Industry Attractiveness

The Indonesian insurance industry expanded significantly between 2009 and 2013, despite being in the early stages of development. It recorded a CAGR of 24.1% in terms of gross written premium, and rose from IDR88.5 trillion (US$8.5 billion) in 2009 to IDR209.5 trillion (US$20.2 billion) in 2013.
The growth was primarily driven by strong demand for investment-linked insurance products, such as unit-linked and pension insurance, mandatory products offered by large insurers, a strong economic performance, a growing middle-class population, increasing passenger car sales and increased healthcare expenses. These factors are also expected to remain buoyant and the Indonesian insurance industry’s gross written premium is projected to grow to IDR413.8 trillion (US$32.7 billion) by 2018, at a CAGR of 14.6%.
The insurance industry underwent major regulatory changes between 2009 and 2013. Otoritas Jasa Keuangan (OJK) made regulatory changes, such as requiring large insurers to offer microinsurance products, and an increase in minimum capital requirements, in January 2013, in response to the growing need for an independent regulator for the banking and insurance sectors,
These new regulations could trigger increased merger and acquisition activity in the industry, as smaller companies may find it difficult to meet the new capital requirements, while larger companies will look to increase their market shares.
The International Monetary Fund (IMF) projects robust economic growth for Indonesia over the coming years. Indonesia’s GDP is projected to grow at annual rates of 5.4%, 5.8%, 6.0%, 6.0% and 6.0% respectively during 2013-2018. This strong economic growth, coupled with a rising capital market, is likely to have a positive impact on the Indonesian insurance industry.
Penetration levels in the Indonesian insurance industry are also low, indicating scope for insurers to grow. Life insurance penetration in Indonesia stood at 1.74% in 2013, while the non-life, and personal accident and health segments recorded 0.39% and 0.13% respectively. The low penetration of insurance products is primarily attributable to a lack of public interest in investing in insurance products to manage risk. This creates opportunities for both potential entrants and existing companies in the industry. With the Indonesian population reaching 251.2 million in 2013, and an estimated median age of 28.9 years, there is significant growth potential for both life and non-life insurance products.
The industry’s robust growth was mainly propelled by demand in the life segment. Unit-linked insurance products became popular during 2006-2013, driven by their flexibility and guaranteed fund value at maturity, along with the benefits of the cover and the strong performance of the Indonesian capital market. Moreover, demand from middle-class consumers is growing as they increasingly use insurance as an asset class for investment. The regulator’s proposal to widen the scope of unit-linked products to sovereign bonds and real estate investment trusts, as well as multinational companies’ bonds, in which Indonesian companies have a stake, is expected to ensure further growth in the individual life category.
At the end of 2012, there were 130 insurers and four reinsurers operating in Indonesia. Of these, 86 were non-life insurers and 44 were life insurers. The life segment remained highly concentrated, with the leading 10 insurers accounting for 87.9% of the segment in 2012. The non-life and personal accident and healthcare segments were more fragmented and competitive, with the top 10 providers accounting for 54.5% and 55.1% of the respective segments in 2012. The four reinsurers are state-owned.
It is mandatory for all insurers to take out treaty reinsurance for premiums of each business line from any of the four domestic reinsurers. If a domestic reinsurer fails to provide treaty reinsurance, the insurers can take treaty reinsurance from an offshore reinsurer. If an insurer has insufficient treaty reinsurance or it the type of risk is no covered, only then can the insurer obtain facultative reinsurance. The country is also vulnerable to natural disasters such as floods, earthquakes, tsunamis and volcanic eruptions. Floods were the most common natural disaster between 2009 and 2013.
The government is planning to merge the four reinsurers into a single reinsurer: PT Asuransi Ekspor Indonesia (ASEI). This will enable the industry to have a single major reinsurer with huge capital and assets. With a large capital base, the newly created reinsurer will be able to share high-risk premiums for natural disasters.

