With GDP growth at 6.1% in 2010 and forecast to reach 6.6% in 2011, on the back of buoyant consumption, expectations are high for insurance in Indonesia.

The industry has enjoyed stable growth since the 1997-98 Asian financial crisis, particularly over the past five years, with gross premiums growing an average of 23% annually since 1996 to reach a total of Rp133.5trn ($16.02bn) in 2010, a 25% year-on-year (y-o-y) rise over 2009 levels. Assets have grown by 21% on average, to Rp399.6trn ($47.95bn) in 2010, a growth of 24% on 2009. Total industry assets, which include social insurance rather than just life insurance assets, are near the $35bn mark, while total investments are above $30bn. Total insurance penetration in 2010 was the lowest in South-east Asia at roughly 1.7%, a little above the 1.4% in 2008. By comparison, the penetration rate in Malaysia was 5.1%, 3.7% in Thailand, 11.1% in South Korea and 9.2% in Japan. During the financial crisis of 2008-09, however, penetration managed to remain constant. Underwriters hope that as disposable income grows, the middle class – now estimated at up to 40% of the population – will purchase more coverage.

With a strong recovery that began in the second half of 2009, investment-linked products were performing remarkably well in 2011, following strong stock market growth. Long regarded as one of the region’s most vulnerable insurance markets due to an over-reliance on unit-linked products in life insurance, Indonesia did not end up experiencing the sharp downturn that many widely predicted (see analysis).

FIGHTING FRAGMENTATION: As the biggest potential market in South-east Asia and with the highest long-term potential for growth for global insurers, many eyes are on Indonesia. For instance, British insurer Prudential, for whom Indonesia was one of the main attractions in its attempted buyout of AIA Indonesia in 2010, sees the country as its second-most-promising Asian market after Hong Kong. The industry regulator, the Insurance Bureau, segregates the market between life and non-life. Despite the strict separation between these two segments, there is overlap on products such as health insurance (see analysis). In 2011, 126 underwriters shared the market, 44 in life and 82 in non-life, with four small reinsurers handling limited levels of risk reinsured domestically. Theoretically, there is still room for consolidation, and Swiss Re, the world’s largest reinsurer, has forecast more mergers and acquisitions.

FOREIGN ENTRANTS: Although the market saw its fair share of mergers and acquisitions in 2010, instead of consolidating the industry, this has brought financially strong players into the market. No new licences have been awarded since 2005. Rather, foreign entrants have bought their way into the market and restructured small local underwriters. One example is Zurich Life, which bought out Mayapada Life in 2010 as a means to acquire a licence. It is now in the process of completely restructuring the business, closing the group life policies that constituted most of the underwriter’s business and launching individual policies in July 2011.

While foreign underwriters agree that the market remains small for the moment, most major brands have positioned themselves to take advantage of the longer-term potential. Meanwhile, the return on investment for general insurance grew a healthy 19% in 2010, but remains at Rp6.75trn ($809.88m), far lower the Rp25trn ($3bn) for life. 17 international underwriters currently operate in non-life joint ventures in the country, including Allianz Utama Indonesia, Asuransi AIU Indonesia and Tokyo Marine Insurance.

Major local interests such as Tugu Pratama Indonesia, Asuransi Sinar Mas and Asuransi Central Asia (ACA) are some of the leading players. Three of the 82 non-life companies are state-owned, including majority-state-owned Asuransi Jasa Indonesia (Jasindo), Artarindo and Asuransi Ekspor Indonesia.

MAJOR PLAYERS: The largest provider of life insurance remains Asuransi Jiwa Mega Life with 17.2% of the market, followed by Asuransi Jiwa Sinar Mas (15.5%) and Prudential Life Insurance (10.5%). Prudential in particular has been growing rapidly, collecting Rp10trn ($1.2bn) in premiums from its client base of 1.14m. The largest non-life underwriters in terms of gross premiums are Asuransi Jasa Indonesia, with a 10.3% market share, Asuransi Sinar Mas (10.2%) and Asuransi Astra Buana (7.3%). Small and medium-sized enterprises (SMEs) still dominate the ranks of licensed underwriters, which has created uneven operating standards across the industry. As a means to confront this, the OECD has called for major upgrades in the IT systems of insurance SMEs. Operational costs also tend to be higher for any underwriter seeking “national” coverage, due to Indonesia’s sheer size. A leading life insurer like Prudential is a good example. It maintains seven sales offices in major cities in western Indonesia, as well as 202 agency offices and 62,000 agents.

