Indonesia Re a cause for concern - FREE

Indonesia Re a cause for concern - FREE

Moves by Indonesia to keep capital in the country by forcing local insurance companies to cede premium to domestic reinsurers caused concerns among Asia Pacific reinsurance market leaders, speaking to Reactions at SIRC this week.

“We are seeing economic nationalisation in Indonesia, through the incorporation of the state reinsurer, Indonesian Re,” said Mike Mitchell, Swiss Re’s head of property underwriting and property and casualty facultative business for Asia.

Indonesia Re’s president director, Frans Sahusilawane, spoke on a panel debate on Asian natural catastrophe risk during the SIRC event and briefly alluded to the economic basis behind Indonesia’s legislation: to keep capital to remain in the country, rather than be ceded away to overseas reinsurers. 

“The law says that when you spend money , you have to have a balance of what goes out and what comes in,” he said. “What’s coming in, in terms of claims?”

Reinsurance market sentiment is that when such claims do occur on a catastrophe-wide scale, Indonesia lacks the domestic capacity to cope with its exposures, without more actively engaging international reinsurance markets.

“The ability for Indonesia to fund its catastrophe risk exposures internally is somewhat constrained. The same goes for China: these are economies that need the global diversification of the balance sheet,” Mitchell said.

To illustrate the concentration of risk, the island of Java is at significant risk of earthquake and flood perils. While it represents only 6% of Indonesia’s landmass, it is home to some 150m people (51% of the country’s population) including the capital, Jakarta.

“It’s very catastrophe prone, and the existing community of local Indonesian reinsurers represent only $200m capacity,” noted Chi-Yeung Lok, rating agency AM Best’s senior financial analyst in Singapore. “That’s not enough capital. They’re still going to need retro.”

While there may be benefits for Indonesia in compelling its domestic insurance sector to invest in foster local talent, and in raising local underwriting standards by encouraging retentions, concentration of risk may outweigh such gains.

“Insurers are also having to retain at least 25% themselves, whereas they have heavily relied on reinsurance in the past, but on the risk management side, concentration of risk within Indonesia will be higher,” said Wong at S&P.

Kent Chaplin, the Lloyd’s market's head of Asia Pacific, based within its Singapore hub, notes parallel government moves in Korea, China and Malaysia, all of which have instituted constraints to keep capital local.

“Other markets in the region have done similar things. It’s about strengthening their domestic market, which needs both capacity and expertise,” he said.

AM Best’s Chi-Yeung however stressed the parallels’ limitations in the differences between those markets.

“The benchmarks set in the region already for national reinsurers - Korean Re and Malaysian Re - are not representative for Indonesia, due to different catastrophe risk exposure in those markets, plus higher quality data available,” he said.

Indonesia’s local insurers are privately resentful at suffering the reduction in choice in their risk transfer options, according to one senior broker, speaking anonymously.

“The local insurers are not happy with compulsory cessions to keep reinsurance within the country. They’d prefer flexibility, but none of them would openly say that,” they said.

“There will certainly be less choice, having to cede into local reinsurers,” agreed Connie Wong, managing director for Asia Pacific insurance ratings at Standard & Poor’s.

“The international reinsurers in the Singapore hub will also see some impact from diminished Indonesian business,” she added.

“The clients are a bit stuck,” agreed Michel Blanc, Scor Global P&C’s Singapore-based chief underwriting officer for treaty business in Asia Pacific. “They cannot access us in the way they were.”

ArgoGlobal Asia’s CEO Ivan Chan, also based in Singapore, also added his concerns from the reinsurance perspective, but stressed there are still opportunities in Indonesia.

“It will have an impact on the reinsurance market, but there’s not much we can do about it,” said Chan. “There are other areas we can access the market, such as through potential for retrocessional arrangements through the state reinsurer.”

Mitchell at Swiss Re agreed opportunities remain. “We don’t see it as a barrier,” he added.

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