As with the banking sector, insurance in Indonesia is on the cusp of wide-reaching change. Given the country’s large population of nearly 250m – expanding by more than 1% per annum – its growing middle class and a GDP rising at about 6% a year, the insurance sector stands to benefit from these fundamentals in the years ahead. Indeed, at just $77, insurance density in Indonesia is less than 3% of the density in Singapore.
On the general (non-life) insurance side of the business, which is smaller than life, premium volume increased by 17.7% in 2014. Life insurance premium income was up 2% year-on-year (y-o-y) as of the third quarter of 2014 – the most recent data available – although the Indonesia Life Insurance Association (AAJI) is aiming for growth of between 23% and 29% in 2015.
Growth was slow in the first half of 2014 due to market uncertainty surrounding national elections, according to the consulting firm Milliman. Unweighted new business life insurance premiums were down 16.3% yo-y, while regular premiums were up 24.9%. Overall insurance company assets increased by 14.5% in 2014, according to preliminary statistics from the Financial Services Authority (OJK), and total assets have more than doubled in the five years through to 2014.
Strong Economic Expansion
Executives have argued that the insurance sector as a whole tends to benefit disproportionately from economic expansion. “The growth of the insurance market is related to growth in the general economy,” Julian Noor, the executive director of the General Insurance Association of Indonesia (AAUI), told OBG. “If the growth of the economy is 5.8-5.9%, then the insurance market should grow at 15%. Growth in the insurance market is higher than the growth of many other industries.”
At the end of 2013, the OJK put the total number of policyholders in the country at 67m, 10m of whom were individual policyholders. According to Fitch's 2015 outlook for the Indonesian insurance sector, both the life and non-life segments were stable, with companies showing steady growth, strong margins and adequate reinsurance protection. Moreover, the outlook claimed that risks in terms of assets owned were within an acceptable range and the sector was well regulated.
Fitch was also optimistic about the prospects for insurance in the country because of the low penetration rate, put by SwissRe at 2.1% of GDP in 2013, up from 1.5% in 2010. As a result, Fitch was confident that growth would remain steady in the medium term as the economy continues to expand and more people bought insurance products. Indeed, global reinsurance adviser Aon Benfield ranked Indonesia as the sixth-most promising market in the world in its annual insurance risk study. “Indonesia is a market that offers possibilities to succeed with almost any selling strategy,” Phil Wilcock, the president-director of Astra Life, told OBG, “Unlike mature markets, there is not much product differentiation nor segmentation.”
Regulating the Industry
The OJK took over as the insurance industry’s regulator from Bapepam–LK in January 2013. According to a report by the law firm Linklaters, the OJK has handled queries more efficiently than its predecessor, while as an active regulator, the OJK has also been pushing for the sector to improve across the board. For example, one of the most significant regulations has been the fixing of tariff rates. The new rules came into effect as of February 2015, with the exception of those pertaining to motor vehicle insurance, which were effective from March 2015.
Mandatory tariffs have been placed on a range of risks, including damage from fire, lightning, explosions, aircraft impact, earthquakes, volcanic eruptions, tsunamis, floods, typhoons and storms. For motor vehicles, three geographical zones were created: Sumatra; Jakarta and West Java; and the rest of the archipelago. Meanwhile, over 120 different structure categories have been established for buildings.
The new policy has furthermore set a number of other parameters for coverage, limiting acquisition costs and establishing a maximum level of discounts that can be offered to those with a clean claims record, as well as setting minimum deductibles and discussing commissions for reinsurance.
The move comes after antitrust concerns were expressed by the Business Competition Supervisory Commission (KPPU), the country’s anti-monopoly regulator. The AAUI started fixing rates after flooding occurred in 2011, setting tariffs in the capital by dividing the city into three zones, each with a different flood profile. However, the KPPU found that members were in effect setting their own prices via the AAUI, violating Law No. 5 of 1999 on Monopolies. It ordered the association to end the practice and said that the OJK should be the body to regulate rates.
The new policy has met some controversy. The American Chamber of Commerce has claimed that it will have a significant impact on the cost of doing business in the country, estimating that some premiums could rise between 50% and 350%. Furthermore, industry experts note that price increases have inflated headline growth figures for the general insurance segment.
Bancassurance & Reinsurance
The OJK is also considering new regulations on bancassurance. Under the proposed rules, banks will have to disclose the level of commissions they receive for selling policies. As of early 2014, a total of 1074 agreements had been signed involving 40 banks, 26 life insurance companies and 23 general insurance companies. According to local media, almost 1000 types of insurance policies are available through banks, and an estimated 60% of all insurance is sold via bank branches. Banks are especially interested in such products as they can earn fee-based income from them, while insurers can gain from efficient distribution, helping them to expand their market share and access new markets quickly.
For the OJK, however, a higher level of regulation is warranted by the nature of these relationships, given the potential for risk that could arise when insurance companies and banks are linked. It is particularly concerned about upfront fees, which are charged at the outset of the relationship by banks for the right to use its branches, amid claims that these could have an adverse effect on competition within the sector. Industry players retort that banks might be less inclined to be involved in bancassurance as a result. Moreover, they claim that consumers may become confused, as different fees are charged for different products.
