February 4, 2014 / 4:31 AM / in 4 years

Fitch: Indonesian Insurance to Remain on a Steady Growth Path

(The following statement was released by the rating agency) JAKARTA/HONG KONG/SINGAPORE, February 03 (Fitch) Indonesian insurance is unlikely to be dented by the January floods, says Fitch Ratings. Moreover, long-term benefits could accrue from recent tariff regulations which are positive for the stability and improvement of non-life underwriting margins, and which could sustain a healthier bottom-line performance. Preliminary industry estimates suggest that budgeted flood-related claims are likely to reach IDR1.5trn, or just half that of similar floods a year ago. The total insured loss borne by Indonesian insurers is almost certain to be lower than the IDR638bn in early 2013, provided flood conditions remain manageable through the remainder of the monsoon season up until the end of March. Claims are expected to be lower because most of the floods occurred in suburban areas with relatively low insurance coverage - albeit covering about the same land area (about 30% of Jakarta). Meanwhile, in contrast with early 2013, central business areas with greater concentrations of office, retail and residential properties - as well as higher insurance coverage - were not as badly affected. Another credit buffer was due to the coverage from reinsurance activity. Industry statistics reveal that around 50% of the non-life industry's total gross premiums in 2012 were being ceded. Most of this is to foreign reinsurers and retrocessionaires, as the low capital base of domestic reinsurers prompts reliance on overseas retrocessions. Lastly, flood risks are not automatically included in many of the motor and property insurance policies in Indonesia. This lowers the full scope of potential claims - which could otherwise weigh on the development of an infant industry. Overall insurance coverage remains at a nascent stage, with penetration at just under 2% of Indonesia's GDP. Not only is the industry able to surmount near-term challenges from natural disasters, but we also believe it is also poised for further, steady growth. The recent implementation of insurance tariff regulations will go a long way in heightening the stability of the non-life underwriting margin. This could, in turn, sustain healthier competition as well as bottom-line performance. Indonesia's non-life sector reflects a developing and highly competitive market with a tendency for price-cutting. More than 80 non-life insurers compete for a slice, leading to prices being discounted up to 50%. Hence, the introduction of the aforementioned tariff regulation could reduce rampant underpricing through regulating the floor price. This could also help to create a balance between prices charged and risks taken by the insurers, as the circular also regulates the maximum limit of acquisition costs and discounts. The regulation of the ceiling prices could also help to prevent overpricing. The tariff regulation may result in higher prices for consumers for the same amount of coverage. Nonetheless, higher prices are unlikely to restrain sustained growth in product demand. This is because of the low insurance penetration alongside favourable economic prospects - characterised most notably by the growing affluence and the rising size of Indonesia's middle-class. Cheryl Evangeline Analyst, Insurance Tel: +62 21 2988 6814 Aninda Mitra Senior Director, Fitch Wire Tel: +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: 2014 Outlook: Indonesian Insurance here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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