Best Sees Indonesia P&C Sector Growth; Capital, Regulatory Challenges

A new report from A.M. Best Co. concludes that “Indonesia’s solid economy is fueling growth for a developing non-life insurance market, well supported by domestic consumption and investment offsetting a weaker international environment.”

Best said there had been “stable growth of 5 to 6 percent in gross domestic product over the past five years; a young and large population; rising spending on personal property; and expanding government outlays have primed the non-life insurance sector for further growth.

“The industry has generally exhibited stable operating performance, and gross premium for nonlife insurance increased 19.5 percent to IDR 34.4 trillion ($3.8 billion) in 2011, according to the General Insurance Association of Indonesia.”

The report, “Economy Boosts Indonesia’s Insurers; Capital, Regulatory Challenges Loom,” also points out that the country is “refining its regulations to strengthen insurance development in line with international standards.

“Regulatory reform has accelerated market consolidation, but the number of non-life insurers, which decreased from 97 to 87 between 2006 and 2010, is still considered excessive. This congested market remains a challenge for insurers.”

Best noted that Takaful “has been a key driver of growth in Indonesia, which has the world’s largest Muslim population, and improved and additional regulation is expected to be introduced progressively. However, one constraint for Takaful’s growth in Indonesia has been the limited range of products.”

Other topics discussed in the report include the following:
— Srong domestic consumption, rising household wealth and expanding infrastructure projects are creating demand for the non-life sector’s largest segment, motor insurance, along with personal property insurance, life products with savings and investment functions, and commercial and industrial insurance.

–Indonesia’s generally low insurance penetration has limited the impact of natural catastrophes, but many insurance companies remain reluctant to develop catastrophe insurance because of current low demand, along with the absence of a government-backed scheme, lack of data and catastrophe modeling and technical issues of rate adequacy for such enormous risks.

–Indonesia’s reinsurance industry has remained stable, with no major hits by natural disasters in recent years. However, the low capital bases of local reinsurers restrain their ability to write coverage, and the market still relies heavily on overseas capacity.

–Indonesia is a potential market for microinsurance, but distribution and product development are key challenges because of the country’s diverse population, distributed across a vast archipelago.

Source: A.M. Best