Digital underwriting: The integration of new technologies into the insurance sector could result in a sea change

Despite some downward pressure in 2014-15 – in part, due to volatility in the mining and energy sectors – Indonesia’s insurance sector has experienced strong growth in recent years and premiums are expected to increase by a double-digit margin in 2016, according to a forecast by the Association of General Insurance Companies in March 2016. The bulk of this expansion will be driven largely by the nation’s robust economic fundamentals, namely ongoing population growth and the emergence of a large and upwardly mobile middle class. To reach this enormous potential market efficiently and quickly, local insurers plan to invest heavily in ICT in the coming years.

Financial technology – colloquially known as “fintech” in the ICT and financial services sectors – is widely considered to be a key growth area not only for insurance, but across Indonesia’s financial services industry, (see Banking and Capital Markets chapters). “Technology is essential to the growth of the insurance industry,” Peter Phillips, CEO of Marsh Indonesia, the local office of the global insurance broker, told OBG. “The traditional drivers of the past are going to be dominated by new drivers of the future, such as online and mobile applications, among others.”

Demographic Context 

While by most measures the rise of fintech in Indonesia has only just begun, the eventual widespread uptake of technology is largely taken for granted in the insurance industry and further afield. According to the International Telecommunications Union, the UN’s telecoms authority, as of the end of 2015 Indonesia was home to 325.6m mobile telecoms subscribers, up from just 211.3m as recently as 2010. The end-2015 figure represents mobile penetration of well over 100%, indicating that many users own more than one SIM card – a common practice in many parts of South-east Asia and other developing regions, where usage rates vary depending on the time of day and mobile operator. A significant percentage of Indonesia’s mobile users subscribe to data plans. According to statistics compiled by We Are Social, a UK-based digital media agency, as of the end of January 2016 around 43% of Indonesia’s adult population owned a smartphone, and some 79m people were active on one or more social media platforms. In terms of overall internet usage, as of early 2016 We Are Social’s data indicates that there were 88.1m active internet users, which represents just 34% of Indonesia’s total population.

Market Growth

These figures suggest that the potential for rapid expansion among internet and fintech users in Indonesia is enormous. The nation’s market fundamentals are robust. With more than 260m residents, Indonesia is the fourth-largest country in the world by population. With a population growth rate well in excess of 1% as of 2016, this figure is expected to increase in the near to medium-term future.

Perhaps more significantly, Indonesia is home to a large and growing youth population. Indeed, as of 2015 the nation’s median age was 29. Additionally, estimates from 2014, which are based on the nation’s most recent census, carried out in 2000, indicate that more than 26% of the population was younger than 14 years old, while around 17% was aged 15-24 and 42% fell between the ages of 25 and 54 years. All told, almost 86% of Indonesia’s total population was aged 54 or younger.

Young Indonesians account for a large percentage of internet subscribers. According to a joint study carried out by the Ministry of Communications and Information Technology and Harvard University’s Berkman Centre for Internet and Society, as of 2014 almost half of the nation’s total internet users fell between the ages of 10 and 19 As these users come into their own economically over the coming decade and a half, they represent a key target demographic for insurance companies, banks and other financial institutions. The nation’s financial industry is in the early stages of preparing to cater to this new, tech-savvy market.

“In the next five to 10 years, the Indonesian insurance sector will probably see a tsunami of start-up, mid-sized and big companies that will wash away the traditional players that do not adjust to new trends,” Phillips told OBG.

Present & Future 

The introduction of new fintech products and services has taken place at a rapid pace in recent years. According to Statista, a research firm based in Hamburg, Germany, as of June 2016 the transaction value of Indonesia’s fintech industry was around $14.5bn. This figure is expected to grow by 18% on an annual basis over the next four years, reaching $28.8bn by 2020, according to Statista forecasts. While this suggests that Indonesia is one of the largest and fastest-growing fintech markets in South-east Asia, by all accounts it represents only a small percentage of the country’s potential in terms of future uptake. For instance, as of March 2015 the country’s commercial banks had total assets of more than Rp6000trn ($438bn). If only a third or half of the value of this market moved online or into an app-based ecosystem, Indonesia would become one of the largest fintech markets in the region.

Fintech development in Indonesia has taken various forms. First, a handful of start-ups and small and medium-sized enterprises (SMEs) have set up shop specifically to disrupt the existing financial services business with digital innovations. For instance, Modalku, which launched in January 2016, operates an online marketplace for peer-topeer lending. As of June 2016 the young company had already overseen the completion of 22 loans worth Rp5.1bn ($372,300) with zero defaults. The company’s primary focus is to provide financing to Indonesia’s 57m micro-enterprises, many of which fail to develop into SMEs in large part due to a lack of financing. Other examples include Bareksa, an online investment portal launched in February 2013 by the Bareksa Portal Investasi service, allowing customers to buy and sell mutual funds online. Doku, which was established in 2007 – making it one of the nation’s oldest fintech operators – is one of Indonesia’s largest provider of electronic payments and risk management services.

A second variety of fintech development is that carried out by existing financial services companies and related entities. This is not particularly common in Indonesia, where growth rates among banks, insurance firms and other related companies have been high enough in recent years that many firms have not yet felt the need to invest heavily in technology. However, as fintech is increasingly understood as the wave of the future across the industry, some of the more established players have made moves to incorporate it more fully into their business. For instance, a number of major banks, including the state-owned Bank Mandiri – Indonesia’s largest lender by total assets – have either partnered with existing fintech startups or invested in developing technology of their own in recent years. In January 2016 Bank Mandiri announced the launch of Mandiri Capital Indonesia, a venture capital unit with a mandate to invest specifically in fintech start-ups.

Moreover, existing international conglomerates could potentially set up shop in Indonesia in order to tap into the country’s enormous and growing market for fintech products and services.

Many of these firms have an advantage over their smaller competitors, having years of ICT or financial sector experience and data to draw on. “Companies that have access to big data and consumer data will become the non-traditional competitors in the sector,” said Phillips.

Government Focus 

The rapid development of fintech potentially poses risks of various types to Indonesia’s financial system and stability. As such, the Financial Services Authority reportedly plans to introduce a fintech regulatory framework before the end of 2016, in an effort to ensure that the nascent segment does not harm consumers or destabilise the economy.

The authority has worked to reassure fintech firms that it does not want to limit their development in any way, and in fact hopes to stimulate growth in the segment while assuring regulation.