Best keeps negative outlook on Indonesian non-life insurance sector

Rising reinsurance costs and more-restrictive coverages have led to heightened reinsurance credit risk and potential pressure on underwriting margins for Indonesian non-life insurers. As a result, AM Best is maintaining a negative outlook on the Indonesian non-life insurance segment. The ratings agency said it expects that although the segment is poised to continue to grow as the economy recovers, the core underwriting portfolios of Indonesia’s non-life companies will continue to face headwinds over the near term. The primary non-life market’s exposure to reinsurance counterparty credit risk has worsened as the financial strength of several domestic reinsurers has deteriorated in recent years due to outsized losses in their life, health and credit insurance lines, said Best, adding that it expects primary insurers’ underwriting margins to come under pressure because of the hardening reinsurance market as well. Best noted that non-life insurers in Indonesia have historically maintained a moderate-to-high reliance on reinsurance. The market ceded between 45% and 50% of premiums in 2022, with more than half the total reinsurance cession attributed to domestic reinsurers due to local cedents’ preference for Indonesia’s domestic reinsurers. “As an alternative to paying higher reinsurance costs, Indonesia’s insurers may choose to increase their retention levels,” said Chris Lim, associate director, analytics, 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.” Best explained that unlike counterparts in more liberalised insurance markets, Indonesian insurers face limitations in raising premium rates for property and motor lines, as statutory tariffs apply to both businesses. It said the lack of pricing flexibility for these two lines, coupled with higher reinsurance costs, will likely have a negative impact on underwriting results. Indonesia’s non-life insurance market has been growing steadily amid a healthy economic recovery, with gross premiums written rising by 15.3% to IDR90.1trn ($5.8bn) in 2022 from IDR78.1trn in 2021. Underwriting losses in the credit insurance line of business, as well as slower premium growth in the property insurance line and rising health insurance claims, are also factors in the negative outlook. Property insurance is the largest line of business in Indonesia’s non-life insurance market, but the segment’s top-line growth has slowed down, with premiums contracting by 16.1% in the first half of 2023 from the same period a year ago. Credit insurance is expected to remain a strong growth driver over the near term, despite the recent challenges facing the line, said Best. Credit insurance premiums grew 31.4% in the first half of 2023. Best said that with demand for credit insurance growing, however, prudent risk selection, underwriting, and risk management controls are crucial to mitigate outsized loss exposures. Motor insurance, the second-largest line in the non-life segment, is also expected to post favourable business growth over the medium term, supported by an uptick in automobile supply and demand. Over the long term, Best said it expects the non-life segment’s expansion to be supported by the country’s economic growth, and particularly as Indonesia continues to develop its insurance market and increase non-life insurance penetration.

Best keeps negative outlook on Indonesian non-life insurance sector

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