Sri Lankan Insurers’ Cyclone Losses Limited, but Weaknesses Persist

Fitch Ratings - Insurance losses arising from recent flooding due to Cyclone Ditwah are likely to be limited for most rated insurers in Sri Lanka, because of low retention levels in the non-motor segment and reinsurance protection, says Fitch Ratings. However, the country’s sole local reinsurer, National Insurance Trust Fund Board (NITF, BBB(lka)/Stable), is more exposed to losses due to its lack of retrocession cover.

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. Non-motor losses will be largely absorbed by reinsurance, but increased motor claims and reinsurance reinstatement premiums will weigh on underwriting performance. We believe insured losses will exceed previous records, given the extent of the flood damage.

The severe weather associated with Cyclone Ditwah triggered widespread flooding and localised landslides in Sri Lanka. Around 643 lives have been lost and over 70,000 people affected, with significant damage to housing, small businesses and road networks. Early industry estimates by most Fitch-rated non-life insurers indicate that a handful of large commercial losses and a cluster of motor claims will form the bulk of insured losses. The full loss assessment will take time due to operational challenges. Some areas are not yet fully accessible, and garages and assessment facilities are already operating at full capacity.

Nonetheless, we expect the overall impact to be manageable from a capital perspective for our rated insurers, which 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. We 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 retention levels in non-motor lines, with the vast majority of fire- and flood-related risks ceded to reinsurers under proportional treaties. Losses from natural catastrophe events are typically mitigated through excess-of-loss arrangements. These treaties typically cover an insurers’ whole portfolio, including motor and non-motor classes. Fire accounted for only 6% of the sector’s total non-life net written premiums in 2024, with motor at 63%.

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. 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 its inability to renew reinsurance contracts on time. Management attributes these delays to bottlenecks inherent in government procurement processes. We think the cyclone event will boost demand for non-motor lines with low penetration levels as households and businesses recognise the value of property and business-interruption coverage. Similarly, in the motor segments, we believe more customers will shift from third-party to comprehensive coverage, driven by heightened public awareness of risks related to floods and electric vehicles.

Source: Adaderana