New RBC and the Future of the Insurance Industry
The insurance industry is fundamentally an industry that sells promises of protection when risks truly materialise, which only holds value if the insurance company has sufficient capital resilience to fulfil them. Amid the increasingly uncertain global economic dynamics—from financial market volatility and geopolitical conflicts to rising disaster risks—the resilience of the insurance industry becomes ever more crucial.
Over the past two decades, the Risk Based Capital (RBC) system has served as the primary indicator of the financial health of insurance companies in Indonesia. The current RBC is essentially a ratio between the company’s solvency level and the minimum capital requirement stipulated by the regulator. Simply put, the RBC formula is the percentage of available capital compared to the risk-based minimum capital requirement.
Regulations require insurance companies to maintain a minimum RBC ratio of 120%. This means the company must have capital at least 1.2 times the risk-based minimum capital requirement to ensure it has sufficient capital to face potential claims.
In the current model, capital requirements are calculated from several main risk components: underwriting risk, arising from the possibility of claims exceeding estimates; asset/investment risk, arising from losses due to declines in investment values; credit risk, which is default by counterparties such as reinsurers or bond issuers; and asset-liability mismatch risk, which is the mismatch between investment assets and policy liabilities. This model is relatively simple and aggregate. That is, risk calculations are done in broad categories without accounting for risk dynamics in great detail. This model has been quite effective in maintaining industry stability over the past two decades, but it is beginning to show limitations when facing increasingly complex modern risks.
Industry developments demand a more advanced approach. The complexity of risks faced by insurance companies today is far greater than two decades ago.
Changes in financial reporting standards through PSAK 117 on insurance contracts also require a solvency approach more aligned with international practices. Therefore, the Financial Services Authority is preparing an RBC reform towards a New RBC framework that is more sensitive to the company’s risk profile.
New RBC is a development of a solvency framework that is more risk-sensitive and forward-looking. In this model, capital requirements are not only calculated based on broad risk categories but also consider the company’s risk profile in a more detailed and dynamic manner.
The main objective of New RBC is to more realistically reflect the company’s risks, improve the quality of risk management in the industry, and align Indonesia’s solvency standards with global practices.
Indonesia is not the only country updating its insurance solvency framework.
Global Practices
In Europe, the Solvency II system has been the standard for supervising the insurance industry since 2016. This framework requires companies to calculate capital requirements based on very detailed risk exposures, while strengthening risk management governance. In Asia, similar reforms have also occurred. Singapore’s financial authority through the Monetary Authority of Singapore has implemented the RBC 2 Framework Singapore, which updates the solvency system to be more responsive to market risks and investment volatility. Countries like Japan and South Korea have also adjusted their solvency models to better align with global practices.
As a result, the insurance industries in those countries have become more transparent, more disciplined in risk management, and enjoy higher confidence from international financial markets. The reform being undertaken by Indonesia through New RBC is essentially on the same path.
In this context, the Financial Services Authority’s step to conduct a trial implementation of New Risk Based Capital (New RBC) should be viewed as an important momentum for industry reform. This policy is not merely changing the way capital adequacy is calculated for insurance companies. More than that, it marks a paradigm shift in how the industry understands and manages risks.
As an initial stage, OJK will conduct trials on insurance and reinsurance companies with equity above Rp5 trillion. This phased approach provides room for the regulator and industry to assess the policy’s impact before wider implementation.
The implementation of New RBC has far broader implications than just changing the capital calculation formula. To date, many insurance companies have viewed RBC as an indicator of regulatory compliance. As long as the solvency ratio is above the minimum threshold, the company is considered safe. However, New RBC encourages a change in approach. Companies’ capital requirements will be calculated based on more detailed risk exposures, from underwriting risk, credit risk, market risk, to operational risk. Thus, companies’ business strategies will be more directly linked to risk management and capital structure.
This paradigm pushes for a transformation from mere regulatory compliance to risk intelligence. Insurance companies cannot just meet regulatory requirements. They must be able to understand risk patterns more deeply and use them as the basis for business decision-making.
Although promising significant long-term benefits, the implementation of New RBC also presents no small challenges for the industry. The first is data readiness. The more complex solvency model requires much better quality data on underwriting, claims, and investments. The second is availability