The profitability of reinsurance business in Indonesia is expected to increase following more efficient underwriting practices and increased reliance on underwriting activity, Fitch Ratings says in a new report titled "Indonesian Reinsurance Dashboard 2017".
The profitability of the sector has been strong in the previous few years, recording a five-year average return on equity of 23%, due to local capacity optimisation, as reflected in a lower combined ratio of 83% in 2016 (2015: 91%).
The industry's capitalisation in also likely to increase in 2017 due to capital injections. Local capacity optimisation is likely to trigger major growth in Indonesia's reinsurance industry and improve the sector's competitiveness in Asia, says Fitch.
The agency expects too that the industry's retention ratio to increase in 2017, as reinsurers receive more capital from parent companies.
The industry's mitigation of catastrophe exposure has also improved, with most Indonesian reinsurers able to cover a return period of around 400 years, more than the Financial Services Authority of Indonesia's requirement of 250 years.
In a separate report titled "Indonesia Insurance Dashboard 2017", Fitch says that positive economic developments should boost Indonesia's insurance premium growth.The international rating agency expects a rise in property, credit guarantee and engineering insurance following a larger government budget for infrastructure.
This is despite slower growth of nonlife premiums in 1Q17. The loss ratio for non-life improved following lower expense claims for property and motor vehicles in 2016. Fitch expects this lower trend to continue along with manageable protection from reinsurance coverage and expected growth in nonlife premiums. Moreover, Fitch estimates that motor premiums will not be significantly hurt by the tariff hike effective since April 2017, since over 70% of vehicle sales and a large proportion of motorbike sales are sold through financing schemes, whereas vehicle financing requires the buyer to take an insurance package.
As for life business, Fitch believes the sector will continue to dominate total industry premiums. Bancassurance's share of life premiums overtook that of agents in 2016, and Fitch says bancassurance still holds great potential as the most effective distribution channel -- taking into account its customer base, convenience and competitive pricing. Expansion to other channels should also continue, such as e-commerce which is growing rapidly.