Growing affluence and the arrival of foreign companies means that Indonesia’s insurance market is poised to soar to new heights.
Like other elements of its financial services industry, Indonesia’s insurance sector is reaching a new phase in development. With premiums showing year-on-year growth of 15.5% in the first half of 2012, it’s clear there is already significant upward momentum that’s likely to continue with growing affluence.
With insurance penetration at just 1.7% of GDP in 2011–the lowest in Asia –the market is still in its infancy when set against the 8.1% of the US or 11.8% in the UK. However, for a truer picture of Indonesia’s insurance potential, a better comparison might be with nearer neighbours Singapore, Malaysia and Thailand where the markets are more mature and populations lower, but the penetra- tion over 4%. This can only mean that as risk awareness grows, demand for insurance cover is set to take-off.
Given the natural disasters to which Indonesia is prone, there has always been an insurance need, but it is only now, with grow- ing prosperity, that more have the means to pay for protection. This has meant interest in a growing range of products, including life insurance, which has seen premiums grow faster than for non-life products in the last 10 years. However, there is room for expansion, as only 16.75 million have life cover, though this is substantially upon the 11.32 million policyholders of 2009. Despite fears that the prevalence of unit-linked products might cause instability in the sector, given the current strength of the stock market they remain first choice with the public.
Foreign companies are increasingly likely to see the Indonesian insurance market as an attractive opportunity, given its under-penetration, and slowing growth and maturing markets else- where.
In the non-life sector, motor insurance dominates, with premiums growing hand-in-hand with affluence. However, since motor insurance is not mandatory and therefore not taken out by lower income earners, market potential is not too great.
Property insurance is increasingly popular, driven by new con- struction in urban areas, and a growing awareness of risk from fire and natural disasters.
The development of an insurance-based health care model for the country has seen the emergence of health cover, which now provides cover for around two thirds of Indonesians. However, though the aim is to provide a universal scheme, implementation has been patchy. The limited nature of the cover provided has led private companies entering the market to offer policies to middle and upper market segments.
Despite having the largest Muslim population in the world, shar- ia insurance premiums make up just 5% of the total market, which means Indonesia is ready to become one of the fastest-growing markets for sharia financial products.
Though Indonesia is prone to natural disasters, given the limited capitalisation of many re-insurers, catastrophe cover is not widely available or taken up. This means that there is often relatively little protection if disaster does strike. For instance, in September 2009 a single earthquake caused 1200 deaths and $2.3 billion USD of damage, of which only $15 million USD was insured.
With over half of Indonesians living on less than $2 USD a day, there is a growing interest in microproducts with limited cover but low premiums. However, with little credit information about many borrowers, managing high levels of defaults is a challenge. What- ever the product, the channel to market is traditionally insurance agents, who in 2010 generated over half of the premiums. How- ever, low professional standards led the government to bring in legislation that required all agents to be certified as of the middle of 2011. This saw a reduction in the number of agents, many of whom were working only part-time and reluctant to spend the $40 USD needed for certification.
Both life and non-life products are offered by a wide range of insurance companies, and though there has not been wholesale consolidation in the marketplace, an increase in minimum capital requirements is likely to trigger a wave, as weaker or smaller insur- ers are forced to get out of the market or merge to survive. It also makes them vulnerable to foreign insurance companies like British insurers Prudential, who are viewing the South-East Asian market with a much interest. They are not alone. With foreign ownership of Indonesian insurance companies running at 80%, significantly higher than in other developing Asian countries like India and Thai- land, outside investment is sure to play a major role in the long-term.
The introduction of a new regulation authority and tightening of controls should lead to growing confidence in a sector where transparency and public disclosure have not always been as good. With Indonesia potentially a new battleground for some of the world’s largest insurers, this should see the development of more products, particularly the development of an increasing number of micro-insurance products targeted at the lower income consumer market. The development of alternative sales networks will further energise the market. And of course, the market will be driven for- ward by growth generally, which will enable more of Indonesia’s 240 million population to protect themselves from risk.