Infrastracture-driven economy to boost Indonesia's insurance

The country's infrasture budget for 2017 rose to IDR387t.

Fitch Ratings says in a new report that Indonesia's increased infrastructure budget for 2017 (IDR387t from IDR317t) is likely to spur economic growth and could lead indirectly to high demand for insurance products.

The rating outlook for Indonesia's life and non-life insurance sectors in 2017 is stable, underpinned by rising insurance awareness, conservative investment practices, economic growth, and enhancing reinsurance coverage.

The outlook also reflects Fitch's view that Indonesia's large population, low insurance coverage, growing middle-income sector and greater insurance awareness should also support sector growth.

Here's more from Fitch:

Generally conservative investment allocation is likely to mitigate against volatility in operating results. Meanwhile, the non-life insurance segment will still be driven mainly by motor and property insurance.

The government's decision to utilise the repatriated funds from the 2016 tax amnesty in funding the infrastructure development programme through the debt markets has boosted investors' trust in infrastructure bonds. Fitch sees the long duration on infrastructure bonds as an attractive investment option for the life insurance companies.

We believe that reinsurance companies would be looking for strong capitalisation and adequate protection against retained exposure. This is due to the favourable trend in insurance business over the past five years; optimisation of local reinsurance capacity imposed by the Indonesian Financial Services Authority, Otoritas Jasa Keuangan (OJK); and a declining trend in the retention ratio of local insurance companies.

The stable outlook reflects Fitch's expectation that Indonesia's economic conditions remain manageable. The outlook could be revised to negative in the event of any extreme external shock in the form of an economic or financial crisis to which developing economies like Indonesia are more vulnerable. Unprecedented extreme equity-market volatility that translates into huge operating losses and severe capital erosion - and a significant, unexpected rise in insured losses from future catastrophe events in Indonesia - could lead to downward pressure on operating profitability.