The Indonesian government plans this year to inject more than $75m into new state reinsurer Indonesia Re, according to Wahyu Kuncoro, assistant deputy for banking and insurance at the State-Owned Enterprises (SOE) Ministry.
Speaking on Friday, Wahyu said that "the ministry plans to inject IDR1trn ($76m) worth of capital into Indonesia Re. The higher capital will give it leverage to handle domestic reinsurance needs."
The Indonesian government said in a document on the establishment of Indonesia Re that the amount of reinsurance premiums placed offshore reached IDR19.95trn in 2013, with just IDR6.47trn reported by local reinsurers.
Indonesia Re has emerged from the consolidation of various local players, Reasuransi Umum Indonesia (RUI), Reasuransi Internasional Indonesia (ReINDO), ASEI Re, Asuransi Kredit Indonesia (Askrindo) and Reasuransi Nasional Indonesia (Nasre).
The reinsurer is expected to be running by the end of June 2015, with a paid-up capital of IDR1.24trn. Wahyu said that Indonesia Re might be able to increase its capacity to between three and four times its capital, but that even this would not be enough to cover the recorded net reinsurance premium deficit, which stood at IDR8.19trn in 2013. The government could inject IDR1trn a year every year over the next few years.
Ratings agency Fitch warned at the beginning of the year that "risk exposures for Indonesian reinsurers are likely to rise as insurance risks are increasingly retained domestically, and this could challenge the domestic sector - given the relatively low level of capitalisation."
New proposals from the Indonesian financial regulator would require Indonesian insurers to reinsure all of their motor, health, surety, credit, life and cargo business with domestic reinsurers. For other insurance business lines a minimum of 25% would have to be allocated to domestic reinsurers, with the minimum level rising over the next few years.
That compares with current requirements that Indonesian insurers only have to cede 10% of their risk to domestic reinsurers.
Fitch warned that "managing the additional business will add to challenges for the local reinsurance sector, especially as Indonesian firms have limited sophistication in reserving and catastrophe modeling - a particular concern in a market with a relatively high likelihood of natural disasters."
Domestic reinsurers in the past have tended to rely on their brokers to generate technical models, while any losses from major catastrophes have shifted mainly to the international markets.
The Indonesian government has not yet stated what options will be open to domestic insurers if they cannot find a domestic reinsurer.