Further consolidation by way of mergers and acquisitions (M&As) is expected in Sri Lanka's insurance market, particularly in the general insurance segment, as the players continue to compete in a crowded market amid tougher operating conditions due to enhanced capital requirements, says Fitch Ratings.
The Insurance Regulatory Commission of Sri Lanka, the country’s insurance industry watchdog, in 2014 directed composite insurers to segregate their life and non-life businesses and operate them under separate entities, while increasing the capital required to stay in business.
Both these developments triggered divestitures by some local players of their non-life businesses mostly to large foreign players so that they could focus more on profitable long-term life insurance business.
In its “Sri Lanka Insurance Dash Board” for the second half of 2018, Fitch said, “Further industry consolidation is likely, given the competitive nature of the non-life insurance market where some players are incurring underwriting losses.
“In addition, recent regulatory developments including higher capital requirements and split of composites have also hastened consolidation.”
Among recent deals, Fairfax Asia bought 78% of the general insurance business of Union Assurance in 2014 and the same company bought all of Asian Alliance General Insurance in 2016. Meanwhile, AIA Insurance sold its general insurance business to Janashakthi Insurance in 2015 before the latter sold its 100% stake in their general insurance business to the local unit of the German insurance giant Allianz in February 2018.
Meanwhile, Fitch Ratings believes the exposure of Sri Lanka’s non-life insurers to extreme weather-related events is manageable due to extensive use of reinsurance. However, reinsurers are seen reducing ceding commissions to reflect the increasing risk of catastrophes.
“Sri Lanka has seen a recurrence of extreme weather-related events – back-to-back floods in May 2018 and over the past two years, and a prolonged drought in several parts of the country, which we believe may raise long-term risks for insurers’ capital”, said the note authored by insurance industry analysts at Fitch, Rishikesh Sivakumar and Jeffrey Liew.