Fitch Ratings has indicated that insurance losses resulting from the recent flooding caused by Cyclone Ditwah are likely to be limited for most rated insurers in Sri Lanka. This outlook is attributed to low retention levels within the non-motor segment and the presence of robust reinsurance protection. However, the country’s sole local reinsurer, National Insurance Trust Fund Board (NITF, BBB(lka)/Stable), faces heightened exposure to losses due to a lack of retrocession cover.
The agency anticipates that the sector’s underwriting profitability will face pressure in 2025. Despite this, the credit profiles of most rated insurers are not expected to be at risk. While non-motor losses are expected to be largely covered by reinsurance, increased motor claims and reinsurance reinstatement premiums are likely to impact underwriting performance. Fitch believes that insured losses will surpass previous records, reflecting the extent of flood-related damage.
The severe weather linked to Cyclone Ditwah has resulted in widespread flooding and localized landslides across Sri Lanka. Reports indicate that approximately 643 lives have been lost and over 70,000 individuals have been affected, with significant damage to homes, small businesses, and road networks. Early industry estimates from most Fitch-rated non-life insurers suggest that the majority of insured losses will come from a few large commercial claims and a cluster of motor claims. A comprehensive assessment of total losses may take time due to operational challenges, as some areas remain inaccessible and assessment facilities are operating at full capacity.
Despite these challenges, Fitch expects the overall impact to be manageable from a capital perspective for rated insurers, which are generally supported by satisfactory capital buffers and strong reinsurance programs. Furthermore, exposure to the event is limited by more stringent policy terms introduced following the 2016 floods. Losses stemming from landslides are often excluded from standard fire and property policies unless specifically purchased as add-ons, further containing insurers’ potential liabilities.
Non-life insurers rated by Fitch typically maintain low retention levels in non-motor lines, with the majority of fire- and flood-related risks ceded to reinsurers through proportional treaties. Losses from natural catastrophes are generally mitigated using excess-of-loss arrangements, which usually cover both motor and non-motor classes within an insurer’s portfolio. In 2024, fire-related policies accounted for just 6% of the sector’s total non-life net written premiums, while motor policies made up 63%.
Fitch expects that NITF’s inwards reinsurance business will be negatively affected, particularly due to the absence of retrocession cover since January 2023. The capitalisation of this segment remains weak. As the country’s only domestic reinsurer, NITF is mandated to receive 30% of reinsurance cessions from all domestic non-life insurers. NITF’s exposure primarily arises from proportional and non-proportional treaty arrangements, though this exposure is limited by primary insurers’ retention limits and reinstatement premiums. Regulatory measures introduced in July 2024, which restrict NITF from accepting facultative reinsurance until sufficient retrocession is in place, have also helped limit its exposure.
NITF’s rating reflects ongoing weaknesses in risk-management practices, including delays in renewing reinsurance contracts, which management attributes to procurement bottlenecks within government processes. Fitch believes the cyclone event is likely to increase demand for non-motor insurance lines, particularly among households and businesses that are recognizing the value of property and business-interruption coverage. In the motor segment, there is also expected to be a shift, with more customers opting for comprehensive coverage instead of third-party only, driven by heightened awareness of flood risks and the growing prevalence of electric vehicles.
