Fitch Concludes Indonesian Flood Losses Manageable for Non-Life Insurers

February 20, 2013

Fitch Ratings said it does not expect insured losses from the recent flooding in Jakarta, Indonesia in January to trigger widespread solvency problems or excessive financial strain on the balance sheet of non-life insurers in the country.

“This is mainly due to the low insurance penetration rate in the country at less than 2 percent of GDP (based on Swiss Re Sigma estimates), and protection from reinsurance coverage,” Fitch said.

“According to the National Disaster Mitigation Agency, the floods in Jakarta caused at least 41 fatalities. The flooding covered a total of 41 square kilometers of land [25.6 square miles] (approximately 8 percent of Jakarta’s total area). It affected a total of 74 urban wards in 31 sub districts across Jakarta’s five municipalities, inundating more than 100,000 houses as well as some of the capital’s main roadways.”

Fitch said government officials reported that total economic losses would reach IDR32 trillion [$3.31 billion), and indicated that in its initial assessment “the insured losses will be markedly lower than the economic losses, although the extent of the impact will vary from one company to another.

“Insured losses are expected to top IDR3 trillion ($311 million) based on industry estimates. It will take time for international catastrophe modeling firms and local loss adjusters to finalize the insured loss amount. The majority of the losses are likely to have come from the motor and property insurance lines.”

However, Fitch added that “since flood risks are not automatically included in many of the motor and property insurance policies in Indonesia, a sizeable proportion of those affected might remain uncovered by insurance protection.

“Indonesian non-life insurers also benefit from protection through their reinsurance coverage. Based on industry estimates, more than 40 percent of the non-life industry’s total gross premiums in 2011 were being ceded, with around 6 percent of these premiums to Indonesian reinsurers. This suggests that a substantial proportion of the industry’s premiums are being ceded to foreign reinsurers.”

Fitch said that in its view “the low capital base of domestic reinsurers encourages reliance on overseas retrocessions.

“Within the life insurance sector, insurers are not expected to be materially affected due to the low casualty rate relative to Indonesia’s over 200 million populations and the low insurance penetration of the life market.”

However, Fitch estimates that “the insured losses will be greater than the flood losses from the 2002 and 2007 floods since the areas affected are more extensive and concentrated towards inner Jakarta, whereby insurance coverage is higher than in rural areas. Based on the General Insurance Association of Indonesia statistics, flood-related claims in 2002 and 2007 amounted to IDR 1.5 trillion and IDR 2.1 trillion, respectively.”

Fitch also indicated that it would “continue to evaluate the impact as loss estimates are updated and insured losses disclosed.” It also stressed that it “remains important for insurers to enhance their risk management practices and increase their catastrophe modeling sophistication to better prepare for future disasters. One way is by conducting better flood risk modeling, which PT Asuransi MAIPARK Indonesia is currently working on. Flood risk modeling which can include more detailed mapping of flood zones and aid tariff regulation, could prove useful for future risk mitigation and product innovation in order to provide better flood risk protection coverage.

Source: Fitch Ratings

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