Proposals by Indonesia’s financial services authority (OJK) to increase the amount of insurance business placed with domestic reinsurers could potentially add to challenges for both the domestic insurance and reinsurance sectors, said Fitch Ratings.
Risk exposures for Indonesian reinsurers are likely to rise as insurance risks are increasingly retained domestically, and this could challenge the domestic sector – given the relatively low level of capitalisation, the rating agency said.
Stemming the outflow of reinsurance business to international markets
The OJK proposals stipulate that Indonesian insurers must reinsure all of their motor, health, surety, credit, life and cargo business with domestic reinsurers. For other insurance business lines, a minimum of 25% will have to be allocated to domestic reinsurers, with the minimum level rising over the next few years.
Under existing regulations, Indonesian insurers are only required to cede 10% of their risk to domestic reinsurers. As a result, more than 70% of reinsurance premiums are currently ceded to the international market, creating an insurance trade deficit of IDR5 trillion (US$400 million).
Domestic insurers need to improve risk management and technical modelling capabilities
The agency also noted that managing the additional business will add to challenges for the local reinsurance sector, especially as Indonesian firms have limited sophistication in reserving and catastrophe modelling - a particular concern in a market with a relatively high likelihood of natural disasters.
As such, to maintain their existing risk profile, Indonesian reinsurance firms will have to improve their risk management and enhance their technical modelling capabilities to better manage increased risk accumulation. Improving capacity (capitalisation) will also be crucial, to ensure that the domestic reinsurance market will be capable of serving the higher demand from local insurance businesses. It has not yet been stated what options will be available to Indonesian insurance companies if they cannot find a domestic reinsurer.
New mega-reinsurer in the pipeline
The government is moving forward on an earlier announced plan to merge state-owned reinsurers PT Reasuransi Internasional Indonesia (Reindo) with PT Asei Reasuransi Indonesia, to create Indonesia Re. The merger of two other local reinsurers, PT Tugu Reasuransi Indonesia and PT Nasional Reasuransi Indonesia, is also planned. This will boost domestic reinsurance capacity, with plans to inject an initial IDR1.5 trillion in capital for the new company.
However, even with the capital boost, this is still less than reinsurance peers in Thailand, Malaysia and Singapore. This initial capital would not be likely to be sufficient to keep pace with the expected growth of the insurance industry nationwide, said Fitch Ratings.