Sri Lankan insurers are facing heightened asset risk due to the country’s weaker credit profile and lower national ratings of several state-owned and private institutions, a Fitch Ratings report said.
On the other hand, the increased asset risk will not greatly impact the regulatory capital ratios of most insurers due to the limited rise in risk charges, according to local risk-based capital (RBC) rules. Local regulatory RBC rules exempt debt securities issued or guaranteed by the government from charges on credit and concentration risk in the calculation of the regulatory capital ratio.
Moreover, some of the recent negative national rating actions were within the same national rating category and therefore not subject to additional credit risk charges according to these rules.
Fitch downgraded Sri Lanka’s sovereign rating due to rising problems in external-debt repayment position over the medium term. As of end-June 2020, Fitch-rated insurers had invested around 55% of their fixed-income portfolios in direct government securities, and around 16% in deposits and debt securities issued by state-owned enterprises, including banks, non-banking financial institutions, and corporations.