According to a new report from AM Best, concerns over the actual and prospective solvency levels at what was recently Indonesia’s largest domestic reinsurer has limited its ability to write new business, and prompted cedants to place coverage elsewhere during the 1/1 renewals.
The report, titled “Indonesian Market Hampered by Weakened Domestic Reinsurer Solvency,” states that thinning capital buffers among Indonesia’s domestic reinsurers leaves them facing the challenge of withstanding further balance sheet shocks, during a time of increased near-term economic uncertainties and unexpected catastrophe events.
Moreover, T Reasuransi Nasional Indonesia (Nasional Re) reported a negative regulatory solvency ratio in 2022. The negative ratio was largely due to Nasional Re being impacted by capital erosion from significant adverse reserve development, largely related to losses from credit reinsurance.
Best also noted that the magnitude of reserve strengthening at Nasional Re was so significant that both its shareholders’ equity and regulatory solvency ratios also fell to negative levels.
At the same time, Nasional Re’s weakened solvency position has also led to a coordinated replacement of capacity by cedents to other reinsurers during the recent reinsurance renewals.
“Replacing this reinsurance coverage was further exacerbated by the limited capacity available in Indonesia’s market given the reduced appetite of international reinsurers,” AM Best Director Michael Dunckley said.
Best also highlighted how Indonesia’s domestic reinsurers have long been favoured by cedents there, stating that this is not only because of applicable regulatory requirements to cede their business locally, but also because of their associated lower reinsurance costs and more favourable reinsurance commissions.
Analysts also stated that non-life insurers in Indonesia favor the use of reinsurance, ceding approximately 45-50% of gross premiums in 2022, with more than 50% going to domestic reinsurers.
However, Best warns that domestic cedents are becoming more cautious in the selection of reinsurance counterparties given the realisation that even well-established domestic reinsurance market leaders such as Nasional Re can pose a risk of default.
“AM Best considers the market’s concentration to domestic reinsurers a source of systemic risk as the impact arising from the failure of the domestic reinsurers would also spill over to the primary market,” AM Best Associate Director Chris Lim added.
