Global credit rating agency AM Best has announced it is maintaining its negative outlook on the Indonesia non-life insurance market.
According to the agency this decision is mainly due to challenges in credit and motor insurance and ongoing macroeconomic uncertainties. Claims frequency normalisation, which has the potential to dampen the segment’s profitability, also underpins the negative outlook, AM Best added.
AM Best noted that revising the outlook to stable would depend on the future diminishing of the challenges faced by the market.
The rating agency 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.
However, given the downside risks to domestic economic expansion, including a potential global recession, inflationary pressures and domestic monetary tightening, market growth is likely to fall short of the levels seen prior to the pandemic, it added.
According to the announcement, in AM Best’s view, the poor underwriting performance in the credit insurance line is a systemic issue that continues to affect the market.
Chris Lim, senior financial analyst at 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.”
Financial profiles of various mid-to-large domestic re/insurers have been weakened by premium rate inadequacy, weaknesses in underwriting risk management and overexposure to credit insurance during a period of significant economic stress.
The former has led to a capital event for some and may continue to pose a drag on the operating performance of others, the rating agency noted.
Underwriting margins, particularly for motor and health insurance, are expected to be constrained by inflationary pressures. Additionally, business growth in motor insurance may be dampened by factors that negatively impact the demand for motor vehicles over the near term.
For example, the termination of the luxury goods sales tax which stimulated an increase in new car sales benefiting business expansion in motor insurance in 2021 and the first half of 2022.
