Indonesia insurance to grow to $22 billion in 2027 thanks to M&A regulations
Indonesia insurance to grow to $22 billion in 2027 thanks to M&A regulations | Insurance Business Asia
Insurance News
Indonesia insurance to grow to $22 billion in 2027 thanks to M&A regulations
Minimum capital requirements for insurance and reinsurance to result in CAGR of 6.4%
Insurance News
By
Kenneth Araullo
Indonesia’s insurance sector is expected to grow at a compound annual growth rate (CAGR) of 6.4% in the next few years to post IDR339.3 trillion (US$22 billion) in 2027, driven primarily by regulations relating to increased merger and acquisition (M&A) activities.
Recent proposals have been made in the country to increase the minimum capital requirement (MCR) for insurance and reinsurance companies, which is expected to result in creased M&A for Indonesia. According to new research from GlobalData, the country is on pace to reach IDR264.8 trillion (US$17 billion) this year alone.
Earlier this May, Indonesia’s insurance regulator Otoritas Jasa Keuangan (OJK) proposed to increase the MCR of insurance companies from IDR150 billion (US$10.4 million) to IDR500 billion (US$34.6 million) in 2026; another further increase is pushed by 2028 to IDR1 trillion (US$69.2 million).
For reinsurers, the increases will range from the current US$20.8 million to US$69.2 million in 2026, up to a further US$138.5 million in 2028. Takaful and re-takaful operators are also recommended in the increase for the MCR.
“The new regulation is also expected to result in the transfer and closure of businesses for insurers with lower revenue due to an inadequate capital structure,” GlobalData insurance analyst Shivani Kela said. “Furthermore, such high capital requirements will also act as an entry barrier for small insurtech players that are looking to disrupt the market. This will take smaller players out of the competition and help larger players with higher capital strengthen their capabilities through consolidation.”
Facing RBC issues
As of December 2022, the country’s sector includes 72 general insurers, 52 life insurers, seven reinsurers, 54 takaful – 29 life and 25 general – operators, and four re-takaful operators.
GlobalData’s insurance database indicates that 66 of these entries had a written premium of lower than IDR200 billion (US$13.8 million) in 2021 and are therefore at higher risk of not meeting the increased capital requirements. Thirty-three companies also stand at a crossroads with written premiums between IDR200 billion and IDR 500 billion, meaning that they may also struggle to meet the new standards.
“Smaller and loss-making insurers may find it difficult to attract investors and may be forced to wind up businesses. With a weaker capital structure, these companies will also struggle to invest additional capital in technology and R&D activities, which will impact their business performance,” Kela said.
Even without the proposed new MCR standards, some insurers have faced the negative effects of failing to raise the required capital. In 2020, Wanaartha Life’s risk-based capital (RBC) ratio was negative, leading to the revocation of its license in 2022.
As of January, the RBC ratio of the Indonesian life insurance sector stands at 477.7%, while the general life insurance is at 321.8%; both are lower than the proposed MCR increase of 567%.
“Despite posing short-term challenges like impeding R&D activities as well as lower technology spending, an increase in MCR will make insurers financially sound over the long run and improve consumer confidence, which will lead to higher local retention of premiums and reduced overseas ceding,” Kela said.
What are your thoughts on this story? Please feel free to share your comments below.
Related Stories
Keep up with the latest news and events
Join our mailing list, it’s free!
