Fitch paints positive picture for Indonesia’s insurers

Ratings agency Fitch is forecasting a rise in premium growth for Indonesia’s insurance industry, on the back of a predicted 5.3% increase in gross domestic product. More specifically Fitch anticipates a rise in property, credit guarantee and engineering insurance as a result of government spending on infrastructure. The forecast comes despite slower growth in non-life premium in the first quarter of 2017. Fitch cites an improved loss ratio for non-life, due to lower expense claims for property and motor insurance in 2016, as another positive factor for insurers and one that will help protect motor premium in the face of a recent tariff hike. Fitch is also forecasting a major growth in Indonesia’s reinsurance industry that will also improve its competitiveness within Asia. It attributes this growth to local capacity optimisation and an increase in capitalisation due to expected capital injections. The growth follows the strong performance of Indonesia’s reinsurance sector during the past few years, recording a five-year average return on equity of 23% and lower combined ratios of 91% and 83% in 2015 and 2016, respectively. Fitch expects profitability to improve further as a result of more efficient underwriting practices. It also expects Indonesian reinsurers’ retention ratio to increase in 2017 as a result of more capital from parent companies and better mitigation of catastrophe exposure, as evidenced by the fact that most Indonesian reinsurers can demonstrate capital cover for a period of 400 years, going beyond the national regulator’s target of 250 years. The Fitch forecast does contrast though with an earlier report from reinsurance broker JLT Re, which noted that while insurance and reinsurance premium volumes have continued to increase, they have done so at a slower rate than total exposure growth. Rapid expansion of the property and engineering sectors has created more exposure for insurers but JLT Re analysis shows a decline in reinsurance cessions and exposure-adjusted purchases, leading the reinsurance broker to conclude that domestic reinsurers are more exposed to large losses, a scenario exacerbated by recent regulatory changes requiring greater per-risk retentions for insurers and compulsory cessions to domestic reinsurers. Furthermore, renewal terms, the availability of capacity and the current efficiency of reinsurance pricing are adding to the increased cession rates to domestic reinsurers. And while reinsurance premiums have grown by an average 10% between 2011 and 2016, this has not been enough to match the overall increase in risk exposures, resulting in a decline in exposure-adjusted premium rates. Consequently, JLT Re is calling for rationalised reinsurance pricing and improved risk modelling from local reinsurers. “The trends highlighted have implications for the risk management functions of Indonesian insurers and reinsurers. Proactive measures taken now in the areas of ERM, capital and risk management will enable organisations to differentiate themselves from their peers and reward those willing to make the investment,” states JLT Re.

Fitch paints positive picture for Indonesia’s insurers

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