Reducing Indonesia’s protection gap: Protectionism versus the protection gap


Destructive earthquakes hitting Lombok and Sulawesi in 2018 have highlighted the scale of the protection gap facing Indonesia’s re/insurance market. In October, the country’s insurance regulator used its industry rendezvous in Bali to call for ideas to kickstart further development of the country’s insurance sector.

However, rules limiting overseas re/insurance market access remain an obstacle to reducing the catastrophe prone country’s protection gap. International reinsurers are among those keen to play their part as stakeholders in closing the protection gap in Asia’s developing markets, Indonesia included.

“We believe that trading risk more globally, without too many national boundaries, will help to do this,” one regional reinsurance leader told GR. “Diversification and growth can only happen through a balancing of global risk – particularly with regard to natural catastrophes,” the source added.

Protectionist barriers were highlighted in a report published in July by the Global Reinsurance Forum (GRF), which focused on trade barriers and regulatory obstacles to greater reinsurance market access.

The GRF study complained of: “restrictions on the ability of reinsurers to freely conduct business on a cross-border basis, thus limiting the capacity of global reinsurers to spread risk globally and to prevent domestic concentrations of risk”.

Regulatory motivations to encourage reinsurers to deploy capital through setting up local subsidiaries are understandable, one reinsurance chief executive told GR.

“The objectives of such regulations can be to ensure that local entities are real entities that could continue trading forward regardless of what happens to their affiliates. We understand the desire by governments to have local staff in local offices paying local taxes,” the senior source said.

“Unfortunately, some regulations protect the local reinsurance champions from external forces or create local employment as a sort of back-door tax on reinsurers. This is a trend that we are seeing not only in Asia Pacific but across the globe,” the CEO continued.

“Reinsurance is a business of global risk-sharing and keeping risk within a country is not beneficial for the country itself. It is far more efficient to be part of the global reinsurance market,” the source added.

The GRF’s report complained about the use of anti-competitive mechanisms such as compulsory cessions to domestic entities, systems of “right of first refusal”, and “compulsory, subsidised or monopolistic governmental mechanisms”, limiting the ability of global reinsurers to compete on a level playing field.

Since 2016 Indonesian insurers are required to place 100% of “reinsured simple risks” with Indonesia Re, the state-backed reinsurer established by the government in 2015 to increase domestic reinsurance capacity. These “simple risks” include all reinsurance of life, health, personal accident, motor, credit and surety business.

Three exceptions exist to this rule, each requiring special regulatory approvals. These are: products specifically designed for multinational companies; medical reimbursement products with global coverage; and new products developed by a foreign reinsurer.

A new product designed by a foreign reinsurer can be reinsured with the foreign reinsurer for a maximum of four years, after which the new policies will be subject to the local cession rules, the GRF report noted.

With the regulator’s exemption, a maximum offshore cession of 75% may be permitted, with a minimum cession to domestic reinsurers of 25%, similar to “non-simple” risks, which include catastrophe-exposed business.

For such “non-simple risks”, a minimum of 25% of reinsurance of that business must be placed with domestic reinsurers and up to 75% may be placed with offshore reinsurers, the GRF report said.

In April 2018, Indonesia’s government issued its regulation GR14/2018 on foreign ownership of insurance companies to further enforce its 80% cap on foreign ownership of re/insurers active within the country.

The GRF study noted this rule as an example of regulatory restrictions in place on foreign ownership of subsidiaries and other discriminatory barriers affecting the establishment of branches or subsidiaries.

“This restricts the ability of reinsurers to deliver their full economic benefit by providing local underwriting expertise and direct services to transfer risk out of domestic markets on an open and competitive basis,” added the GRF’s report.

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