As Indonesia’s insurance industry is all set to undergo major regulatory reforms, Fitch Ratings expects that these rules will likely reduce the number of companies operating in the sector and encourage a “healthier competitive environment”.
The Southeast Asian country’s Financial Services Authority will significantly raise minimum equity requirements starting from the 2026 end. As of February 2024, Indonesian insurers must maintain a minimum equity capital of over USD 6 million, and as per the new regulations, this will increase to almost USD 16 million by the end of 2026.
Fitch foresees stricter minimum equity standards for Indonesian insurers under the reforms, which will lead to a reconsideration of market participants, potentially fostering more competition. The ratings agency further sees these regulations, especially those concerning credit insurance, bringing ramifications across the Southeast Asian country’s broader financial sector, impacting lending practices.
Indonesia’s insurance market, which as of the fourth quarter of 2023, had 49 life insurers, 72 non-life insurers, and seven reinsurers, is known for its fragmentation.
“This proliferation of companies has fuelled intense competition, driving aggressive expansion strategies and diluting pricing power and profitability. Fitch Ratings suggested that sector consolidation could yield positive outcomes for rated issuers, positioning them for enhanced competitiveness in the market,” commented Insurance Business.
“The Financial Services Authority (OJK) is set to enact substantial increases in minimum equity requirements by the conclusion of 2026. Furthermore, a subsequent phase, slated for implementation by the end of 2028, will see further elevations in minimum equity standards, with a particular focus on insurers offering comprehensive product suites, including credit insurance. Reinsurers will also face heightened equity thresholds under a tiered framework commencing from the end of 2026,” the report explained things further.
Fitch sees these regulatory changes to prompt insurers to explore business options such as capital raising or mergers and acquisitions. Meeting the revised equity thresholds will pose challenges, especially for ventures facing issues like lack of profitability or absence of shareholder backing.
Explaining Things Further
The regulatory reforms will be carried out in two stages, with the second one being implemented by the 2028 end, where the minimum equity capital requirement will rise again to nearly USD 32 million for all insurers.
“Fitch Ratings’ initial assessments suggested that a significant portion of rated issuers are already compliant with the impending end-2026 requirements based on current equity levels. However, a substantial portion of the rated portfolio, primarily in the non-life and reinsurance segments, will require additional equity infusion to meet the elevated standards by the end of 2028,” Insurance Business commented.
“While organic capital generation may suffice for approximately half of the insurers requiring equity augmentation to meet the end-2026 benchmarks, meeting the more stringent end-2028 requirements will likely prove challenging without external support,” it added further.
Also, reinsurers will be facing an increase in their minimum requirements, rising from over USD 6 million currently to almost USD 32 million by the 2026 end. As the two-tier insurance sector regulatory reforms come into play by 2028 end, reinsurers offering basic products will need over USD 63 million worth minimum equity capital, while those offering a wider range will need over USD 127 million.
Fitch is expecting the impact of the new rules to be favourable for rated insurers. However, tighter underwriting standards could potentially temper micro and consumer lending activities, positively impacting banks’ risk profiles. On the other hand, assuming a greater share of insured risk may lead to deterioration in risk profiles and capitalisation ratios for banks.
The ratings agency also noted other regulatory amendments aiming at reducing information asymmetry between banks and insurers. One such example here is the OJK’s mandate for the inclusion of credit risk profile data from banks in credit insurance agreements, which will enhance the overall transparency of Indonesia’s financial sector.
“Expected adjustments in capital requirements for credit insurance providers may incentivise smaller non-life insurers to realign their focus away from this segment towards simpler product offerings, fostering a more competitive landscape and facilitating more accurate risk pricing for the remaining firms,” Fitch concluded.