Page 33 - Digital Edition SIRC Supplement

MARKET REPORT - INDONESIA
Figure 2: Liability premiums in Southeast Asia (USD million), 2007-2020
250 capacity to support Indonesian insurers.
200
150 This is of particular importance given
100 significant under-insurance of property
50 In this regard, it is important to
0 by reinsurance to primary insurers
Malaysia Philippines Indonesia Thailand
Source: Liability insurance in Asia, Swiss Re, September 2015
an annual expected Nat CAT property damage of US$2.5 billion
and is ranked ninth globally. Most of the expected losses will
be coming from uninsured earthquake losses but there is also a
significant gap in protection against flood losses. For instance,
a one-in-250-year earthquake will result in economic losses of
over 2% of GDP in Indonesia. Efforts to raise awareness and
close the gap will be important in underpinning the non-life
insurance outlook of Indonesia.
• Apart from under-penetration in the property insurance,
liability penetration is also very low in Indonesia though this
line of business has registered strong growth in the past decade
(see Figure 2). In Indonesia, liability has underperformed other
insurance lines, mainly due to lack of regulation and low claims
consciousness. The market is small, with premiums of just
US$85 million in 2014. Limits have remained low and even
so, with low losses companies tend not to buy liability covers
above the limits. Underwriting profitability is high with loss
ratios in the single digits since 2007.
In recent years, demand for liability insurance has been
driven by exporters and contractors to major corporations or
multinationals, and also by infrastructure projects. Rising
regulatory scrutiny and increasing consumerism will help to
underpin further growth of liability premium in Indonesia, as
well as in many regional markets in the ASEAN community.
• Furthermore, the coming inauguration of the ASEAN
Economic Community will also impact the outlook of
insurance business in Indonesia. The promise of freer flow
of capital and the removal of trade and non-trade barriers
will likely add to intra-regional trade and investment flows.
Regulatory convergences will be an increasingly important
driver in helping to align regional insurance regulations and
facilitate foreign participation in the Indonesian insurance
market. While free flow of services including insurance is a
long-term objective, the ability to tap into regional markets and Asia, Swiss Re.
greater insurance integration bodes favourably to the outlook
of Indonesia.
Reinsurance has a key role to play
Reinsurers always have a role to play in the current changing
environment of Indonesia. Our role is to continuously help to
bring up the technical knowhow of the insurance industry, to
provide reinsurance solution that is effective in risk transfer
and to improve capital efficiency of Indonesian insurance
companies.
Reinsurers can also help to bridge the gap in technical
knowhow. The increasingly complicated risk landscape in
Indonesia will inevitably require insurers to put in place more
Back to Contents SIRC Supplement • November 2015 • www.asiainsurancereview.com 31
sophisticated underwriting and risk
management approaches. Reinsurers can
leverage on their global expertise and
Additionally, reinsurers are conducive
in helping to raise awareness of risks.
the country’s large protection gap and
risks.
safeguard the protection offered
despite a heavy pipeline of impending
regulatory changes. For instance, the
Vietnam current formula to compute the capital
requirement under RBC considers that
a company is getting protection with a
proportional treaty (either quota share
or loss portfolio transfer/adverse development cover), but not
with a non-proportional programme.
Proportional programme is in fact not the most efficient way
to transfer risks to reinsurers. Although proportional treaties
cover losses from ground up but when there is big loss like a
one-in-20-year flood event, the net loss ratio can be very high
and threaten the solvency of the primary insurers. For instance,
during 2011/12 floods in Thailand, it was observed that some
proportional programme have net loss ratio of over 2000%! A
non-proportional program would in this case be able to limit
the impact to net loss ratio. The primary insurers would be
even better protected if the non-proportional programme is
structured and tailored to the needs of the ceding companies.
This highlights the importance of conducive regulations in
facilitating risk transfers and ultimately consumer protection.
At the same time, regulatory changes such as increasing the
retention by insurance companies, while being beneficial as a
collective action to improving market conditions and quality of
risks, could result in domestic insurers being short of adequate
protection.
The future of the market is promising though which way
it goes will still be hinging heavily on policy actions by the
government. For instance, we see that Indonesia has not yet
taken up alternative risk transfer which can have positive
impact on risk diversification through the use of prospective
and retrospective finite solutions. This can help to protect
increased retention, and facilitate mergers and acquisition. A
supportive regulatory environment that enables the take up of
these alternative risk solutions will help Indonesia to realise
its strong potential.
Mr Clarence Wong is Head of Economic Research & Consulting, Asia,
Swiss Re; and Miss Adeline Chua is Head of Initiatives and HGMs,