Indonesia's insurers battle rising non-performing loans

Its first quarter performance showed promise.

Indonesia’s non-life insurance sector reported strong growth in the first quarter of 2024, continuing momentum from 2023. Mainly thanks to property, credit, health, and motor insurance segments, according to AM Best.

As part of the government's “Golden Vision 2045” strategy, infrastructure development plans, including the new capital city, modernization of existing infrastructure, and renewable energy production, are expected to boost demand for commercial insurance.

A proposal to make motor third-party liability (TPL) insurance compulsory by 2025 is expected to significantly increase demand for motor insurance. 

Currently voluntary, mandatory TPL insurance could help narrow Indonesia’s insurance protection gap. However, its success will depend on effective product design, risk management, and pricing strategies.

New regulations from Indonesia’s Financial Services Authority (OJK) are set to enhance the financial resilience of non-life insurers. 

OJK Regulation Number 23 of 2023 requires non-life insurers to meet higher minimum capital requirements by 2026 and 2028. 

OJK Regulation Number 20 of 2023 also aims to improve governance and risk management in credit insurance, addressing past credit insurance losses and promoting better underwriting practices.

Non-life insurers are also benefiting from high domestic interest rates, which are supporting favourable investment income. 

Term deposits and fixed-income instruments, which make up most of the sector’s investments, are expected to deliver strong returns as companies reinvest in higher-yielding assets.

However, challenges remain in key business lines. Property and engineering insurance face higher reinsurance costs due to tight market conditions. 

Health insurance claims have risen due to high medical inflation, and credit insurance continues to struggle with losses linked to non-performing loans. Insurers may need to strengthen reserves, though the extent of this is expected to lessen with time.

Electric vehicle (EV) adoption in Indonesia is creating pricing risks in motor insurance. 

Whilst EVs currently make up a small portion of the market, their increasing numbers and government incentives are prompting regulatory discussions about tariff differentiation between EVs and traditional vehicles to better align premiums with risk.