Best: Indonesia Insurers’ Reinsurance Buying Habits Could Affect Capital Ratios

April 10, 2015

The purchase of reinsurance by Indonesian non-life insurers is high, which could have a significant effect on capital requirements and magnify the capital impact of changes to reinsurance asset quality, according to anA.M. Bestspecial report.

The report, titled “Risk-Based Capital Impacts From Reinsurance Asset Leverage in Indonesia,” states that, in the short term, the average insurance company will not experience a significant capital ratio drag from higher allocations to non-rated or less highly rated reinsurance counterparties.

However, the report noted, over time as Indonesia’s non-life market expands, reinsurance assets could become more sensitive to catastrophe events and risk-based capital ratios could start to decline to worrisome levels.

“To avoid disproportionate negative impacts on capital ratios, it is important that such non-life insurers keep reinsurance asset growth at a prudent pace relative to capital growth,” said Chi-Yeung Lok, a senior financial analyst in A.M. Best’s Singapore office.

Property insurance stands out as the single largest driver of the Indonesian non-life industry’s reinsurance use, and hence, reinsurance asset leverage, as ceded property premiums accounted for 41 percent (8 trillion Indonesian rupiah) of all premiums ceded by direct non-life insurers to reinsurers in 2013.

Ceded motor premiums rank a distant second to property premiums at 11 percent (IDR 2 trillion) of total ceded premiums in 2013. Energy onshore, aviation and satellite are among business lines with the lowest percentage of premium retention; however, their share of market gross premiums for non-life insurers is small.

Reinsurance assets can be an important aspect in assessing the balance strength of insurance companies, and the significance of this component increases with the level of reinsurance leverage ratio. A.M. Best studied 12 select major non-life insurers that together account for almost 50 percent of market gross premiums, and found that the average reinsurance asset leverage ratio (reinsurance assets to capital) was roughly 100 percent of capital in 2013.

Net of payables to reinsurance counterparties, this ratio on average represented 80 percent of capital. While this level is moderate, A.M. Best is concerned over the future stability of this ratio as the non-life insurance market grows and develops, especially in the face of catastrophic events and increasing insurance penetration and density.

Source: A.M. Best Company

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