REINSURANCE: Domestic reinsurance capacity remains limited. Underwriters face a legal cession requirement of 10% to domestic reinsurers, but only around 20% of reinsured risk is placed domestically. The main problem is the lack of capacity, with domestic reinsurers only required to hold Rp200bn ($24m) in equity. As a result of these factors there have been repeated calls for a merger of Tugu Reasuransi Indonesia (Tugu Re), Reasuransi Internasional Indonesia and Nasional Re, the three state reinsurance enterprises.

However, profits in 2010 were especially strong for these mid-sized reinsurers, as well as for privately held Maskapai Reasuransi Indonesia, growing an aggregate 21.8% in 2010. Reinsurers have capitalised on a shift in their investment portfolios, which were becoming increasingly overweight with stocks and mutual funds. Tugu Re, a mid-sized private reinsurer, saw a 64% jump in profits to Rp18.1bn ($2.17m) in 2010.

REGULATORY REFORM: The Insurance Bureau, which regulates the industry, is a part of the Capital Markets and Financial Institutions Supervisory Agency (BAPEPAM-LK). As of mid-2011 details were still emerging about plans to create a new independent Financial Supervisory Authority. This new authority will be independent from the Ministry of Finance and will regulate all financial services institutions, including banks, when it commences operations in 2013.

“The aim is to create a more stringent regulator,” Hendro Utomo, the vice-president of financial institutions ratings at PEFINDO, told OBG. As a result, the room for arbitraging regulatory frameworks between insurance and banking will narrow. The blueprint for the industry, known as the Indonesian Insurance Architecture (IIA), sets out clear goals of raising capitalisation and improving competition. It is gradually raising capital requirements for underwriters, from Rp40bn ($4.8m) in 2011 to Rp70bn ($8.4m) at the close of 2012, and to Rp100bn ($12m) by 2014. It is also changing the market to a risk-based capital framework, to be fully enforced in 2012. The Rp100bn ($12m) requirement may be a discouragement for new players in an already crowded market, but there is no shortage of interest in buying out existing licence holders. BAPEPAMLK estimates that 46 of the 87 general insurers still have less than Rp100bn ($12m) in capital. Recapitalisation is vital to raise the industry’s capital base and improve risk retention. Market access for foreign underwriters is more straightforward than in most countries in the region, with foreign investors allowed to own up to 80% of an insurance company – due to be raised to 100% in 2012. Foreign underwriters active in the market prior to the 2007 legislation have been allowed to continue operations. Thus, for example, Manulife is able to own 99% of Asuransi Jiwa Manulife Indonesia.

BAPEPAM-LK has begun stringent “fit and proper” tests, which require more transparent financial statements and more in-depth auditing. A new e-reporting system, set up with the industry associations, should be in place by the end of 2011. This will speed up disclosure and improve visibility for the industry and the regulator. Investment regulations were tightened in 2010 to insulate the industry from price volatility in asset classes. The industry’s aggregate investment income grew 26% in 2010 to Rp356.3trn ($42.76bn), following strong returns on the capital markets, with life insurance investments accounting for a full Rp168trn ($20.16bn). Investment portfolios are dominated by government securities, which amounted to Rp81.61trn ($9.79bn) in 2010, alongside Rp73.82trn ($8.86bn) in bank deposits, Rp63.94trn ($7.67bn) in investment funds as well as Rp62.81trn ($7.54bn) in stocks.

UNDERWRITERS: Underwriters are now allowed to place only up to 10% of their assets in time deposits with one particular bank, down from the previous 15%. The regulator has also outlawed the use of any new discretionary mutual funds, given their history of fraud. The ceiling for investment in a particular asset class has been set at 20% of all assets, excluding bank deposits.

