Having weathered the impact of the international financial crisis, the insurance industry expects steady growth in 2010. However, the landscape is shifting more quickly as some players look to boost their presence on the undervalued market, liberalisation takes effect and the emergent Islamic sector moves forward.
Having felt an initial squeeze due to the global downturn, with premium income falling by 3.4%in the first quarter, Indonesia's insurance industry picked up through 2009 as an air of pessimism was replaced by cautious optimism. This was partly due to the economy's remarkably strong performance. While many other countries in the region slided into recession, Indonesia managed 4% GDP growth in 2009, according to the IMF. This was trimmed from an average of 6% during 2005-07, but still a good performance, given the global environment.
The growth is expected to pick up again over the coming years. Coupled with its population of more than 230m, this makes Indonesia an enticing prospect for many insurance firms. It is thought that the potential of the Indonesian market was one of the reasons behind Prudential's $35.5bn "mega bid" for AIA, the Asian wing of troubled US insurance giant AIG. Prudential's move is seen as a game-changing moment in the global insurance industry, given the fact that AIA is one and a half times the size of the UK-based insurer. Prudential chief executive Tidjane Thiam has pointed to the combination of GDP growth, low insurance penetration and high savings rates as an ideal combination of factors for insurance expansion. Indonesia, where premiums total less than 1% of GDP, is a typical case in point.
This year, as the market recovers, firms are confident that they can achieve strong growth. Allianz Indonesia reported on March 11 that it expects its total premiums to rise by 16% in 2010, to Rp5tn ($554m). This would be on top of 17% growth last year. Life insurance has provided 80% of Allianz's business and is the predominant segment in the country, accounting for more than two-thirds of premiums.
While Indonesia is an attractive market, there are challenges to firms doing business in the country. One is simply geographical; Indonesia's many islands make it necessary to have a large agent force to promote, sell and manage products. Firms are therefore using call centres and other methods to expand their reach. The extension of banking networks has also facilitated bancassurance, which packages insurance as a banking product.
Public awareness is also an issue, with insurance still considered as a luxury good by the majority of the population. The government has been making steps to increase knowledge about insurance, introducing an annual insurance day in 2006. The Asian tsunami of 2004, which left millions of uninsured Indonesians dependent on government aid, has also been a factor in increasing the perception of insurance as a necessity. Nonetheless, the single most important issue behind premium growth is likely to be income, with people more likely to purchase policies if they have the disposable cash to do so.
The sector is already somewhat fragmented, with a range of local and international companies competing for a slice of the pie. The dynamics have shifted somewhat since the introduction of new minimum capitalisation thresholds in 2008, and this year further changes are afoot due to ASEAN deals that are likely to both increase competition and raise the capitalisation bar again.
"In 2010 insurers will be forced to meet capitalisation requirements as set by the ASEAN free-trade agreements," Afdal Bahaudin, the president-director of Tug Panama, told OBG. "This could result in significant changes to the landscape of the industry as companies seek to improve their competitiveness. The new free-trade agreements with both ASEAN and China will present interesting challenges to the local insurance market. The competitive environment will be intensified as local insurers competing with international organisations will be forced to meet international standards."
Meanwhile, the sharia-compliant insurance industry – or takaful sector – is also in a state of flux. In other predominantly Muslim countries, such as Malaysia, the "Islamic insurance" market has proved a roaring success, and the global takaful industry is thought to be growing at 20% per year, taking it to a value of up to $11bn by 2012. However, despite a plethora of offerings in Indonesia, the world's most populous Muslim nation, takaful is still in its infancy in the country. One issue is lack of a formalised structure.
"Sharia products have great potential," Bahaudin told OBG. "However, to achieve substantial growth the government must implement a regulatory framework that will assist the sector in its development."
The rise of Islamic banking is providing opportunities for sharia-compliant bancassurance, but industry insiders still assert that better oversight and a drive to increase awareness among the rural population, which is most likely to buy takaful products, will be necessary to achieve the segment's full capability.
The potential of the Indonesian insurance sector is in little doubt, but those aiming to succeed will have to gear themselves for a dynamic market undergoing a considerable amount of change, as public attitude and income continues to act as a break on premiums growth.