Indonesian outlook revised to negative

AM Best has revised its market segment outlook on Indonesia’s non-life insurance market to negative from stable, citing a weaker-than-expected economy recovery, which likely will delay the segment’s recovery to pre-pandemic growth levels, along with the increased likelihood of depressed investment returns and heightened credit insurance risks.

The report notes that a resurgence of the COVID-19 virus, coupled with slow vaccination progress, has led to a reinstatement of stringent mobility restrictions, hampering near-term economic recovery. Weaknesses in the economy and the potential inability to contain the pandemic could mute insurance demand in a number of product lines, such as property, engineering, motor, transportation and travel insurance. Although premium income increased by approximately two percent to IDR38.5 trillion (USD2.74 billion) in the first half of 2021, compared with the same prior-year period, the growth lagged behind pre-pandemic levels, and may remain constrained as a result of the latest round of mobility restriction measures.

Credit insurance, a key line of business in Indonesia’s non-life insurance market, is under pressure as well with further economic weaknesses arising from the escalation of COVID-19 infections. This could weaken the debt repayment abilities of debtors and lead to higher default rates, and therefore, higher credit insurance claims, particularly for the more vulnerable small and medium-sized enterprises. Insurers with higher exposure to credit insurance and weaker underwriting risk management may face outsized losses that could weaken their financial profile.

The low interest rate environment also continues to impede the investment performance of Indonesia’s non-life insurers. The report states that investment risks could trend higher as prolonged pandemic conditions erode the financial strength and earnings abilities of debt and equity issuers.