Indonesia's large and growing middle class boosts insurance sector


Indonesia’s insurance sector is crowded, reflective of the country’s sizeable population – the world’s fourth largest, at around 265m – as well as its potential. Some 152 companies vied for premium in 2017, operating in an environment that, although presenting significant opportunity, also comes with a measure of insurable risks, in particular from extreme weather and natural disasters. In the highly competitive life market, agents reach out to consumers by offering unit-linked policies, which combine life coverage and regular investment income. While formal products remain outside the reach of most Indonesians for now, the wealthier segments of the market nonetheless represent an attractive target for insurers. “The current number of possible insurance buyers in Indonesia is still small in comparison to the overall population, but the growth rate is high,” Sam Flitman, lead adviser for insurance at PwC, told OBG.

Structure & Oversight

In addition to licensed insurers – which are made up of both public and private firms, as well as domestic and foreign entities – the country has a large number of pension funds, with a total of 237 in 2017. The state is exploring the creation of a holding company to own the insurers that it controls, which comprise companies operating in the life, non-life and reinsurance segments.

This fits a wider national trend of grouping stateowned enterprises by activity and consolidating them under a holding company structure. Such a move would transform the country’s existing insurers, creating an entity with a larger capital base, the benefits of scale and increased reinsurance capacity. The Financial Services Authority (OJK) is the regulator and is responsible for oversight of most financial services. The body’s near-term reform agenda is the Financial Services Sector Master Plan 2015-19, which includes a variety of programmes to boost financial literacy and increase the range of products on offer, with a particular focus on consolidating the financial services industry. Capital requirements are set at Rp150bn ($10.6m) for life and non-life providers, and Rp300bn ($21.3m) for reinsurers; while, for sharia-compliant insurers and reinsurers, the figures are set at Rp100bn ($7.1m) and Rp175bn ($12.4m), respectively. The OJK has notably established a single-presence policy, whereby a private investor can only own one insurer in each of the three main categories. Foreign insurers are generally most active in the life insurance market, whereas the non-life market tends to be dominated by domestic firms.

Foreign Investors

For any foreign player looking to participate in the market, the negative investment list – a document updated periodically that sets restrictions by economic sector for non-Indonesian investors – is an important starting point. The latest version, published in 2016, caps foreign ownership of any new insurance venture at 80% and bans the dual-layer ownership structure that had previously been used. In the past, there was speculation that the government may adopt foreign ownership limits of between 30% and 80%; some stakeholders argued that a more nationalistic policy would help to retain profits domestically and boost economic growth, while others advocated for a higher limit that would allow the industry to attract more capital and expertise. In May 2018 the country enacted Regulation No. 14 of 2018, confirming the 80% limit on foreign ownership for Indonesian insurance firms.

While the 80% cap does not apply to entities already in operation – there are an estimated 20 with a higher concentration of foreign ownership – any future increases in capital must be made within the limits of this threshold. In addition, the country does not allow local branches of foreign companies, so any insurance venture requires local incorporation – although these and other conditions may potentially be relaxed for companies that propose to consolidate multiple insurers into one business.

Regulatory Support 

This approach is largely consistent across the financial sector. Indonesia created the OJK in the wake of the 1997-98 Asian financial crisis, with the aim of easing the burden on Bank Indonesia (BI), which acted as the central bank and financial services regulator at that time. It was hoped that moving the latter function to a different agency would allow BI to focus on monetary policy and system stability, and would enhance supervision of licences by having a purpose-built regulator perform those duties and responsibilities.

One of the OJK’s primary goals is consolidation, and thus it is willing to consider exceptions to rules in instances in which licensees request approval for actions that align with this goal. Even with this support though, reforming the roster of licensees to shrink the total and boost capacity is expected to be a long process, in particular in the non-life segment. “There needs to be consolidation, and it is going to take time,” Flitman told OBG.


Pressure has been mounting on insurers in recent years to invest in infrastructure development, as the country has a sizeable deficit of bridges, roads, hospitals and other public works but lacks sufficient domestic capital to fund the necessary upgrades (see Infrastructure & Transport chapter). “The insurance sector has seen investment-led growth in the life segment,” Iwan Pasila, president director of Mandiri Inhealth, told OBG. “However, 2018 has been a challenging year overall due to the high level of competition in the market.”

Furthermore, insurance providers have proved conservative with their investment accounts, allocating just 2% to direct investment and 1% to real estate as of 2017. With positive economic fundamentals at play, and an ambitious infrastructure pipeline in the works, there should be further scope for insurers to fund construction activity. The resulting economic impetus should in turn fuel industry expansion. “The delay in the US Federal Reserve interest rate increase and the stabilisation of oil prices is likely to benefit the wider economy and foreign direct investment inflows, which picked up in January 2019,” Rio Winardi, president director at BCA Life, told OBG. “Growth in GDP and concurrent improvements in education eventually will lead to premium growth.”

