Indonesia non-life segment retains negative outlook as credit risk surges

Suffering reinsurance will result in harder-to-maintain underwriting margins

Indonesia non-life segment retains negative outlook as credit risk surges

Insurance News

By Kenneth Araullo

AM Best has maintained its negative outlook on Indonesia's non-life insurance sector, attributing it to heightened reinsurance credit risk and the potential strain on underwriting margins due to escalating reinsurance costs and increasingly restrictive coverages.

According to the findings outlined in its latest market segment report, the non-life insurance market in Indonesia is facing increased exposure to reinsurance counterparty credit risk. This heightened risk is due to a decline in the financial stability of several domestic reinsurers in recent years.

These reinsurers, the credit agency noted, have suffered substantial losses in their life, health, and credit insurance lines. AM Best predicts that primary insurers will face challenges in maintaining underwriting margins due to the toughening reinsurance market.

“As an alternative to paying higher reinsurance costs, Indonesia’s insurers may choose to increase their retention levels,” said Chris Lim, AM Best analytics associate director. “However, doing so increases income volatility—insurers will bear greater exposures to catastrophe risks given that the country is prone to natural disasters such as earthquakes and floods.”

Factors contributing to this negative outlook also include underwriting losses in the credit insurance line of business, sluggish premium growth in property insurance, and a surge in health insurance claims.

Despite these challenges, AM Best foresees the non-life insurance segment's expansion being underpinned by the country's economic growth in the long term. This growth is expected to be further fuelled by Indonesia's ongoing development of its insurance market and an increase in non-life insurance penetration.

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