Regulatory Changes Indonesia Insurance

An extensive overhaul is expected in Indonesia's insurance industry as new regulations aim to reshape its operational landscape. Stricter minimum equity standards for Indonesian insurers leading to a reconsideration of market participants, potentially fostering a more robust competitive environment. These impending regulations, particularly those concerning credit insurance, are likely to have ramifications across the broader financial sector, impacting micro and consumer lending practices.

Insurance Industry - Currently, Indonesia's insurance market is characterized by fragmentation, boasting 49 life insurers, 72 non-life insurers, and seven reinsurers (2023). This proliferation of companies has fuelled intense competition, driving aggressive expansion strategies and diluting pricing power and profitability.

Increase Minimum Equity - The Financial Services Authority (OJK) is set to enact an 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.

These change are expected to prompt insurers falling short of the new requirements to explore options such as capital raising or mergers and acquisitions. Meeting the revised equity thresholds will pose challenges, particularly for insurers grappling with profitability issues or lacking shareholder backing.

For those insurers unable to meet the heightened standards by the end of 2028, joining an Insurance Business Group (KUPA) might serve as an alternative route.

Compliance - 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.

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.

Credit insurance regulations - The anticipated impact of the new credit insurance regulations to be favorable for rated insurers, although the implications for banks remain uncertain.

Tighter underwriting standards could potentially temper micro and consumer lending activities, positively impacting banks' risk profiles. Conversely, assuming a greater share of insured risk could lead to a deterioration in risk profiles and capitalization ratios for banks.

Other changes - Other regulatory amendments aimed at reducing information asymmetry between banks and insurers. For instance, OJK's mandate for inclusion of credit risk profile data from banks in credit insurance agreements is poised to enhance transparency.

Expected adjustments in capital requirements for credit insurance providers may incentivize 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.