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Monday June 3rd, 2024

Sri Lanka insurer regulatory capital drops with new accounting rules

ECONOMYNEXT – Risk -based capitalization (RBC) of Sri Lanka’s insurance companies have dropped after the adoption of a new accounting rule based on international financial reporting standards (IFRS), Fitch Ratings said.

“We estimate that the RBC ratios of Fitch-rated Sri Lankan insurers were around 5pp lower on average at end-September 2019 under SLFRS 16 (Sri Lanka FRS), compared with what they would have been under the previous accounting standard,” Fitch Ratings said.

“Fitch expects insurers with a large drop in RBC ratios may change their short-term investment allocations and asset duration as an immediate fix.

SLFRS 16 had become effective from 1 January 2019, replacing LKAS 17 (Leases).

“The new standard removed the distinction between operating leases and finance leases,” Fitch said.

“Most contracts classified as operating leases, which were previously off balance sheet, are now recognised on the balance sheet as RoU assets, along with a corresponding lease liability.

“Operating leases were primarily on business premises for most insurers, including branch offices and motor vehicles.

Insurers have requested the regulator to revise its method of calculating capital, Fitch said. Some Asia-Pacific regulators have also changed their approach if the underlying assets is tangible, the rating agency said.

The full statement is reproduced below:

Fitch Ratings: Sri Lankan Insurers’ Regulatory Capital Positions Drop on IFRS 16 Adoption
02 DEC 2019 09:27 PM ET

Fitch Ratings-Colombo/Sydney-02 December 2019: Sri Lankan insurers’ risk-based capitalisation (RBC) ratios have fallen with the adoption of new accounting standards for lease contracts; SLFRS 16, the local equivalent of IFRS 16, Fitch Ratings says. This is because right-of-use (RoU) assets recognised under SLFRS 16 are currently inadmissible under Sri Lanka’s RBC regime and are deducted from total available capital – the numerator of the regulatory RBC ratio. RoU assets are also subject to a 1% operational-risk charge in calculating regulatory RBC ratios.

We estimate that the RBC ratios of Fitch-rated Sri Lankan insurers were around 5pp lower on average at end-September 2019 under SLFRS 16, compared with what they would have been under the previous accounting standard. However, we believe the impact on insurers with sizable RoU assets in relation to smaller capital buffers and RBC ratios that are close to the 120% regulatory minimum would be considerably higher. Fitch expects insurers with a large drop in RBC ratios may change their short-term investment allocations and asset duration as an immediate fix.

SLFRS 16 became effective on 1 January 2019, replacing LKAS 17 (Leases). The new standard removed the distinction between operating leases and finance leases. Most contracts classified as operating leases, which were previously off balance sheet, are now recognised on the balance sheet as RoU assets, along with a corresponding lease liability. Operating leases were primarily on business premises for most insurers, including branch offices and motor vehicles.

Insurers have requested the regulator, Insurance Regulatory Commission of Sri Lanka, to revise its approach and permit the deduction of net RoU assets after removing the corresponding lease liability from total available capital to calculate RBC ratios. This is because RoU assets are closely matched by lease liabilities, which effectively limits the effect on equity. Some regulators in the Asia-Pacific region allow tangible assets to be included in available capital and extend this treatment to RoU assets if the underlying asset is tangible. In some instances, net exposure – RoU asset less the corresponding lease liability – is risk charged based on applicable risk factors.

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Water levels rising in Sri Lanka Kalu, Nilwala river basins: Irrigation Department

Sri Lanka Navy assisting in rescue operations (Pic courtesy SL Navy)

ECONOMYNEXT – Sri Lanka’s Irrigation Department has issued warnings that water levels in the Kalu and Nilwala river basins are rising and major flooding is possible due to the continuous rain. People living in close proximity are advised to take precautions.

“There is a high possibility of slowly increasing prevailing flood lowline areas of Kiriella, Millaniya, Ingiriya, Horana, Dodangoda, Bulathsinhala, Palinda Nuwara and Madurawala D/S divisions of Ratnapura and Kalutara Districts, up to next 48 hours,” it said issuing a warning.

