Solvency changes on the horizon for developing Indonesian market

Country’s regulator proposes changes to investment rules, which could help solvency in the well-performing but underdeveloped market.

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Indonesia's massive population cushions it from shocks on the international market - but what of investment?

The Indonesian insurance regulator, which is part of Otoritas Jasa Keuangan - the Financial Services Authority (OJK), has proposed a rise in the minimum paid-up capital requirements for insurers – along with a bevy of other changes to the Asian market’s investment sphere. 

In recent years, the most-populous country in south east Asia has become a hotspot for foreign investment, however, its insurance market is still often considered too immature to offer the necessary security for full adoption. 

However, the proposed changes to solvency rates, said some rating agencies, could initiate a further inflow of capital into the sector and therefore strengthen Indonesian insurers’ capital profiles.

“We estimate that around 80% of rated insurers [in Indonesia] will
need to raise capital to varying degrees under the proposal.”

These potential changes would also “support the industry’s development,” said Fitch Ratings in a recent white paper on the state of the insurance investment sphere in the world’s fourth largest country. 

Whilst Indonesia is still relatively undeveloped in insurance markets – for example, by the end of 2021, its insurance penetration rate increased to approximately 3.06% from about 1.96% in 2013, according to Statista – these conditions look posed to change.

“We estimate that around 80% of rated insurers [in Indonesia] will need to raise capital to varying degrees under the proposal,” Fitch said, discussing the recent changes. “We believe the tougher requirements will be challenging for weaker insurers that have not been receiving immediate capital support from shareholders, including several state-owned insurers.” 

Regulatory perspective 

The regulator, OJK, is currently receiving input from the sector on the higher minimum paid-up capital requirements.

Its proposals contain the idea of raising the minimum paid-up capital for conventional life and non-life insurers to IDR500 billion ($34 million) by 2026 and IDR1 trillion ($67 million) by 2028 – up from IDR150 billion ($10 million) currently. The proposed amount for reinsurers is IDR1 trillion ($67 million) by 2026 and IDR2 trillion ($134 million) by 2028, which are up from the current IDR300 billion ($20 million).

OJK also plans to classify insurers into four classes based on their core capital, which will then determine the insurers’ business scope. 

In a May 2023 commentary paper, AM Best said that the thinning capital buffers of domestic reinsurers were presenting a significant challenge when it came to withstanding further balance sheet shocks.

The global ratings agency added that market ambition could continue to be hampered by the “concentration to domestic reinsurers”, which it saw as a “source of systemic risk”, as opposed to reinsuring on the international market and spreading risk.

“The economy has benefitted from an increase in exports, notably from commodity
 products, which helped improve the government’s fiscal position.”

Another issue, it said, was the lack of security on domestic reinsurers’ credit ratings.

Money coming in 

Whilst the domestic market remains under-developed, there are signs that the country’s high economic growth rate and strengthening regulation could attract an influx of foreign investment. 

UK investment firm Aubrey Capital Management increased its exposure to Indonesia at the end of 2022, and the region now accounts for 10% of its Global Emerging Markets fund.

It said that reasons for a positive outlook include the fact of a macro tailwind. “The economy has benefitted from an increase in exports, notably from commodity products, which helped improve the government’s fiscal position,” said Camellia Huang, Investment Analyst at Aubrey Capital Management. “Additionally, Indonesia’s GDP is expected to grow by 5% over the next few years.”

Indonesia’s huge domestic consumer base means that the market is buffered from some shocks to the global system. For instance, the country’s economy has outperformed several competitors and other regional middleweights in recent years. Indonesia’s annual inflation rate dropped to an eleven-month low of 4.33% in April of 2023, from 4.97% in March and below the market consensus of 4.39%. It had hit a seven-year high of 6.5% last October.

“The fiscal deficit is expected to be reduced by removing pandemic-related
support and adjusting taxes.”

