Interview: David Beynon, William Kuan
How are life insurance firms tailoring their strategies to attract Indonesia’s growing middle class and what progress has been made?
DAVID BEYNON: With regards to capturing the middle class, we believe there is a universal sales model that will be able to cater to all classes and would avoid the need for such tailoring. This model is known as “single need-based selling”.
While many new firms adopt “product push” tactics that may initially have quick results, they are inefficient in the long run. At the other end of the spectrum, they offer full financial needs analysis, whereby prospective customers’ financial needs are integrated into a report that is used as a basis for selecting products to sell.
In Indonesia this kind of selling is probably at least 10 years away, leaving single need-based selling, which focuses on one of eight key financial needs, as the best option. While these needs are universal, the order of preference varies by country.
WILLIAM KUAN: Based on published statistics, Indonesia will have approximately 140m-150m people in the middle class by 2050, according to World Bank and IMF reports. I think the middle class has grown over time, and alongside this growth, both social and conventional media have led to a heightened awareness of insurance. This is a strong foundation for growth, but there is still room for more progress.
Companies are continually operating in this space and it has been effective, but the segment is still in its infancy. In a more general sense, companies should make more of an effort to listen to the market in order to design products that fit the needs of the country’s new and expanding middle class.
We have heard that there is an increasingly heightened awareness about the benefits of insurance protection. Life expectancy in this country is higher than ever before, and it is important for people to have a steady and reliable plan in order for them to be able to enjoy their retirement years. Thanks to medical advances, many illnesses and diseases are treatable, particularly when caught early. However, the treatment is expensive, and this is where insurance must come in. Fortunately, the middle class is beginning to recognise this fact.
What kind of role do you anticipate the bancassurance model playing in the coming years and what opportunities exist in this segment?
KUAN: At present, the insurance industry’s channels remain mixed between agency and bancassurance arrangements. However, at Prudential Indonesia the customers’ preference is skewed towards agency.
We do see tremendous opportunities for both of these channels to grow, but I think that the agencies will stay in a paramount position in the following years. This is in part because people still prefer face-to-face sales. At the same time, however, we anticipate seeing rapid growth of the bancassurance segment in the coming years.
BEYNON: Bancassurance is growing at a very fast rate; it comprises at least a third of the insurance business and is by far the most effective way to increase insurance penetration.
There are several ways to enter the bancassurance market. The primary strategy is to acquire shares in an insurance firm that is already owned by a bank: this is a growing trend. If this is not possible, an alternative strategy is an “open architecture” distribution agreement with a bank or to “pay to play”, by which one can secure a preferred provider position with a bank for a fee.
Otherwise, one can look outside of financial providers at big conglomerates that have a large captive client base. By using a strong brand with an excellent reputation, insurance companies can distribute their products more effectively.
Returning to banking, the precedent of banks offering exclusivity to insurance firms has changed.
Regulators have quite sensibly recognised that one insurer cannot provide everything that a bank’s clients need. As such, banks must now make at least three positions available for insurance partners, including a primary link for the preferred provider. This will always have the option of offering products on a first refusal basis, which can then be followed up by two further product providers.
To what extent can the sector continue on its trajectory of rapid growth without compromising on the quality of service that it delivers?
BEYNON: The sector can continue growing, and in my view, this is largely due to the agency system. I should clarify that what we call the agency system refers to sales managed by independent agencies on contracts. Only one major international company is still operating “branch-based” selling in the country; all other insurance firms use agencies.
This preference can largely be attributed to the entrepreneurial flexibility of this model, which motivates sales agents and their staff. In fact, Indonesia probably has the most developed agency-selling landscape, giving it space to develop the capacity to keep up with sector growth. With regard to firms having much success here, they have grown so fast due to the dominance of the agency model as well as the work ethic of the staff.
In terms of human capital, sufficient talent is available within the country. Indonesians have been in the business for up to 15 or 20 years. The number of agents is not a problem, in part because insurance penetration is so low, but also because it is an increasingly sought-after profession. However, it is true that Indonesia needs to invest in its human capital more generally to reach its full potential.
KUAN: I am of the firm belief that it can; moreover, I think that it is imperative for companies to invest more heavily in developing talent. There is a lot of talent throughout the country. The major challenge must therefore be to accelerate the development of the sector’s human resources. I think the key to maintaining such rapid growth without compromising quality of service is people, systems automation and customer service.
In what ways is the entry of new foreign players into the market affecting levels of competition and what does this mean for local firms?
BEYNON: I think it is undoubtedly the case that foreign players are returning to Indonesia and competition is therefore increasing as a result. Back in 2004 and 2005, there were some major international insurance firms that had started to move out of Asia in order to focus on Europe. However, now they are coming to the realisation that they would benefit from being situated in Indonesia and are returning.
KUAN: As the sector has become increasingly competitive in the last few years, it remains important to remember that competition makes us better, sharper and more efficient. Indeed, tremendous opportunities exist for all firms to grow and exist together in the sector, for three main reasons.
The first is GDP growth, which remains robust and is expected to remain at around the 5-6% mark over the next three years, which, compared to markets in Europe and the US, is simply awesome. The second factor is the rapid emergence of the middle class, and the third is that insurance penetration in the country remains extremely low.
In terms of premiums to GDP, Indonesia is running at around 1.2%. Compared to neighbouring countries such as Malaysia and Singapore, which are running nearer 4% and 6%, it remains extremely low on all measures. These three factors are crucial in explaining why this market is attracting competition.
Opportunities are present for all companies involved to benefit from growth. However, this in turn may present other challenges for smaller players as regulators push to ensure that best practices and standards are adhered to by all in the sector.
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