“In addition, flood situation prevailing at upstream lowline areas of Ratnapura district will further be prevailing with a slight decrease.

“The residents and vehicle drivers running through those area are requested to pay high attention in this regard.

“Disaster Management Authorities are requested to take adequate precautions in this regard.”

The island is in the midst of south western monsoon.

DMC reported that 11,864 people belonging to 3,727 families have been affected due to the weather in Rathnapura, Kegalle, Kilinochchi, Jaffna, Mullaitivu, Kalutara, Gampaha, Colombo, Galle, Matara, Hambantota, Puttalam, Kurunegala, Kandy, Nuwara Eliya, Anuradhapura, Polonnaruwa, Badulla, Moneragala, and Trincomalee districts.

Meanwhile, the Meteorology Department stated that showers are expected on most parts of the island today.(Colombo/June3/2024)

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UNP gen secy defends call for postponing Sri Lanka poll, claims opposition silent

The UNP party headquarters in Pitakotte/EconomyNext

ECONOMYNEXT — United National Party (UNP) General Secretary Palitha Range Bandara has defended his call for postponing Sri Lanka’s presidential election by two years, claiming that his proposal was not undemocratic nor unconstitutional.

Speaking to reporters at the UNP headquarters Monday June 03 morning, Bandara also claimed that neither opposition leader Sajith Premadasa nor National People’s Power (NPP) leader Anura Kumara Dissanayake have spoken against his proposal.

“I have made no statement that’s undemocratic. My statement was in line with provisions of the constitution,” the former UNP parliamentarian said.

He quoted Section 86 of Chapter XIII of the constitution which says: “The President may, subject to the provisions of Article 85, submit to the People by Referendum any matter which in the opinion of the President is of national importance.”

Sections 87.1, 87.2 also elaborates on the matter and describes the parliament’s role, said Bandara.

“I spoke of a referendum and parliament’s duty. Neither of this is antidemocratic or unconstitutional. As per the constitution, priority should be given to ensuring people’s right to life,” he said.

“Some parties may be against what I proposed. They may criticse me. But what I ask them is to come to one position as political parties and make a statement on whether they’re ready to continue the ongoing economic programme,” he added.

Bandara claimed that, though thee has been much criticism of his proposal for a postponement of the presidential election, President Wickremesinghe’s rivals Premadasa and Dissanayake have yet to remark on the matter.

“I suggested that [Premadasa] make this proposal in parliament and for [Dissanayake] to second it. But I don’t see that either Premadasa nor Dissanayake is opposed to it. To date, I have not seen nor heard either of them utter a word against this. I believe they have no objection to my proposal which was made for the betterment of the country,” he said. (Colombo/Jun03/2024)

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300 of 100,000 trees in Colombo considered high risk: state minister

ECONOMYNEXT – Trees in Sri Lanka’s capital Colombo are being monitored by the municipal council, Army and Civil Defense Force as the severe weather conditions continue, State Minister for Defense Premitha Bandara Tennakoon said.

“Within the Colombo Municipal Council city limits, there are 100,000 trees. Of these, around 300 are considered high risk,” Tennakoon told reporters at a media conference to raise awareness about the current disaster management situation.

Not all trees required to be cut down he said. “We can trim some of the branches and retain them.”

The problem was that buildings in the vicinity of the tree had cut branches on one side, causing it to become unbalanced, the minister said.

New laws would be brought in so provincial/municipal institutions could strengthen enforcement of building codes.

“We don’t have a single institution that can issue a warning about a tree. Not one to tell us what trees can or cannot be planted near a road.

“Trees should be suitable for the area. Some trees have roots that spread and damage roads, buildings. When the roots can’t go deep, they tend to topple over.

“Now Environment Day is coming up, and anyone can go plant a tree by the road. We have to take a decision about this. We have to enforce laws strongly in future.” (Colombo/June3/2024)

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