Segment Outlook

The Indonesian life segment’s gross written premium grew at a CAGR of 29.1%, from IDR57.6 trillion (US$5.5 billion) in 2009 to IDR160.0 trillion (US$15.2 billion) in 2013. The growth was generated largely by unit-linked and endowment products, encouraged by the country’s favorable business and economic conditions. The strong economic growth recorded following the global financial crisis, was largely due to Indonesia’s relatively young (and growing) working population and the growing popularity of unit-linked products. The number of polices sold through linked business increased from 2.4 million in 2009 to 4.4 million in 2013, at a CAGR of 15.9% in that period.
Indonesia’s favorable demographic factors included increased life expectancy from 69.7 to 70.7 years from 2009-2013, a large urban population base of 51.4% in 2012, and the rising middle-class population. These positive demographic factors are likely to drive the growth of life insurance products such as unit-linked and pension life products up to 2018. The number of linked business policies sold is projected to rise from 4.4 million in 2013 to 6.8 million in 2018, at a CAGR of 9.0%. The number of pension life insurance policies sold is expected to increase from 3,887 in 2013 to 4,520 in 2018. Endowment products were the largest in terms of gross written premium, accounting for 62.4% of the life segment in 2013. The category grew at a CAGR of 21.9% to reach IDR33.5 trillion (US$3.2 billion) in 2013.
Indonesia had a relatively low insurance penetration rate of 1.7% in 2013, yet significant growth opportunities existed in the segment that attracted multi-national insurers such as Dai-Ichi Life and Mitsui Sumitomo Insurance. These insurers entered the country between 2009 and 2013, observing the rapid growth of the Indonesian insurance industry and limited growth prospects in their domestic markets. Growth will be driven by new product development, especially in the pension and whole life categories, increasing the attractiveness of life insurance to the large population. Indonesia’s strong economic outlook and consumer behavior to save for the future is also expected to encourage consumers to invest in long-term savings products such as wealth management and insurance policies.
Indonesian Islamic insurance (Takaful) recorded a strong premium growth between 2009 and 2013. Penetration of less than 2% is recorded for Takaful products, despite Indonesia having the world’s largest Muslim population. A growing range of Sharia-compliant insurance products is available, and the country’s large rural population is most likely to purchase these products. Education and increased awareness among the group is vital for takaful to achieve its full potential.
The IMF projects robust economic development for Indonesia at a CAGR 5.8% up to 2018. This strong economic growth and a rising capital market are likely to have positive impact on the Indonesian insurance industry. The Indonesian government’s favorable regulatory climate for foreign direct investment allows 80% foreign ownership, which is likely to encourage global investors to participate in the high-profit-margin insurance industry. The government took several steps after the global financial crisis in 2009, enacting initiatives to improve liquidity and stabilize the financial markets, including increasing the deposit insurance guarantee from IDR100 million to IDR2 billion and decreasing the bank reserve requirement – these initiatives helped the country to receive higher foreign investment.
Demand in the life segment is expected to continue, as increased awareness levels, product innovation and relatively high returns on investment are predicted to further increase sales of unit-linked, pension, endowment and other life insurance products. The regulatory authority’s proposal to widen the scope of unit-linked products to sovereign bonds and real estate investment trusts, as well as Indonesian-invested multinational companies’ bonds, is expected to ensure further growth in the individual life insurance category.
A key challenge for life insurance companies operating in Indonesia will be changes in the country’s regulatory environment, which will increase the required financial stability of insurers. These new regulations could trigger increased merger and acquisition activity in the industry, as smaller companies find it difficult to meet the new capital requirements, while larger companies look to increase their market share. The segment is expected to record a CAGR of 15.8% to reach IDR333.6 trillion (US$26.4 billion) by 2018.

Distribution Channels

The life segment’s gross written premium grew at a CAGR of 29.1% between 2009 and 2013. As a consequence, insurers employed a number of distribution channels to market their products efficiently. Aside from selling life insurance products directly to customers, distribution channels such as insurance brokers, bancassurance, agencies, e-commerce and others enabled life insurers to generate business.
Agencies generated 48.6% of the gross written premium from new business in the life segment in 2013. This strong preference was primarily due to Indonesia’s geography – the country is made up of a large group of islands, which require a broad network of agents to sell, promote and manage insurance products. The channel offers insurers a large client base, strong brand reputation and an existing sales force. Agency networks also have close relationships with insurers and pension providers, and operate according to the interests of the insurer that they work for. Leading companies, such as PT Asuransi Jiwa Sinar Mas, employed a large network of more than 12,000 agents as of September 2011.
In an attempt to remain competitive and retain market share, life insurers are increasingly focusing on developing a qualified team of insurance professionals and agents. Any sustained professional development is challenged by the high risk of rival insurers stealing the best-performing agents and, as a result, the number of policies sold through agencies is expected to increase from 1.4 million in 2013 to 2.2 million in 2018, after recording a CAGR of 9.8%.
Bancassurance was the second-largest distribution channel, accounting for 21.1% of the gross written premium from new business generated in the life insurance segment in 2013. The number of policies sold through bancassurance increased from 533,128 in 2009 to 596,498 in 2013, after registering a CAGR of 2.8%.
Bancassurance was first introduced in Indonesia in the mid-1990s by Bank Lippo through a strategic alliance with sister company Lippo Life, and marketed life insurance products under the Warisan brand. However, since then, several insurance companies have partnered with local banks to cross-sell insurance products through the banks’ large retail networks. Sun Life Financial Indonesia, an Indonesian life insurance provider, formed strategic alliances with banks such as Standard Chartered Bank, Bank Central Asia, Bank Negara Indonesia, Citibank and GE Money. Through these banks, Sun Life sells products such as education insurance, term insurance, and unit-linked products.
Other insurance companies with established co-operation agreements with banks to market life insurance products include Asuransi Manulife, AIG Life, Asuransi Jasindo, Asuransi Jiwasraya, Axa, Alliance, and Asuransi Jiwa Mega. The development of the bancassurance channel was primarily driven by the growing number of working people buying insurance products in banks rather than from agents due to reasons such as convenience, competitive pricing and the strong reputation of banks in the country.
Direct marketing was the third-largest distribution channel in the Indonesian life segment, accounting for 12.9% of gross written premium new business in 2013. Although traditionally favored by large insurance companies, the channel is becoming increasingly popular among small and medium-sized insurance companies due to its relatively low costs. The number of policies sold directly to customers increased from 277,722 in 2009 to 352,333 in 2013, which is expected to reach 486,277 in 2018.
The e-commerce channel intensified the demand for insurance products as a result of its convenience and cost advantages. Online sales of insurance products recorded the fastest growth in the Indonesian life insurance segment between 2009 and 2013. The number of policies sold through e-commerce increased from 19,589 in 2009 to 25,097 in 2013, whereas the number of distributors increased from 120 in 2009 to 166 in 2013.
The agencies channel is expected to continue its domination of the life segment. The market shares are expected to decrease for agencies from 48.6% in 2013 to 45.6% in 2018 and bancassurance from 21.1% in 2013 to 16.9% in 2018. The decrease is expected due to the growing popularity of the e-commerce and brokers channels.

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