Penetration Rate

Insurance penetration rose from its 2017 rate of 2.84%, climbing to reach 3.01% of GDP in November 2018 – an increase attributed to organic gains in premium income rather than governmental reforms. Despite this improvement, industry growth has largely lagged behind regional peers. According to data cited in the OJK’s master plan, insurance assets were valued at 23% of GDP in both Malaysia and Thailand, and 46% in Singapore in 2014, while Indonesia was nearly equal to the Philippines, at roughly 8% of GDP. This figure remained approximately the same in Indonesia in 2017. As part of its efforts to foster industry growth, the OJK has introduced awareness campaigns, tightened standards for brokers and other service providers to enhance the consumer experience, and is considering new mandatory coverages, such as compulsory third-party coverage for motorists.

Middle Class

One of the main advantages for the sector is Indonesia’s numerous citizenry, which includes a growing middle class that is itself larger than the population of many other countries. According to estimates from Boston Consulting Group, this demographic numbered around 74m in 2013 and is expected to balloon to 141m by 2020. While a December 2017 report from the World Bank put this estimate at a more modest 52m – or 20% of the population – this cohort accounted for 43% of total household consumption. Given the informal nature of much of Indonesia’s employment, particularly at the lower end of the middle-income bracket, some insurers find it more useful to measure potential clientele by income rather than demographics. Alberto Daniel Hanani, CEO at Sarana Lindung Upaya Asuransi, a provider based in Semarang, told OBG that individuals were generally considered potential customers once they attained an income level of $12 per day, though those earning less could find coverage options in the micro-insurance segment, which comes with increased risks.

Whatever the figure, it is widely agreed that the market of potential customers who can afford insurance products is rising quickly. For individual insurers, the target market may be slightly larger or smaller, depending on the products they have on offer and the cost of reaching consumers.

Aggressive pursuit of new clientele has proved both feasible and necessary, as seen by the success in marketing unit-linked life policies, which could help the sector capture more of the middle class. However, as more Indonesians find themselves with discretionary income, providers are likely to compete with not just other insurers, but also other products; smartphones, vehicles and various consumer goods could prove to be an easier sell than policies.

Geography Matters

In any analysis of the Indonesian market, there is the inevitable question of geography, though opinions vary on the subject. The population is spread across a large archipelago, with more than 17,000 islands, and therefore competing across separate markets may not be feasible for companies that do not already have a substantial and geographically diverse presence. “Insurance penetration correlates with the extent to which companies have developed their branch networks, and the products and services offered, through optimising technology,” Agung Abadi, president director of Asuransi Tri Pakarta, told OBG.

However, there are several areas in which insurers are likely to find a larger base of higher-level earners: about 60% of what is considered the middle class are Javanese, with another 20% of this income bracket found nearby on Sumatra, Bali and Lombok.

Non-Life Lines

Unlike the relatively consolidated distribution of potential high-income clients, the non-life sector is fragmented. There are dozens of domestic providers, brokers and agents competing for business, which is mainly focused on automotive coverage that also includes motorbikes. The segment has the potential to improve its profitability, however, if consumers begin to switch to cars instead of motorbikes, which are cheaper to insure. Motorbike sales fell in early 2018 as auto sales rose, and for the General Insurance Association of Indonesia (AAUI), this provides a great opportunity to study the market and better quantify the impact of rising rates of automobile ownership on premium income.

For its part, the OJK plans a mixed approach to growing the non-life market, with a combination of public sector ventures, more mandatory coverage and incentives for private firms. One of the main themes in its master plan, as well as in the market in general, is extreme weather and natural disasters, particularly earthquakes and tsunamis. The combination of the two that hit Palu on Sulawesi in September 2018 created an estimated $1.1bn in claims, with around Rp680bn ($48.2m) in general claims paid out in the immediate aftermath. Insurers have learned to prepare for these periodic disasters: in a statement issued in October 2018 regarding the incidents, international credit ratings agency Fitch noted that the financial impact on insurance companies would be minimal thanks to considerable use of reinsurance to cover risks. However, it also cited low penetration as a mitigating factor, calculating the impact of the earthquake and tsunami to be around 0.4% of total exposure. Insurers will therefore face greater risk as they expand their coverage. Although devastating, disasters can be used as opportunities to educate consumers about coverage and gain acceptance.

