Despite a bleak macroeconomic picture, Indonesia’s non-life insurance market is well-diversified and underpinned by solid capitalisation, supporting a stable outlook assigned to the segment, according to a new AM Best report.

A new Best’s Market Segment Report, titled, “Market Segment Outlook: Indonesia Non-Life Insurance,” states that the non-life insurance market’s overall robust return on equity, supported by stable historical underwriting performance and strong balance sheet fundamentals, along with good government support including infrastructure plans and economic stimulus, are factors in the stable outlook.

The Indonesia non-life insurance market expanded by 14% year over year, to IDR 79.7 trillion (USD 5.4 billion) in 2019 from IDR 69.9 trillion (USD 4.9 billion) in the previous year, supported mainly by strong growth in credit insurance. Gross premium written (GPW) for credit insurance, the market’s third largest business line, increased by 86.2% to IDR 14.6 trillion in 2019. Property insurance, the largest business segment, also posted solid GPW growth of 9.7% to IDR 20.9 trillion. However, motor insurance GPW recorded muted growth of 0.3%.

AM Best believes that the non-life market in Indonesia benefits from a good business mix that will help to cushion any negative impact from the COVID-19 pandemic. Unlike other markets, which feature motor and health as the largest lines of business, Indonesia’s non-life segment is dominated by property and motor insurance, while credit, personal accident and health lines account for significant portions of total non-life GPW. Collectively, these five lines make up over 80% of the country’s non-life insurance premiums.

However, the decline in economic activity has had a direct impact on the non-life insurance segment. Non-life GPW in the first half of 2020 declined by 6.1% year over year, with the steepest falls in premiums were seen in the property and motor lines of business. Property insurance GPW

AM Best has assigned a Financial Strength Rating of B++ (Good) and a Long-Term Issuer Credit Rating of “bbb+” to Kot Insurance Company AG (Kot) (Switzerland). The outlook assigned to these Credit Ratings (ratings) is stable.

Kot is a captive reinsurer of Petroleos Mexicanos (PEMEX), the Mexican state-owned oil and gas company.

The ratings reflect Kot’s balance sheet strength, which AM Best categorises as very strong, as well as its strong operating performance, neutral business profile and appropriate enterprise risk management. The ratings also reflect a rating drag due to Kot’s ownership by PEMEX, reflecting the weaker credit profile of the parent.

Kot’s very strong balance sheet is underpinned by risk-adjusted capitalisation at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR). AM Best expects Kot to maintain a buffer over the minimum requirements for the strongest BCAR assessment in the medium term, supported by its relatively low net underwriting leverage and conservative investment strategy. An offsetting rating factor in the balance sheet strength assessment is Kot’s dependence on reinsurance to write large risks; however, the risks associated with this dependence are mitigated partly by long-standing relationships with reinsures of good credit quality.

Kot’s robust historical earnings have been driven by its underwriting account. The combined ratio remained excellent at 20% in 2019 (2018: 21%), below the five-year weighted average of 38% (2015-2019).

Kot’s five-year weighted average return on equity is 24% (2015-2019). AM Best expects the captive’s operating performance to remain supportive of a strong assessment, although prospective results are exposed to some degree of volatility stemming from low frequency, high severity losses.

Kot is well-integrated within PEMEX and is important to the group as a cost-effective risk management tool. However, as PEMEX’s single reinsurance captive, Kot’s underwritten risks are concentrated in Mexico.

AM Best