Non-life insurers, which tend to have healthy operating profits, place up to 90% of their assets in low-yielding-but-liquid bank deposits and government bonds. Life insurers, however, often rely more on investment returns to offset lower operating profits, placing their assets in liquid stocks, mutual funds, and corporate and government bonds. The revised date of 2014 for the enforcement of the Rp100bn ($12m) requirement, as well as looming liberalisation within ASEAN by 2015, has been driving new rounds of capital-raising. In an effort to raise Rp150bn ($18m), Panin Financial, a subsidiary of Panin Bank, put 34% of its equity on the market in the second quarter of 2011.

The underwriter recorded a 20% increase y-o-y in profit in 2010, with premium revenue of Rp1.24trn ($148.8m). Another leading player, Tugu Pratama, has twice deferred plans to become a publicly-listed company, although it is continuing to look to sell 20-30% of its equity in new shares through an initial public offering (IPO), at such time when its standing in the market is seen as favourable. In addition, Asuransi Jiwasraya is also widely expected to launch an IPO in 2012, although it had yet to publicise such plans by late 2011.

FOREIGN PLAYERS: Both domestic and foreign investors are keen on preserving their majority stakes in underwriters. Although few new foreign players have entered the market in recent years, insurers, particularly Asian insurers, have been watching the market closely. Meanwhile, there have been a number of acquisitions in the life segment (see analysis).

The $10bn bundle of contracts signed in April 2011 between China and Indonesia with regard to infrastructure, cement, property and agriculture projects is sure to bring a sharp rise in activity for Chinese insurance underwriters, which are widely expected to expand their presence in the coming years. At the signing, Chinese Premier Wen Jiabao announced that Chinese banks and insurers would be rapidly increasing their presence. Insurance groups from India, Thailand and Vietnam are also seeking market access in Indonesia, either through ventures with private equity or through local groups. With new investment and increased mergers and acquisitions, the expectation is that the insurance industry’s weight in the capital markets will grow. There is certainly space, as insurance currently accounts for a modest 6% of the financial sector’s assets, compared to the 80% of commercial banks.

AUTO: Property and motor insurance together still generate over 60% of total non-life premiums, with motor insurance alone accounting for 45% of that. But given the absence of mandatory motor insurance and the limited incentives for lower-income owners to insure their vehicles, the segment falls short of its potential. Motorcycles are perhaps the most poorly covered, with only two underwriters offering motorcycle insurance. In addition, down payments on motorcycles are as low as Rp500,000 ($60), while default risks remain high.

Policies tied to lease financing have been the key driver in the growth of motor protection. Given that such automotive credit is dominated by auto leasing companies rather than banks, agents still play a leading role in this segment, in contrast to neighbouring countries, where the bank insurance model ( bancassurance) has made more inroads.

PROPERTY: The main players in property insurance are Asuransi Jaya Proteksi and Jasindo, and underwriters that have equity links to major banks, such as Assuransi Central Asia (owned by Bank Central Asia), Asuransi Sinarmas (linked to Bank Internasional Indonesia) and Panin Insurance (owned by Panin Bank).

Leading banks in mortgage and real estate financing, which have non-exclusive bancassurance relationships with a number of underwriters, include Bank Tabungan Negara and Bank CIMB Niaga. Tugu Pratama Indonesia remains the leading player on high-rise property insurance. Agents still dominate distribution in the segment, given the limited growth of housing credit property insurance. Growth has been driven by a healthy amount of construction activity in urban centres and a growing awareness of the dangers of fire and other natural disasters. Both life and non-life companies run insurance awareness days as a means to broaden market penetration, but total premium growth has remained sluggish due to highly competitive pressures on rates. Insurance tariffs have been poorly enforced, as has the crackdown on excessive discounting, although both the regulator and the companies are now becoming more stringent. Many private underwriters are watching upcoming large infrastructure projects that have been structured as public-private partnerships by the administration of Susilo Bambang Yudhoyono.

