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Indonesia’s rapidly developing insurance market has seen more fundamental changes as the country’s regulator, the Financial Services Authority (Otoritas Jasa Keuangan (OJK)), announced in January that it will raise minimum equity requirements significantly from the end of 2026, which Fitch Ratings has said could cause industry developments, in a new report.
As part of the new regulations, which are known as POJK 20, 23, 24, and 27, the minimum equity for insurance companies to hold will be at least 250 billion rupiah (£13 million) by 2026, 67% higher than the previous minimum level, said OJK.
For reinsurance firms, the minimum capital requirement was raised to 500 billion rupiah in 2026 (£25 million), and set to go up to two trillion rupiah (£10.18 billion) at the end of 2028, OJK said, compared to 300 billion rupiah (£15 million) under previous rules.
The changes will take place as the world’s fourth most populous country prepares to go to the polls on 14 February. The candidates in the election have largely focused on maintaining the nation's high economic growth rates.
This is just the latest in many modernisation drives by the insurance regulator. Last year, the insurance regulator, part of OJK, proposed a rise in the minimum paid-up capital requirements for insurers – along with a bevy of other changes to the market’s investment sphere. Part of the aim of those changes was to make the market more stable and therefore increase its attractiveness to foreign investors.
Overall, the Indonesian market is seen as underdeveloped. Late last year, the outlook for Indonesia’s non-life insurance segment was rated negative, according to a report published by ratings agency AM Best, despite the country's economy largely being spared from inflationary pressures and near-recession conditions that affected regions.
The agency listed several factors for their negative outlook being maintained: heightened reinsurance counterparty credit risks for non-life insurers, which has been driven by weakened credit quality of domestic reinsurers.
The regulations announced in January could affect investment teams at insurers due to consolidation that would change share values for public companies. It could also impact investors that need to focus on organic growth rates.
For portfolios, this would mean fewer companies looking to make investments in sectors, which could already be lacking competitiveness, but it could also mean insurance companies have more capital to invest when they merge.
Fitch Ratings said the tougher minimum equity requirements for Indonesian insurers would likely reduce the number of companies operating in the sector, but also “encourage a healthier competitive landscape”.
New credit insurance regulations could influence micro and consumer lending by the banking sector, as banks will be required to retain 25% of the insured default risk. Previously, insurers bore up to 100% of the insured risk.
The new rules would come into effect from the end of 2026. A second stage, to be implemented by the end of 2028, would see the minimum raised again for all insurers, with those offering a full range of products, including credit insurance, facing a higher-tier minimum.
“[We believe] consolidation of the sector would generally be credit positive for our rated issuers, which are likely to survive the process.”
Requirements for reinsurers would also rise from the end of 2026, and again under a two-tier system from the end of 2028.
Fitch said that Indonesia’s insurance market was fragmented, with 49 life insurers, 72 non-life insurers, and seven reinsurers as of Q4 2023. “This leads to intense competition that encourages aggressive business expansion and weakens pricing power and profitability,” said Fitch’s analysis. “[We believe] consolidation of the sector would generally be credit positive for our rated issuers, which are likely to survive the process and would subsequently enjoy strengthened competitive positioning.”
They added that the changes may prompt insurers that are unlikely to meet the new requirements to raise additional capital or explore M&A options. “Meeting the tougher equity minimums will be more challenging for insurers that are unprofitable or have little prospect of receiving capital support from shareholders,” said Fitch. “Insurers that are able to meet the end-2026 minimum equity requirement but fall short of the end-2028 requirement will have the option of becoming part of an Insurance Business Group (KUPA), formed by a parent company and/or holding company that is able to meet the end-2028 minimum."
However, about 62% of the rated portfolio, all in the non-life and reinsurance sectors, would need to increase equity capital to reach requirements under the second stage by the end of 2028, the report added.
Indonesia is just one of several countries in east and southeast Asia seeing changes to capital and equity requirements from regulators looking to shore up a more profitable insurance outlook.
Fitch noted that the country's outlook would be 'positive' with the new rules solidifying. “Organic capital generation is feasible for around 50% of rated insurers that need to raise equity capital to meet the end-2026 requirement,” it said. “However, we believe those rated insurers that need to raise equity capital to meet the tougher end-2028 requirements will mostly be unable to do so through organic capital generation alone.”
Insurers would need to grow at a compound annual growth rate (CAGR) of 15% to meet the end of 2028 requirements with the average currently being 7%. “That would be a challenge, even if consolidation improves their profitability in the next few years,” said Fitch.
The report also said that the effect of the new credit insurance regulations should be credit positive for the rated insurer but that the net impact on the banking sector was less clear. “If banks tighten underwriting standards, which may slow micro and consumer lending but improve banks’ risk profiles,” said Fitch’s analysis. “Otherwise, retaining a greater share of the risk for such lending may cause banks’ risk profiles to deteriorate. Their risk-weighted assets will also rise as they retain part of the insured risk on their books, potentially affecting capitalisation ratios.”
“This should lead to healthier levels of competition and facilitate better pricing of the risks associated with credit insurance for the firms that remain."
OJK is also changing the rules to require credit risk profile data from banks to be included in agreement contracts for credit insurance.
This means that planned upward adjustments to capital requirements for credit insurers providers may also encourage small non-life insurers to shift out of the segment towards simpler product lines like property and motor insurance. “This should lead to healthier levels of competition and facilitate better pricing of the risks associated with credit insurance for the firms that remain,” said Fitch.
Ultimately, this could strengthen the Indonesian market. Already, the country is a leading emerging market for foreign investment; these changes could mean there is more investment coming into the country, which would enable domestic insurers to be in a stronger financial position to invest.