“These disasters are moments of truth for insurance companies,” Muhamad Ihsan, operational and technical director of Sarana Lindung Upaya Asuransi, told OBG. “If you pay claims fast, you will gain credibility and customers,” he added. The government is also planning to implement a solution to insure its own assets against catastrophe risk, in the form of a pool system to supplement existing funds in the annual budget for disaster relief. In January 2019 officials announced that the budget allocation for disaster response would be more than doubled to Rp15trn ($1.1bn), a third of which would be designated for rehabilitation and reconstruction, while the remainder would be reserved for disaster response. Losses in the past have dwarfed mitigation funding: from 2004 to 2013 disasters caused Rp126.7trn ($8.9bn) in damages, compared to budgeted funds of Rp3.1trn ($219.8m). Additional areas earmarked for support in the OJK’s master plan include agriculture and climate risk, as well as export insurance for aquaculture, palm oil, rice and other exported commodities (see Agriculture & Plantations chapter).

Game of Life

In the life segment, which dominates sector activity, Prudential Life Assurance is the market leader, with Rp71trn ($5bn) in assets at the close of 2017. The next three spots were held by Asuransi Jiwasraya, Asuransi Jiwa Manulife Indonesia and AIA Financial – which were clustered around the Rp45trn ($3.2bn) level – followed by Asuransi Allianz Life Indonesia, which rounded out the top five with Rp33.3trn ($2.4bn). Total premium income jumped 17.2% to Rp195.72trn ($13.9bn) for the year.

In a sector marked by foreign companies’ aggressive pursuit of consumers for unit-linked life policies, domestic insurers are increasingly partnering with multinationals to offer their own unit-linked products. That trend includes the takaful (sharia-compliant insurance) segment, in which interest-bearing products are eschewed in favour of a risk-pooling approach. There were 30 takaful providers in 2018, none of which had yet to gain major market share.

Takaful as an alternative to conventional products is a new concept in Indonesia, as is the case in most Muslim-majority countries, and it has grown at a slower pace globally than other sharia-compliant finance alternatives, such as Islamic banking, or sukuk (Islamic bonds). Of the $1.89trn in global assets recorded in the Islamic Financial Services Board’s “2017 Stability Report”, 78.9% was held in banking, 16.8% in sukuk, 3% in Islamic funds and 1.3% in takaful. Growth for this segment could be impacted in part by regulation, as a legal reform contained in the 2014 insurance law stipulated that by 2024 takaful may no longer be sold by conventional companies through a sharia-compliant division.

Micro- & Reinsurance

The OJK sees micro-insurance as another attractive alternative to conventional coverage, and its master plan requests that existing insurers continue working to develop smallscale options for lower-income buyers, including products in segments like health, accident, property and small business risk, among others.

Another area prime for further development, which has the potential to help domestic companies capture a greater share of profits, is reinsurance. In 2015 the state merged Indonesia RE with Reasuransi Internasional Indonesia, both public sector reinsurers; the company captured 38% market share that year, making it the largest domestic reinsurer by assets. Other notable market players include Reasuransi Indonesia Utama; Reasuransi Indonesia Marein; and Reasuransi Maipark Indonesia, which focuses on catastrophe risk. Although full-year figures had yet to be released as of March 2019, 2018 was expected to be a strong year for the domestic reinsurance market; AAUI forecast 10% premium growth. In the first quarter of the year alone gross premiums were up 25% year-on-year at Rp3.7trn ($262.3bn).


Agents play a large role in the industry, particularly in the life segment, in which they accounted for 37% of premium income in 2017. There are 600,000 certified agents, and the OJK and the Indonesian Life Insurance Association announced aims in late 2018 to increase this figure to as many as 10m over the next few years.

“Compared to Japan, where the agency-model can be described as loyal, insurance agents are only employed on a freelance basis in Indonesia,” Shadiq Akasya, president director of BNI Life told OBG. “To enable market players to scale, insurance companies need to shift focus to regular premium and improve service by digital technology to retain a loyal customer base,” he said. Meanwhile, the role of bancassurance, which accounted for 46% of premium income, is expected to plateau or fall, as most banks and insurers have already established partnerships, so the number of new ventures is expected to drop. For the future, digital channels are expected to play a larger role. For example, PasarPolis – which began operations in 2015 based on the online aggregation model, offering insurance products and price comparisons – recently expanded its offerings to include products such as micro-insurance.

In 2018 the firm received venture-capital funding of between $5m and $8m from three Indonesian technology companies: the ride-hailing service GO-JEK, online retailer Tokopedia and the travel-booking site Traveloka – each which began offering policies through PasarPolis as an option.


With major global insurance players now well established in Indonesia, the attractiveness of the local market is now firmly in focus. The OJK hopes that targeted regulation to support new lines of business will leverage the size of the country’s population and the potential of its rising middle class, but it has also signalled through its master plan that it will take steps to address a range of sector issues, such as enhanced enforcement, the development of green products and new licensing standards for brokers.

For example, motor commissions were capped at 25% of premium value and property commissions at 15% in 2014, highlighting the body’s focus on consumer protection. In the meantime, private sector operators are continuing to look for new avenues to capitalise on favourable headwinds in the industry.

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The Report: Indonesia 2019

Insurance chapter from The Report: Indonesia 2019

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