Best’s Commentary: Indonesia’s Insurance Market Hampered by Domestic Reinsurer’s Weakened Solvency Position

SINGAPORE–(BUSINESS WIRE)–#insurance–Concerns over the actual and prospective solvency levels at what was recently Indonesia’s largest domestic reinsurer has limited its ability to write new business and prompted cedants to place coverage elsewhere during the 1 January 2023 renewals, according to a new AM Best commentary.

The Best’s Commentary, “Indonesian Market Hampered by Weakened Domestic Reinsurer Solvency,” notes that thinning capital buffers among Indonesia’s domestic reinsurers leaves them facing the challenge of withstanding further balance sheet shocks amid the increased likelihood for near-term economic uncertainties and unexpected catastrophe events.

PT Reasuransi Nasional Indonesia (Nasional Re) reported a negative regulatory solvency ratio in 2022 after being impacted by capital erosion from significant adverse reserve development, largely related to losses from credit reinsurance. The Best’s Commentary also notes that the magnitude of reserve strengthening at Nasional Re was so significant that both its shareholders’ equity and regulatory solvency ratios fell to negative levels.

This weakened solvency position at Nasional Re led to a coordinated replacement of capacity by cedents to other reinsurers during the recent reinsurance renewals.

“Replacing this reinsurance coverage was further exacerbated by the limited capacity available in Indonesia’s market given the reduced appetite of international reinsurers,” AM Best Director Michael Dunckley said.

Indonesia’s domestic reinsurers have long been favoured by cedents there, not only because of applicable regulatory requirements to cede their business locally, but also because of their associated lower reinsurance costs and more favourable reinsurance commissions. According to the commentary, non-life insurers in Indonesia favor the use of reinsurance, ceding approximately 45-50% of gross premiums in 2022, with more than half going to domestic reinsurers. However, domestic cedents are becoming more cautious in the selection of reinsurance counterparties given the realisation that even well-established domestic reinsurance market leaders like Nasional Re can pose a risk of default. Notwithstanding, some cedents continue to rely heavily on the use of basic measures such as the counterparties’ absolute capital bases and market positions as key indicators of creditworthiness.

“AM Best considers the market’s concentration to domestic reinsurers a source of systemic risk as the impact arising from the failure of the domestic reinsurers would also spill over to the primary market,” AM Best Associate Director Chris Lim added.

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AM Best is a global credit rating agency, news publisher and data analytics provider specialising in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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Contacts

Chris Lim, FCII, CFA
Associate Director
+65 6303 5018
chris.lim@ambest.com

Richard Banks
Director, Industry Research – EMEA
+44 20 7397 0322
richard.banks@ambest.com

Michael Dunckley, CFA
Director, Analytics
+65 6303 5020
michael.dunckley@ambest.com

Edem Kuenyehia
Director, Market Development & Communications
+44 20 7397 0280
edem.kuenyehia@ambest.com