Insurance industry to see consolidation under higher capital requirements

Insurance industry to see consolidation under higher capital requirements

Tougher minimum equity requirements for Indonesian insurers are likely to reduce the number of companies operating in the sector and encourage a healthier competitive landscape, says Fitch Ratings.

New credit insurance regulations could influence micro and consumer lending by the banking sector, as banks will be required to retain 25% of the insured default risk. Previously, insurers bore up to 100% of the insured risk.

Indonesia’s insurance market is fragmented, with 49 life insurers, 72 non-life insurers and seven reinsurers as of 4Q2023. This leads to intense competition that encourages aggressive business expansion and weakens pricing power and profitability.

Fitch believes consolidation of the sector would generally be credit-positive for its rated issuers, which are likely to survive the process and would subsequently enjoy strengthened competitive positioning.

The Financial Services Authority (OJK) will raise minimum equity requirements significantly from end-2026. A second stage, to be implemented by end-2028, would see the minimum raised again for all insurers, with those offering a full range of products, including credit insurance, facing a higher-tier minimum. Requirements for reinsurers would also rise from end-2026, and again under a two-tier system from end-2028.

Options for insurers

The changes may prompt insurers that are unlikely to meet the new requirements to raise additional capital or explore M&A options. Meeting the tougher minimum equity will be more challenging for insurers that are unprofitable or have little prospect of receiving capital support from shareholders. Insurers that are able to meet the end-2026 minimum equity requirement but fall short of the end-2028 requirement will have the option of becoming part of an Insurance Business Group (KUPA), formed by a parent company and/or holding company that is able to meet the end-2028 minimum.

Fitch believes around 90% of its rated issuers already meet the new requirement for end-2026, based on recent equity levels. However, about 62% of the rated portfolioall in the non-life and reinsurance sectorswould need to increase equity capital to reach requirements under the second stage by end-2028.

Organic capital generation is feasible for around 50% of rated insurers that need to raise equity capital to meet the end-2026 requirement. However, Fitch believes those rated insurers that need to raise equity capital to meet the tougher end-2028 requirements will mostly be unable to do so through organic capital generation alone.

On average, Fitch-rated insurers’ equity has grown at a CAGR of 7% over the last five years, but would need to grow at a CAGR of 15% to meet end-2028 requirements. That would be a challenge, even if consolidation improves their profitability in the next few years.

Credit insurance

The effect of the new credit insurance regulations should be credit-positive for Fitch-rated insurers, but the net impact on banks is less clear. If banks tighten underwriting standards, that may slow micro and consumer lending but improve banks’ risk profiles. Otherwise, retaining a greater share of the risk for such lending may cause banks’ risk profiles to deteriorate. Their risk-weighted assets will also rise as they retain part of the insured risk on their books, potentially affecting capitalization ratios.

Other changes being introduced should reduce the information asymmetry between banks and insurers.

For example, OJK will require credit risk profile data from banks to be included in agreement contracts for credit insurance. Planned upward adjustments to capital requirements for credit insurers may also encourage small non-life insurers to shift out of the segment towards simpler product lines like property and motor insurance.

This should lead to healthier levels of competition and facilitate better pricing of the risks associated with credit insurance for the firms that remain.

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