The proposed merger of three state-owned Indonesian reinsurers could weaken the domestic market's capital framework, given the weak financial positions of two of the three companies, Fitch Ratings said in a recent release.

The consolidation, which is part of a wider government effort to streamline state-owned entities, will likely dilute the capital of the new merged entity, as one of the companies, Reasuransi Nasional Indonesia, has a large negative equity position of 2.1 trillion rupiah.

The merger will also reduce the combined capacity of the three reinsurers, which include Reasuransi Indonesia Utama (Persero) and Tugu Reasuransi Indonesia, Fitch said.

The rating agency expects the move to ease competition, but local players' reduced capitalization would allow more reinsurers abroad to enter the Indonesian market and restrict the industry's ability to cushion against complex risks.

Any development on the plan would impact the credit assessment of Tugu Reasuransi Indonesia, Fitch said.