Indonesia has proposed to substantially increase the minimum capital requirement (MCR) for insurance and reinsurance companies and this should increase M&A activity.
As a result, there should also be further consolidation in the Indonesia insurance market, which is estimated to grow at a CAGR of 6.4% from IDR264.8trn ($17bn) in 2023 to IDR339.3trn ($22bn) in 2027, according to GlobalData.
As of December 2022, there were 72 general insurers, 52 life insurers, seven reinsurers, 54 takaful operators and also four re-takaful operators in Indonesia.
According to GlobalData’s Insurance Database, 66 of these entities had a written premium of lower than IDR200bn in 2021 and are at a higher risk of not meeting the increased capital requirements.
Furthermore, 33 companies had a written premium between IDR200bn to IDR500bn and may also struggle to meet the new standards.
Shivani Kela, insurance analyst at GlobalData, said: “The new regulation is also expected to result in the transfer and closure of businesses for insurers with lower revenue due to an inadequate capital structure. Furthermore, such high capital requirements will also act as an entry barrier for small insurtech players that are looking to disrupt the market. This will take smaller players out of the competition and help larger players with higher capital strengthen their capabilities through consolidation.”
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Kela added: “Smaller and loss-making insurers may find it difficult to attract investors and may be forced to wind up businesses. With a weaker capital structure, these companies will also struggle to invest additional capital in technology and R&D activities, which will impact their business performance.”
“Despite posing short-term challenges like impeding R&D activities as well as lower technology spending, an increase in MCR will make insurers financially sound over the long run and improve consumer confidence, which will lead to higher local retention of premiums and reduced overseas ceding,” Kela concluded.