With the introduction of compulsory cession rules and a mega reinsurer in the pipeline, Indonesia means business as it steps up its reinsurance game, and aims to recapture some 70% of the premium outflow –IDR19 trillion (US$1.33 billion) in 2013 – by 2020.
Notwithstanding the Otoritas Jasa Keuangan (OJK)’s issuance of the draft regulations on compulsory local cessions, it is business as usual in the local reinsurance market and then some.
“Since the end of 2014, all domestic reinsurers had been reviewing and adjusting their business models and strategic plans accordingly. Some have sought to increase their capital and the capacity that we have seen earlier this year is quite adequate to absorb the anticipated increase in portfolio so far,” said Dr Frans Sahusilawane, who is President Director of the new mega reinsurer, Indonesia Re.
But going forward, both he and Maskapai Reasuransi Indonesia (MAREIN)’s President Director, Mr Robby Loho, acknowledged that there is much more ground that needs to be covered. “There remain lots of things that we have to prepare for and equip ourselves with, from capacity to knowledge and capabilities, to processes, technology and management.”
Capital remains a challenge
Despite local reinsurers’ efforts, Mr Loho felt that capital remains a substantial challenge. As such, for MAREIN, he said the company had increased its retrocession capacity “by about 50% compared to last year.”
Dr Sahusilawane noted that the “projection of capital required in order to recapture 70% of the offshore reinsurance premiums (70% being a planned percentage that Indonesia Re aims to recapture) is around IDR7-8 trillion now, increasing to IDR20-25 trillion in five years” whilst the domestic market’s total capital currently amounts to about IDR4 trillion. He acknowledged that increasing capital will be no easy feat, but he firmly believes that “good business will always be able to attract capital”.
For Indonesia Re – which is still in the process of finalising its merger with PT Reasuransi Umum Indonesia (RUI), the parent company of ReINDO – it has also been “doing well in the first semester of 2015”. He said that although the OJK’s final draft of compulsory cession rules has not been released, “domestic reinsurance premium in the first half of 2015 has jumped 100% to IDR3.4 trillion, which was higher than expected and clearly shows the positive reception in the marketplace”.
Local reinsurers must be able to step up to fill knowledge, expertise gap
Nonetheless for Dr Sahusilawane, capacity is not the biggest challenge.
“To me the biggest challenge is how to enhance the knowledge and capabilities of our domestic market as we still face challenges in the area of pricing, underwriting, and managing CAT exposures etc. Local insurers currently enjoy such expertise and professional advice from their international reinsurers,” he said.
With the cession rules in effect, when the large chunk of reinsurance business is shifted from the international reinsurers to the local reinsurers, the latter will have the “duty to fill the gap of knowledge and capabilities, and to improve on it in order to help give their local direct insurer clients a competitive advantage in the ASEAN Economic Community (AEC) environment”, he said.
Final rules likely to reduce harshness in implementation
Market players are expecting the insurance regulator to issue the final draft of its rules – encompassing feedback gathered from the industry – by the last quarter of the year though Dr Sahusilawane does not expect the revised draft to have any major amendments, “perhaps only to certain operational points, to remove some possible harshness in the implementation”.
Mr Loho said it would good if the rules could be followed by a detailed implementation plan with clear directions and controls so as to prevent companies from possibly circumventing the rules. He also suggested the OJK appoint supervisors from the industry as the latter would have been exposed to market practices and thus know the signs of errant behaviour.
Turning to discuss their priorities, both Mr Loho and Dr Sahusilawane said in the short term, their focus would be on increasing business on the life side and seeing through the creation of the mega reinsurer, respectively. In the longer term however, both expect to look towards continuously enhancing their operational expertise and expanding outwards from Indonesia.
In the coming year, Mr Loho said MAREIN is aiming to further increase its life reinsurance business – both top and bottom lines – and will develop new life reinsurance products for its cedants. On the non-life side, it will maintain its prudent underwriting stance.
“We also hope to increase our actuarial and technical expertise and draw new talent to the industry. In terms of increasing sales, we need to expand our network of clients,” said Mr Loho.
For Dr Sahusilawane, the immediate agenda is to pursue Indonesia Re’s roadmap till next year, particularly overseeing the “transfer of portfolio of ReINDO and studying the portfolio alignment of Nasional Re” and enhancing the mega reinsurer’s – and later the whole market’s – knowledge, innovation and technology, and management capabilities.
“Then, I will also need to look into preparing for Indonesia Re’s expansion regionally,” he added.