A significant overhaul is expected in Indonesia's insurance industry as new regulations aim to reshape its operational landscape.
Fitch Ratings foresees stricter minimum equity standards for Indonesian insurers leading to a reconsideration of market participants, potentially fostering a more robust competitive environment. These impending regulations, particularly those concerning credit insurance, are likely to have ramifications across the broader financial sector, impacting micro and consumer lending practices.
Currently, Indonesia's insurance market is characterised by fragmentation, boasting 49 life insurers, 72 non-life insurers, and seven reinsurers as of the fourth quarter of 2023. This proliferation of companies has fuelled intense competition, driving aggressive expansion strategies and diluting pricing power and profitability.
Fitch Ratings suggested that sector consolidation could yield positive outcomes for rated issuers, positioning them for enhanced competitiveness in the market.
The Financial Services Authority (OJK) is set to enact substantial increases in minimum equity requirements by the conclusion of 2026. Furthermore, a subsequent phase, slated for implementation by the end of 2028, will see further elevations in minimum equity standards, with a particular focus on insurers offering comprehensive product suites, including credit insurance. Reinsurers will also face heightened equity thresholds under a tiered framework commencing from the end of 2026.
According to Fitch Ratings, the regulatory changes are expected to prompt insurers falling short of the new requirements to explore options such as capital raising or mergers and acquisitions. Meeting the revised equity thresholds will pose challenges, particularly for insurers grappling with profitability issues or lacking shareholder backing.
For those insurers unable to meet the heightened standards by the end of 2028, joining an Insurance Business Group (KUPA) might serve as an alternative route.
Fitch Ratings' initial assessments suggested that a significant portion of rated issuers are already compliant with the impending end-2026 requirements based on current equity levels. However, a substantial portion of the rated portfolio, primarily in the non-life and reinsurance segments, will require additional equity infusion to meet the elevated standards by the end of 2028.
While organic capital generation may suffice for approximately half of the insurers requiring equity augmentation to meet the end-2026 benchmarks, meeting the more stringent end-2028 requirements will likely prove challenging without external support.
Fitch Ratings expects the anticipated impact of the new credit insurance regulations to be favourable for rated insurers, although the implications for banks remain uncertain.
Tighter underwriting standards could potentially temper micro and consumer lending activities, positively impacting banks' risk profiles. Conversely, assuming a greater share of insured risk could lead to a deterioration in risk profiles and capitalisation ratios for banks.
Fitch Ratings noted other regulatory amendments aimed at reducing information asymmetry between banks and insurers. For instance, OJK's mandate for inclusion of credit risk profile data from banks in credit insurance agreements is poised to enhance transparency.
Expected adjustments in capital requirements for credit insurance providers may incentivise smaller non-life insurers to realign their focus away from this segment towards simpler product offerings, fostering a more competitive landscape and facilitating more accurate risk pricing for the remaining firms.
