Indonesia non-life market rated negative despite buoyant economy
Despite limited volatility resulting from global economic shocks, Indonesia still rated as negative in insurance outlook.
Andrew Putwainposted on Thursday, October 12, 2023
The outlook for Indonesia’s non-life insurance segment remains negative, according to a new report published by ratings agency AM Best this week.
The agency listed several factors for their negative outlook being maintained: heightened reinsurance counterparty credit risks for non-life insurers, which has been driven by weakened credit quality of domestic reinsurers.
It also listed the potential pressure on underwriting margins owing to the rising cost of reinsurance and more restrictive reinsurance coverage terms.
“Ongoing volatility affecting the underwriting performance of credit insurance over the near term”, and “headwinds in key lines of business, including property and health” were also given as reasons.
“As an alternative to paying higher reinsurance costs, Indonesia’s insurers may choose to increase their retention levels,” said Chris Lim, Associate Director, Analytics, at AM Best. “However, doing so increases income volatility—insurers will bear greater exposures to catastrophe risks given that the country is prone to natural disasters such as earthquakes and floods.”
“Domestic interest rates remain high, resulting in high investment yields that have been supporting insurers’ overall earnings."
Conversely, whilst the overall outlook was rated negative the investment side of the business gave a more mixed picture with some reasons for optimism among tightening margins and higher costs.
“The easing of Covid-related restrictions and resumption of business activities in 2022 drove rebound in Indonesia’s economic growth,” it said, which saw a 5.3% overall increase for the year, which was up from 3.7% in 2021.
“Domestic interest rates remain high, resulting in high investment yields that have been supporting insurers’ overall earnings,” they said. Though, AM Best warned of headwinds.
Earlier this year, the country’s financial regulator announced a drastic change to its insurance regulation with new solvency policies, similar to those that have been adopted across various countries in Asia.
The Financial Services Authority (Otoritas Jasa Keuangan - OJK), proposed a rise in the minimum paid-up capital requirements for insurers.
The proposals contained the idea of raising the minimum paid-up capital for conventional life and non-life insurers to IDR500 billion ($34 million) by 2026 and IDR1 trillion ($67 million) by 2028 – up from IDR150 billion ($10 million) currently. The proposed amount for reinsurers is IDR1 trillion ($67 million) by 2026 and IDR2 trillion ($134 million) by 2028, which are up from the current IDR300 billion ($20 million).
In a May 2023 commentary paper, AM Best said that the thinning capital buffers of domestic Indonesian reinsurers were presenting a significant challenge when it came to withstanding further balance sheet shocks.
Other East Asian and SE Asian markets including Taiwan (from 2022) and the Philippines are also rated ‘Negative’ for their non-life segments by AM Best.
Similar to Indonesia’s situation, mitigating factors in the negative outlook for the Philippines were insurers’ strengthened capitalisation in recent years, supported by a phased increase in the minimum capital requirement.
“This enhanced capital position may provide some Philippine non-life companies better opportunities to support portfolio diversification via expansion into non-property lines; for example, travel and personal accident insurance,” said Michael Dunckley, Director, Analytics, AM Best.
Robust investment yield
AM Best’s paper highlighted an overall mixed view of the market but did show that the recent influx of foreign investment capital, economic growth, interest rates, and other factors were drawing stark differences in underwriting performance and investment returns in the country for insurers. “Robust investment yields [were] expected to continue over the medium term,” it said. “Despite near-term pressure on underwriting results, favourable investment yields are supportive of overall earnings of non-life companies.”
“The interest rate is likely to be maintained or lowered marginally over the near term, although monetary policy decisions will depend on macroeconomic factors.”
Part of this was the central bank – Bank Indonesia – keeping the interest rate unchanged since early 2023, following a series of rate increases that started in Q3 2022.
“The interest rate is likely to be maintained or lowered marginally over the near term, although monetary policy decisions will depend on inflation, global interest rates, and other macroeconomic factors,” it said. “As term deposits and fixed-income instruments make up the majority of the-life segment’s investments, high interest rates will likely help bolster the market’s operating performance.”
This means that as Indonesia experiences strong GDP growth in 2024 insurers’ are likely to also see good investment return, which could mitigate poor underwriting results – a pattern being seen in many markets.