New Indonesia rules unlikely to stem M&A

Indonesia’s new comprehensive insurance law, which took effect on October 23, adds some restrictions to foreign investment in the sector, but is unlikely to discourage future M&A activity involving international insurers, believes Fitch Ratings.

The agency maintains that foreign investor interest in Indonesia’s insurance sector will remain high because of its low market penetration rate, the country’s large population, and the expected growth of its middle class.

The new law provides greater clarity on regulations and the government’s policy focus with regard to the industry, replacing the much broader and more general terms written into the previous insurance law passed in 1992.

With the prospect of a new law having lingered over the sector for over a year, its passage clears up uncertainty over the strategic direction of regulation and gives insurance companies comprehensive guidelines on key issues related to foreign ownership, policyholder protections, and takaful (Islamic insurance) products.

Notably, the 80 percent cap on foreign investments in Indonesian insurers remains in place, despite earlier speculation that this might be reduced. The 80 percent cap is higher than that in several of the large peer nations in south/south-east Asia, and is a key factor encouraging foreign interest in the sector.

By comparison, Malaysia has a limit of 70 percent, while the cap is 49 percent for Thailand and India.

Maintaining the 80 percent limit provides the clearest indication yet that the government remains open to foreign investment in the insurance sector. As such, Fitch maintains that international interest in Indonesian insurance will remain strong, with M&A activity expected to continue in the short to medium term.

The rating agency also noted that the law has tightened up the requirements for the 20 percent Indonesian shareholding, closing some loopholes which had enabled higher foreign stakes.