance reinstatement premiums.
Given the widespread flood damage, Fitch projects that insured losses will surpass all prior records.
Cyclone Ditwah caused severe flooding and localised landslides in Sri Lanka, resulting in 643 deaths and affecting over 70,000 people. Housing, small businesses, and roads sustained significant damage.
Fitch-rated non-life insurers anticipate insured losses primarily from large commercial and numerous motor claims. The full loss assessment is expected to be delayed due to limited access in affected areas and overstretched operational capacity at assessment facilities.
Nonetheless, the agency believes its rated insurers will be able to manage the overall impact, as they have satisfactory capital buffers and strong reinsurance programmes.
In addition, insurers’ exposure to the event is limited by the tighter policy terms introduced after the 2016 floods. Analysts also understand that losses caused by landslides are often excluded from standard fire and property policies unless purchased as an add-on, further limiting insurers’ potential losses.
Fitch-rated non-life insurers have low non-motor line retention, ceding most fire and flood risks to reinsurers via proportional treaties.
Natural catastrophe losses are typically mitigated by excess-of-loss arrangements covering the entire portfolio, including motor and non-motor. In 2024, fire was only 6% of the sector’s total non-life net written premiums, compared to 63% for motor.
“We believe NITF’s inwards reinsurance business will be adversely affected, exacerbated by the lack of retrocession cover for this segment after the expiry in January 2023,” Fitch stated.
Adding: “Capitalisation of the segment remains weak. NITF, as Sri Lanka’s sole domestic reinsurer, is mandated to receive 30% of reinsurance cession from all domestic non-life insurers.
“NITF’s exposure arises primarily from proportional and non-proportional treaty arrangements, with the extent of this exposure reduced by primary insurers’ retention limits and reinstatement premiums. The exposure would have been greater if not for regulatory measures introduced in July 2024 that restrict NITF from accepting facultative reinsurance – which covers large individual risks – until sufficient retrocession in place.”
NITF’s rating reflects its weak risk-management practices, including late reinsurance renewals blamed on government procurement delays. Fitch expects the recent cyclone to increase demand for non-motor lines (property and business-interruption coverage) and drive a shift from third-party to comprehensive motor insurance, due to greater public awareness of flood and EV risks.
