Positive economic developments and insurance sector reforms are helping to boost profitability in Indonesia’s reinsurance segment, following the formation late last year of a new state-owned reinsurance company.
A July report by ratings agency Fitch showed return on equity for Indonesian reinsurers averaged 23% over the past five years, and profitability is expected to increase further as more efficient underwriting methods are implemented.
The segment’s combined ratio – its expenses and losses divided by its earned premiums – also fell from 91% in 2015 to 83% last year, Fitch said, indicating greater efficiency in operational costs.
The agency said reinsurance would expand more than any segment this year, with loss ratios in the automotive and property lines to improve in light of lower expense claims in 2016. Capital injections are also expected this year from parent insurance companies, as domestic operations increase, partly a result of state efforts to keep reinsurance business onshore.
Meanwhile, income from new premiums collected in the property and engineering insurance segments – driven by nationwide infrastructure investments – will further support development as protection from reinsurance coverage grows and the segment gains from regulatory reforms.
Fitch predicts GDP in Indonesia will register 5.3% growth for 2017, bringing positive knock-on effects for the insurance sector as a whole, which had some RP1000trn ($80bn) in assets under management as of last March, according to the Financial Services Authority (OJK).
Reinsurance policy shift opposed by some foreign players
This growth comes amid significant structural reforms for local reinsurers, which the government has given special regulatory support in a bid to ensure their dominance.
Reforms issued by OJK, in effect as of January 2016, require Indonesian insurers to conduct all reinsurance business in the so-called simple risk categories – motor, health, personal accident, credit, life and surety – exclusively with domestic providers. For all other non-simple categories, at least 25% must be placed with local firms.
The move forms part of a government initiative aimed at preserving market share for local reinsurers, keeping capital in the country and strengthening the domestic segment.
To this end, in the fourth quarter of 2016 two domestic firms merged to form Indonesia Re. The state-owned reinsurer aims to raise significant capital over the next few years, targeting equity of $1bn by 2020.
The longer-term goal for the government is to develop the local reinsurance market into one that can expand offshore, generating the market depth required to cover insurers elsewhere in Asia. This is particularly important following the launch of the ASEAN Economic Community at the end of 2015.
However, foreign reinsurers have voiced concerns over the policy, claiming it is a restriction of free trade. For its part, the European reinsurance federation, Insurance Europe, argues that the reforms shut out foreign reinsurers and could expose the Indonesian sector to risk due to lack of diversification.
“Insurance Europe urges the EU authorities to seek to overturn protectionist regulation that hinders competition and creates an uneven regulatory playing field,” it said in a statement issued in early August. “It would like to see Indonesia’s restrictions on cross-border [re]insurance lifted.”
Mutual benefits for insurers investing in infrastructure
The industry regulator is encouraging insurance firms to diversify their investment base as the industry grows in the coming years. Consultancy KPMG forecasts that in the years to 2020 premiums will see compound annual growth rates of 13% in life insurance and 10% in property and casualty lines, reaching ID243trn ($20bn) and 81trn ($10bn), respectively.
In March the OJK’s commissioner for the non-bank financial sector, Firdaus Djaelani, specifically urged firms to help fund infrastructure projects, either directly or by purchasing state bonds. He suggested that some projects run by state-owned enterprises had internal returns of up to 13%.
Indonesia’s extensive infrastructure programme – including works at ports, airports, and electricity generation and distribution facilities – represents a key avenue for insurers to diversify and boost earnings, according to Ben Ng, president director of AIA Financial. Such projects, he said, offer mutual benefits, and funding could be significant if supported by the right tax incentives.
“Insurance can be a long-term funding source for infrastructure,” Ng told OBG. “With tax being heavy on fixed-income investments, long-term funding [for infrastructure] presents enormous opportunities.”
Infrastructure investment by insurers could reap a double dividend, as large development projects will also drive demand for property insurance, credit guarantees and engineering coverage both during and after construction.