Concerns over the actual and prospective solvency levels at PT Reasuransi Nasional Indonesia (Nasional Re) has limited its ability to write new business and prompted cedents to place coverage elsewhere, according to AM Best.
AM Best’s commentary, entitled “Indonesian Market Hampered by Weakened Domestic Reinsurer Solvency,” says “thinning capital buffers among Indonesia’s domestic reinsurers leaves them facing the challenge of withstanding further balance sheet shocks.”
This is amid the increased likelihood for near-term economic uncertainties and unexpected catastrophe events.
The report follows Nasional Re reporting a negative regulatory solvency ratio in 2022, after being impacted by capital erosion from adverse reserve development, related to losses from credit reinsurance. Nasional Re was until recently Indonesia’s largest domestic insurer.
AM Best also notes that the reserve strengthening at Nasional Re led to shareholders’ equity and regulatory solvency ratios falling to negative levels. As a result of this weakened position, there was a coordinated replacement of capacity by cedents to other reinsurers during the recent reinsurance renewals.
AM Best says Indonesia’s domestic reinsurers have long been favoured by cedents there, citing applicable regulatory requirements to cede their business locally as the reason why, as well as their associated lower reinsurance costs and more favourable reinsurance commissions.
According to the report, non-life insurers in Indonesia favour the use of reinsurance, ceding approximately 45-50 per cent of gross premiums in 2022, with more than half going to domestic reinsurers.
However, domestic cedents are becoming more cautious in the selection of reinsurance counterparties — given that well-established domestic reinsurance market leaders like Nasional Re can pose a risk of default.
AM Best’s associate director, Chris Lim, adds: “AM Best considers the market’s concentration to domestic reinsurers a source of systemic risk as the impact arising from the failure of the domestic reinsurers would also spill over to the primary market.”
