Global ratings agency AM Best has confirmed that it is maintaining a negative outlook on the Indonesia non-life insurance segment.
The agency cities heightened reinsurance credit risk and potential pressure on underwriting margins owing to rising reinsurance costs and more-restrictive coverages, as the key reasons behind the negative outlook.
In a new report, Best states that 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.
The agency explained that it expects primary insurers’ underwriting margins to come “under pressure” because of the hardening reinsurance market as well.
While Indonesia’s non-life insurance market has been growing steadily amid a healthy economic recovery, with GPW rising by 15.3% to IDR 90.1 trillion (US $5.8bn) in 2022 from IDR 78.1 trillion in 2021.
Domestic interest rates also remain high, resulting in high investment yields that have been supporting insurers’ overall earnings. However, Best noted that while the segment is poised to grow as the economy recovers, the core underwriting portfolios of Indonesia’s non-life firms will continue to face headwinds across the near term.
Meanwhile, non-life insurers in Indonesia have historically managed to maintain a moderate to high reliance on reinsurance. In 2022, the market ceded between 45% – 50% of premiums, with more than half the total reinsurance cession attributing to domestic reinsurers due to local cedents’ preference for Indonesia’s domestic reinsurers.
Moreover, other factors that contribute towards the negative outlook includes, 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.
Best explained that over the long term, it expects the non-life segment’s expansion to be supported by the country’s economic growth, and particularly as Indonesia also continues to develop its insurance market and increase non-life insurance penetration.
Chris Lim, associate director, analytics, AM Best, said: “As an alternative to paying higher reinsurance costs, Indonesia’s insurers may choose to increase their retention levels. 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.”
