Rating agency AM Best has announced that it is maintaining its negative market segment outlook on the Indonesia non-life insurance segment citing challenges in credit and motor insurance ongoing macroeconomic uncertainties.
In a new Best Market segment report, titled “Market Segment Outlook: Indonesia Non-Life Insurance,” Best notes that it expects the segment to exhibit higher growth in 2022, supported by the resumption of domestic activity and demand as Indonesia transitions to treating COVID-19 as endemic and moves away from strict lockdowns seen up to 2021.
At the same time though, market growth is likely to fall short of the levels seen prior to the pandemic given the downside risks to domestic economic expansion, including a potential global recession, inflationary pressures and domestic monetary tightening.
Moreover, Best states that the poor underwriting performance in the credit insurance line is a systemic issue that continues to affect the market.
Chris Lim, senior financial analyst, AM Best, said: “Underwriting losses stemming from credit insurance have led to financial strain for several industry players, as the economic impact from COVID-19 hampered the debt repayment abilities of consumers. In turn, this has led to higher default rates, and therefore, higher credit insurance claims.”
Furthermore Best highlights that premium rate inadequacy, weaknesses in underwriting risk management and overexposure to credit insurance during a period of major economic stress have also weakened the financial profiles of various mid-to-large domestic insurers and reinsurers.
Inflationary pressures are also anticipated to constrain the underwriting margins for insurers. In particular. “Rising inflation is expected to lead to an increase in motor claims costs, driven by the higher cost of labour and spare parts,” said Myles Gould, director, analytics, AM Best.
“Medical cost inflation in Indonesia is also estimated to be rising at a pace notably faster than general inflation.”
Best also addresses how business growth in motor insurance may be significantly dampened by factors that negatively impact the demand for motor vehicles over the near term. Business expansion in motor insurance in both 2021 and during the first half of 2022 benefitted in part by an increase in new car sales, which was stimulated by a temporary reduction of luxury goods sales tax. However, this tax incentive has been terminated.
Best concludes that it could revise the outlook to stable should these challenges diminish in the future.