AM Best has revised its market segment outlook on Indonesia’s non-life insurance market to negative from stable, citing a weak economy recovery, which could delay its pandemic recovery and impact investment returns.
The rating agency notes that a resurgence of the COVID-19 virus and slow vaccination progress have led to a reinstatement of stringent mobility restrictions, that has disrupted near-term economic recovery.
Weaknesses in the economy and the potential inability to contain the pandemic could limit insurance demand in a number of product lines, such as property, engineering, motor, transportation and travel insurance.
Although premium income increased by approximately 2% to IDR 38.5 trillion (USD 2.74 billion) in the first half of 2021, the growth lagged behind pre-pandemic levels, and analysts believe it may remain constrained as a result of the latest round of mobility restriction measures.
Credit insurance, a key line of business in Indonesia’s non-life insurance market, is also under pressure due to the risk of higher claims from defaults among debtors.
“Insurers with higher exposure to credit insurance and weaker underwriting risk management may face outsized losses that could weaken their financial profile,” AM Best warned.
The low interest rate environment also continues to impede the investment performance of Indonesia’s non-life insurers and analysts believe investment risks could trend higher as prolonged pandemic conditions erode the financial strength and earnings abilities of debt and equity issuers.
AM Best expects the mandatory tariffs within the non-life insurance market for property – including business interruption – and motor lines of business to remain a supportive element of the market.
Additionally, it says greater investment in and usage of technology to support improvements in distribution and operational efficiency should help Indonesia’s non-life carriers achieve competitive advantages over the medium to long term.