Reinsurance is another focus for the OJK, which has pushed for more risk to be placed with domestic entities. Under the proposed regulations, all motor, health, life and cargo insurance, as well as several other lines, must be reinsured domestically, according to a Fitch report from early 2015. At least 25% of other lines will also have to be kept onshore – a figure set to increase over time – whereas at present, only 10% of premiums must stay locally, resulting in an estimated 70% of risk being sent overseas. According to Fitch, this has resulted in a Rp5trn ($413.3m) insurance trade deficit.
Furthermore, the government plans to increase market capacity by merging two state-owned firms, Reasuransi Internasional Indonesia and ASEI Reasuransi Indonesia, into a new entity, set to be called Indonesia Re. The surviving company would be recapitalised with an additional Rp1.5trn ($124m). According to Fitch, two other reinsurers, Tugu Reasuransi Indonesia and Nasional Reasuransi Indonesia, may also later be merged.
Even so, the ratings agency notes that these plans could be unrealistic, given that local insurers may lack the capacity to create the kind of sophisticated products that are currently designed and offered by offshore providers. Moreover, clarifying regulations still need to be issued and, as of June 2015, the anticipated state mega-reinsurer had yet to be created.
Indeed, reinsurers have covered many of the losses faced by the country to date. It is this that has allowed local industry to remain stable despite the natural disasters that have taken place in recent years. Therefore, the sector will have to become more proficient at modelling to work with such high levels of complex risk. Most of all, Fitch notes that capitalisation within the country is not at a sufficient level to take on all the risk that the OJK would like to keep onshore. Even with the proposed increases, the sector would not safely absorb all of the potential losses.
New Insurance Law
In 2014 the Indonesian parliament passed a new Insurance Law to replace the 1992 Insurance Law. Although foreign ownership limits were not explicitly treated by the new law, other regulations effectively place them at 80%. Importantly, local shareholders must now be Indonesian citizens and cannot act as pass-throughs for a foreign entity. As such, the use of structuring to achieve effective 100% foreign control is now illegal. Companies have been given five years to meet this requirement or alternatively undertake an initial public offering. The new law has also introduced a single-presence policy, wherein a person or entity may only control one insurance company in the country. Those that have more than one presence must therefore merge or sell operations, and they are given up to three years to comply.
Moreover, sharia insurers must be made into standalone entities. Companies are given 10 years to meet this requirement, and must meet the requirement immediately if and when sharia-complaint products comprise 50% of their business. According to the OJK, the country had a total of 49 sharia-complaint entities in 2013, up from 42 in 2009. Of these, three were life insurance companies, two were non-life companies, three were reinsurance companies, 17 were units of life companies and 24 were units of non-life companies. Under the new law, therefore, these units will have to be spun off, and staff will no longer be able to sell both conventional and sharia products at once.
Capital & Compensation
The law has also mooted the establishment of a policy assurance programme to cover the policies of insurers that have gone into liquidation. To date, policyholders have been protected by funds formed by the insurers themselves. These last-resort assets are equal to 20% of a company's total capital and 20% of annual premiums, and can be deposited with a bank. According to legal firm Norton Rose Fulbright, policyholders have preferential treatment in the event of bankruptcy, before secured and unsecured creditors, but behind tax and employee claims.
The OJK further protects the policyholders by receiving complaints from them and resolving claims disputes. Indonesia started using risk-based capital (RBC) for insurers in 1999. The RBC ratio has to be above 120%, and the OJK can force the sale of all or part of an insurer’s business if the ratio falls below that level (though grace periods can be granted for those between 100% and 120%). Capital requirements have been steadily rising since 2008, reaching Rp40bn ($3.31m) by the end of 2010 and Rp70bn ($5.79m) by the end of 2012. By the end of 2014 all companies in the sector had to have Rp100bn ($8.27m) in capital, while the requirement for reinsurers was placed at Rp200bn ($16.53m).
Mergers & Other Activities
The last few years have seen a number of major acquisitions take place in Indonesia, as foreign insurers aim to secure a share of the country’s expanding market (see analysis).
In May 2012 Japan’s Meiji Yasuda Life Insurance increased it’s 5% stake in Indonesia’s Avrist Assurance to 20%, with the Japanese firm further increasing its share to 29.87% in December 2013. This followed the May 2013 purchase of a 40% stake in Panin Life by Japan’s Dai-ichi Life Insurance in a Rp3.3trn ($272.8m) transaction, with the company subsequently renamed Panin Dai-ichi Life. The insurer is part of the Panin Group, which has an array of financial services subsidiaries.
In May 2014 another Japanese insurer, Nippon Life, bought 20% of Sequis Life for Rp4.9trn ($405m). The Indonesian company was founded in 1984 and formed a joint venture with New York Life in 1992, which it subsequently bought out in 2003 and continued its expansion by purchasing MetLife Indonesia in 2005.