It was higher than Thailand’s rate in April (2.67%) but lower than the Philippines’s (6.6%). The country’s growth rate – 5.1% for 2023 – also put it higher than most ASEAN-10 average (4.8%), but below the ‘Emerging’ average (5.4%). 

“Indonesia’s investment will rebound thanks to recent legislation to stimulate it, and construction and mining leading the way,” said the OECD’s Economic Outlook for Southeast Asia, China and India 2023 report. “The monetary authority is raising interest rates to counter inflation and prevent capital outflows. The fiscal deficit is expected to be reduced by removing pandemic-related support and adjusting taxes.” 

Earlier this year, S&P Global predicted that any potential economic slowdown would have less impact on domestic demand-led economies such as Indonesia, given its vast population. 

Foreign investment

Indonesia saw some $43 billion in foreign investment in 2022, the highest in the country’s history.

For 2023, the government aims to increase its foreign and domestic investment target to $92 billion, or 1,400 trillion rupiah. The government also attempted to pass several laws encouraging foreign investment in recent years. 

With this booming investment market, the Indonesian general insurance industry is forecast to grow at a compound annual rate of 9% from 77.2 trillion rupiah ($5.3 billion) in 2023, to 108.8 trillion rupiah ($7.1 billion) in 2027. This is in terms of gross written premiums (GWP) and according to the data and analytics company Global Data. 

However, these estimates solely represent foreign investment – and do not cover the health of Indonesian insurers and their portfolio management, or solvency. 

“We think not all Indonesian insurers have been successful at raising equity capital in recent years,” said Fitch in its report on domestic insurers’ portfolio management in Indonesia. “We also do not foresee the option of allowing the issuance of local-currency debt instruments as part of funding the core capital,” it added.

“Several insurers have been in breach of the regulator’s minimum risk-based capital (RBC) requirements and relied on debt funding to shore up capital,” the report continued. 

These organisations include PT Reasuransi Nasional Indonesia – one of Indonesia’s largest reinsurers – and PT Asuransi Jasa Indonesia, owned by the state insurance holding company, which received subordinated loans to improve capitalisation.

Both companies have not received any equity capital support despite their state ownership. 

Indonesian life insurers’ RBC ratio has been declining since the start of the Covid-19 pandemic – reaching 484% by the end of 2022, from 789% at the end of 2019.

“More than 60% of invested assets were in cash, time deposits and fixed-income
securities – mostly government bonds – at end-2022.” 

The RBC ratio for the non-life industry has been broadly stable at 327% at the end of 2022 and 345% in 2019. However, the non-life sector’s absolute capital is lower than that of the life sector. The RBC ratio for Indonesian reinsurers also remains low, with the average ratio for the four biggest Indonesian reinsurers at 158% at the end of 2022 and 156% in 2021. 

A safe future prospect? 

Fitch said that the new regulation will reduce investment risk, strengthen insurers’ liquidity, and minimise default risk.

“However, we expect a limited impact on insurers’ admitted asset calculation as the specified assets under the stricter requirements contribute less than 10% of the insurance sector’s total assets,” it continued. “More than 60% of invested assets were in cash, time deposits and fixed-income securities – mostly government bonds – at end-2022.” 

In February 2024, the country is due to go to the polls in another election. “Joko Widodo, Indonesia’s president, will have consumer confidence and increased prosperity at the forefront of his efforts to cement his popularity for re-election for an unprecedented third term,” said Fitch on the likelihood of Widodo being re-elected. 

This view was shared by other analysts. “Widodo has pushed consensus on this issue further towards acceptance of higher levels of foreign investment, especially in industries downstream of primary goods extraction,” said Allianz in its May 2023 Country Risk Report. “However, protectionist views persist strongly among the political class. After the election, there is the risk that the next government could tighten laws on foreign ownership and investment.” 

This means that whilst there are more changes to entice investment and stabilise the economic system are probable, they will likely not come at the expense of ordinary Indonesian citizens – and their pocket money.