Economic weakness could dampen demand for non-life insurance

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A weaker-than-expected economic recovery will likely delay the recovery of the Indonesian non-life insurance market to pre-COVID-19 growth levels, along with the increased likelihood of low investment returns and increased credit insurance risks, says AM Best.

For these and other reasons, the international rating agency has revised its market segment outlook for the Indonesian non-life insurance market from stable to negative.

the Best market segment report, “Market Segment Outlook: Indonesia Non-Life Insurance” notes that a resurgence of the COVID-19 virus coupled with slow vaccination progress has led to the reintroduction of severe mobility restrictions, hampering short-term economic recovery. Weaknesses in the economy and the potential inability to contain the pandemic could dampen insurance demand across a range of product lines including property, engineering, motor, marine and travel insurance.

Although premium income rose about 2% to IDR 38.5 trillion ($ 2.74 billion) in the first half of 2021, growth was below pre-pandemic levels and could be due to the latest round of mobility restrictions.

credit

Credit insurance, an important business area in the Indonesian non-life insurance market, is also under pressure with further economic weaknesses due to the escalation of the COVID-19 infections. This could weaken debtors’ ability to pay off debt, leading to higher default rates and thus higher credit insurance claims, especially for the more vulnerable small and medium-sized businesses. Insurers with higher credit insurance exposure and weaker underwriting risk management could face excessive losses that could undermine their financial profile.

The low interest rate environment continues to have a negative impact on the investment performance of Indonesian property insurers. The report said that investment risks could tend to rise as ongoing pandemic conditions undermine the financial strength and profitability of bond and equity issuers.

AM Best believes that mandatory tariffs in the non-life insurance market for property, including business interruption and motor lines, will remain a supportive element of the market. The mandatory tariffs for these businesses have helped limit the unhealthy price competition often seen in other liberalized markets. In addition, greater investment in and use of technology to improve sales and operational efficiency should give Indonesia’s non-life insurance companies a competitive advantage in the medium to long term.


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