Indonesia’s Bank Central Asia (BCA) formed a life insurance company in late 2013 called Asuransi Jiwa BCA, which is 99%-owned by BCA Sekuritas. The company plans to concentrate in the short term on selling to customers of related BCA companies, such as the bank and auto lender. It has accordingly set a goal of reaching Rp3trn ($247.98m) in assets by 2019.
Further to this, Tune Insurance was also planning to start operations in Indonesia in 2015. The company, partly owned by AirAsia and related companies, and active in 36 countries worldwide, said that it was in discussions to acquire a strategic stake in a local insurer. The focus will be on digital distribution, and Tune believes that it will be able to reach much of the country that does not currently have access to insurance products. The company had previously tried to acquire a 70% stake in Batavia Mitratama Insurance, but was unable to gain the approvals for the transaction. In May 2015 Tune Insurance purchased 50% plus one share of Indonesia’s general insurer Asuransi Staco Mandiri for Rp82.86bn ($6.9m), though the acquisition is pending approval from the OJK and Malaysia’s central bank.
In October 2013 the OJK introduced a micro-insurance blueprint in partnership with the state-owned banks, the post office and relevant industry associations. The authority noted that standards for the product range were not yet consistent across institutions. Under the blueprint, the OJK set guidelines for what defines micro-insurance, and provisionally set maximum premiums at Rp50,000 ($4.13), with a maximum payout of Rp50m ($4133).
At the end of 2014, the OJK reported that the country had 6m micro-insurance customers, and that some 53 companies were currently selling micro-insurance products. But in early 2015, AAJI said that it expected that growth in the subsector would be flat that year. It cited low awareness as one of the main problems in selling the relevant products. In 2014 the World Bank loaned the government of Indonesia $500m, part of which will be used to increase inclusion and develop stronger micro-insurance regulations.
Innovation is helping to make products that are both affordable and meaningful to the consumers. Allianz, which began in micro-insurance in 2006 in Indonesia, started selling TAMADERA in 2010, a life product with a critical illness component. Policyholders pay weekly premiums for five years, and their premiums are returned to them in full after that five-year period if no claims are made. In addition to paying out life insurance, it also pays if the policyholder faces one of the covered critical illnesses. In order to make the product work, the company employs an online administration system that allows for online claims and scanning of documents. Most of all, the costs and benefits are straightforward and easy to understand, the benefits target the main concerns of the poor and the price is set so it is affordable to lower income Indonesians.
Some insurers are focusing on providing types of insurance that target specific concerns, such as dengue fever. Treatment of the disease, which can take five days and cost up to Rp2.5m ($206.65), is unaffordable for many Indonesians. Products are being offered that can meet the cost of this illness and be purchased easily. Asuransi Central Asia, for example, sells vouchers at convenience stores that cost Rp10,000 ($0.83) that can be used for up to Rp1m ($82.66) of care. More expensive and multiple cards can also be purchased to get longer or higher coverage. Customers register using their mobile phones and a code from the voucher.
Despite the positive fundamentals supporting growth in the industry, Fitch has warned that the sector is in danger of facing severe exogenous shocks as well as natural disasters. Indonesia suffers earthquakes, tsunamis, floods and landslides. Floods, which strike the capital periodically, have been a particularly important problem in recent years, with damage from flooding in 2011 estimated to be at $3.3bn. In 2013 the capital city was again inundated, leading to damages of around $3bn. The following year Jakarta experienced flooding once again, albeit to a lesser extent, with the damages totalling around $430m.
Major earthquakes in 2004 and 2006 also caused extensive damage of $4bn and $3bn, respectively, according to the Centre for Research on the Epidemiology of Disasters. While risk from natural disasters can be reinsured, and limits can be placed on policies to protect insurers from excessive claims, Indonesia will continue to require extensive coverage.
Moreover, the sector faces structural issues common to fast-growing, developing markets. Given the sophistication of insurance products, training employees can be very expensive, and staffing remains an urgent challenge, with turnover for salespeople at around 40%, according to Asri Natanegeri, vice-president and head of bancassurance at DBS Bank. The lack of skilled workers also serves to drive up wage inflation in the sector.
Indonesia has begun rolling out universal health coverage. On January 1, 2014 free government-funded health care was made available to 48% of the population, with all Indonesians to be covered by 2019 (see analysis). The programme requires people to pay a portion of their salary for coverage, and they can opt to pay more for better coverage. The government will pick up the minimum premium for the poorest, which has been set at Rp19,225 ($1.59) per month. However, the system is currently under-funded and the procedure to obtain treatment is complicated. Despite the challenges, however, the programme is increasing insurance awareness and creating new opportunities for private sector involvement.
Given Indonesia’s expanding middle class and continued GDP growth, more insurance is likely to be sold in the years ahead. However, even as insurers garner more business, there will be challenges for the OJK, as it works to achieve the right balance of regulation to ensure long-term sustainability without limiting growth or worrying investors. The government is expected to approach the issue of reciprocity delicately, watching to ensure that Indonesia will encounter a level regional playing field while also allowing foreign insurers to actively participate in the local market.
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