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Aug 2020

Breaking News: Indonesia - Regulator proposes more business be placed with local reinsurers

Source: Asia Insurance Review | Jan 2015

Indonesia’s Financial Services Authority (OJK or Otoritas Jasa Keuangan) has proposed for insurers to retain or reinsure more business with domestic reinsurers, in order to “improve and optimise capacity in the country”. 
Some classes of business will have to be wholly placed with domestic reinsurers. For other classes, a minimum of 25% of the business will have to be similarly placed, with the proportion to be increased in the following years.
Balance of payments in deficit
In a draft circular to the insurance industry last month, OJK said that the average balance of payments in Indonesian reinsurance transactions within the past five years was a deficit of IDR5.65 trillion (US$455 million) per year. The deficit was partly because the reinsurance capacity in the country could not absorb all reinsurance needs and the reinsurance capacity in the country was not optimally utilised.
As such, OJK is encouraging insurance companies to increase their own retention of business as well as maximise the cessions to domestic reinsurance companies. It will also help promote this optimal utilisation of domestic reinsurance capacity through regulation.
Requirements for treaty and facultative placements domestically
OJK proposed that amendments to retention by insurance companies be effected by increasing the minimum retention requirements with a target increase of 1.5 to two times of the provisions concerning the minimum limits for each risk retention. 
As for the optimal utilisation of domestic reinsurance capacity, the requirements are to be:
1. Compulsory priority cession to local reinsurer of a minimum of 25% or the following amount, whichever is higher:
Proportional Treaty : US$16 million
Non-proportional Treaty : US$14 million
Life : US$6 million
2. 100% local placement for Motor, PA, Health, Suretyship, Credit, Life, Cargo lines of business.
3. Treaty leader has to be a local reinsurer.
4. To be applied to treaties commencing 1 January 2015.
1. Priority cession to local reinsurer for the following lines of business – Property, engineering, energy, miscellaneous, cargo, hull, aviation – with minimum amount as follows:-
Property, Engineering, Energy – US$50 million
Miscellaneous – US$30 million
Cargo, hull and aviation – US$20 million
2. Priority placement to local reinsurer of structured facultative business for all layers across the board.
Early implementation urged
In the circular, OJK also advised domestic reinsurers to increase their services to insurance companies by providing training to the latter and improving their services and claims settlements. “In addition, we instruct all domestic reinsurance companies to immediately obtain an international rating in order to improve competitiveness with foreign reinsurers,” said the regulator in the circular.
On the implementation of these proposed provisions, the OJK said they required the insurers to submit reports on its early implementation. However, at press time, it is not clear if the Indonesian insurers will be able to comply with this latest directive from the OJK in the time frame recommended. 
May have difficulty in complying
Meanwhile, an industry executive said that the proposed new regulations might not have a smooth implementation because:
the capacity of Indonesian reinsurers is limited at present;
local reinsurers are not ready to lead yet (for example, because of a lack of technical capabilities);
local reinsurers do not fulfil rating requirements for many professional players;
there are concerns that local reinsurers would be overwhelmed with claims handling in a severe natural catastrophe situation;
the domestic market’s access to international reinsurers and know-how transfer is limited;
desired consolidation process in the highly fragmented market gets slowed down; and
in addition, the Indonesian market might become less attractive to international (re)insurers.
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