How can insurance companies increase capital efficiency while still meeting the new Insurance Roadmap capital requirements?

Jakarta, 14 November 2023 - Following The Indonesia Financial Services Authority’s (Otoritas Jasa Keuangan/OJK) regulatory requirement reflected in POJK 67/2016, Indonesia’s financial services sector required a minimum capital standard for insurance and reinsurance companies. These requirements stand at Rp100 billion for conventional insurance companies and Rp50 billion for Sharia-compliant insurance companies, with double the amount mandated for their insurance counterparts.  

In addition, recently OJK has released the draft Indonesia Insurance Roadmap 2023–2027 in response to current market changes. The Roadmap reveals a startling increase in the minimum capital requirements for the insurance sector by 2028. It will be interesting to know whether or not these new regulations are sufficiently stringent and in line with the goals of the industry. The roadmap proposes a substantial growth in capital requirements by 2026 and 2028. These minimum capital requirements are intended to bolster the insurance industry's stability and the companies' ability to fulfil their financial responsibilities. Even though capital management is essential to the insurance industry's profitability, companies must make sure they can successfully pay their financial obligations.

Saiful Aziz, PwC Indonesia Advisor, said, “As part of best practice, insurance companies worldwide conduct an assessment of capital adequacy and efficiency through the application of a capital management framework, i.e., Internal Capital Adequacy Assessment Process (ICAAP). The proper implementation of the framework plays a pivotal role in ensuring a company accurately quantifies the risks it faces and the amount of capital needed to mitigate them. Furthermore, an equitable framework is invaluable for charting the company's strategic course and planning future growth, encompassing critical decisions like dividend distributions and entering capital-intensive projects and investments, all the while remaining prepared to weather unforeseen challenges.”

In situations where the company's current capital falls below the Internal Target Capital Level (ITCL), insurers should first activate a well-thought-out capital management plan to restore the capital position. This prudent step is taken before resorting to the less-favourable alternative, capital injections – a move often met with resistance from shareholders. Restoring capital is essential not only for the company's sustainability but also for upholding the security of policymakers and fostering confidence in the market.

On the other hand, in cases of overcapitalisation, injecting further capital by raising the minimum capital requirement could inadvertently lead to capital inefficiency. Overcapitalisation typically occurs when insurance companies underwrite lower-risk or lower-volume businesses. In such instances, the insurer may already meet the required capital, and raising this threshold would compel reevaluation of business strategy and risk appetite. This might involve underwriting more substantial volumes of business or accepting higher risks, all in an effort to deploy the surplus capital effectively. Before any strategic changes, it's essential to employ a comprehensive capital management framework, providing a means to assess impact and gain a clearer understanding of capital adequacy.

To close, Saiful added, “The goals of the roadmap from OJK are something that we embrace and value since they have the ability to increase trust in the insurance industry. The insurance industry's services will all be strengthened under this grand plan. Furthermore, companies need a thorough examination to weigh the pros and cons of the regulations, considering the future direction of the insurance industry.”

Link to the article here.