Indonesian non-life insurers’ expansion into credit insurance is unlikely to erode their credit profiles in the near term, according to a report by Fitch Ratings.
However, the international credit ratings agency stressed that sound management of risk accumulation will be crucial for these insurers as they expand their businesses.
“We believe credit insurance will continue to outgrow the overall insurance market as more banks and other financial institutions get familiar with, and benefit from, the credit insurance products,” the report said, adding that the segment had a compound annual growth rate (CAGR) of 30% from 2016 to 2018, compared with the overall non-life sector CAGR of below 7% during the same time period.
The credit insurance line made up 11% of total gross premiums in the non-life sector in 2018 against 8% in 2016. The growth was attributed to a government initiative in 2016, when the National Financial Inclusion Strategy opened access to banking services and boosted lending to micro businesses and SMEs.
According to Fitch, managing risk accumulation is the key to keeping underwriting margins healthy, due to the parties covered often having a higher risk profile than average debtors. This is because most credit insurance products target the micro and SME segments, where businesses often have limited financial disclosures and poorly designed business plans, and generally lack the collateral banks demand.
The credit insurance line’s three-year average loss ratio to end-2018 was at 60% – much higher than the average loss ratio in property and automotive lines of 33% and 44%, respectively.
The report mentioned that three insurers that have expanded into credit insurance – Asuransi Sinar Mas, PT Asuransi Wahana Tata, and PT Meritz Korindo Insurance – have strengthened the diversity of their products and are garnering more business, amid rising claims in this line of business.
“Fitch expects these companies to be prudent in expanding into the new line while developing the necessary underwriting skills,” the report said. “Potential claims would be affected by the selection of banking partners, market segment targets and loan products.”