ISLAMIC INSURANCE: The world’s most populous Muslim nation has a limited, but rapidly growing, sharia-compliant insurance sector.

Takaful, or Islamic insurance, assets were only Rp4.5trn ($54m) in 2010, 2% of the insurance industry’s total, according to BAPEPAMLK figures. However, this was growing fast, with a 47.6% y-o-y rise in 2010. Takaful investments, meanwhile, reached a mere Rp2.38trn ($285.6m), 2.3% of the industry’s total. Takaful contributions grew a very healthy 35.7% to Rp3.2trn ($384m) in 2010, albeit this is less impressive than the 63% y-o-y growth recorded in 2009.

This niche market, which many expect to grow quickly in the future, has attracted much attention; 18 non-life and 13 life underwriters offer some form of the sharia-compliant product, and underwriters have a dedicated association. BAPEPAM-LK has sought to support the development of the segment by issuing new takaful regulations in January 2010, establishing clear guidelines and a separation of assets and obligations.

DISASTER READINESS: Despite being prone to natural disasters, Indonesia maintains a manageable claims-to-premiums ratio of around 50% in non-life policies. Risk retention by non-life underwriters is relatively high, averaging 80% for motor and property insurance and around 60% for other non-life products.

The only significant natural disaster coverage in the country is managed by a pool of underwriters that cede 5% of their premiums in Jakarta and 25% in other regions to earthquake reinsurer Asuransi MAIPARK. This limited capitalisation has drawn criticism and there have been requests that contributions be raised to 50%, given the highs risks in country that regularly ranks at the top of global earthquake lists. For instance, one earthquake in September 2009 caused 1200 deaths and $2.3bn in damage. Of this only $50m was insured. In March 2010 the General Insurance Association issued the latest earthquake insurance tariffs, with rates split into five different zones. At 2.5%, Indonesia’s general earthquake deductible is the highest in South-east Asia, followed by the Philippines at 2%.

Momentum has been gathering for the creation of an ASEAN-wide natural disaster insurance pool, an initiative enthusiastically backed by Indonesia and the Philippines. Meanwhile, in addition to the Rp50bn ($6m) disaster management fund already in place, the Ministry of Finance is seeking parliamentary approval for another Rp150bn ($18m) to complement the fund – out of a total of the Rp4trn ($480m) allocated to disaster management in the 2010 budget.

REACHING CLIENTS: The industry’s distribution channels are still dominated by agents, who generated 53% of premiums in 2010, far outstripping bancassurance’s 22%. Agents have played a key role in insurance, but historically loose standards have plagued the industry. BAPEPAM-LK is now forcing all agents to be certified by July 2011. Both general and life insurance companies have been running such drives. The Indonesian Life Insurance Association had certified 250,000 agents by mid-2011 and expects to double this number by 2012.

The process of agent certification now under way is bringing about a reduction in the total number of agents on the market. Oemin Handajanto, the president-director of Zurich Topas Life, estimates that 70% of agents work part-time and are reluctant to spend the Rp350,000 ($40) needed to get their certification. After all, turnover in Indonesian agents is notoriously high. Some insurers are subsidising the cost for their more committed agents, but the pool will likely shrink by 2012. Costs associated with bancassurance have also been growing since new rules were issued in 2010, which mandated that each bank branch selling investment-linked insurance products have at least one certified agent. While certified bank staff can still sell basic life insurance or health products, the operating costs of selling unit-linked insurance has risen.

OUTLOOK: The Indonesian market has fast emerged as a key battleground for the world’s largest insurers, particularly in the more profitable life insurance segment. Planning for the long term, underwriters see unique promise in this market, which has the potential to be the largest in the region. Much recent activity within the market has been in line with this long-term investment view, adding to the dynamism of a still overly fragmented market, particularly in the non-life sector.

In the future, insurers are set to increasingly adopt a multi-channel distribution approach. Furthermore, if initial forays into microinsurance prove to be successful, the Indonesian market will not only grow at a faster rate but may also offer a number of useful lessons for other lower-income emerging markets in Africa or Asia.