Global Business Guide Indonesia

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Finance | Opportunities in Indonesia’s General Insurance Sector

With a population of more than 240 million people living in a country prone to natural disasters, yet which is also expected to become ASEAN's largest marketplace for new automobile sales; Indonesia is considered a desirable destination for investments in the general insurance sector. Still, there are local issues to be overcome, such as the low penetration rate of insurance sales and a lack of public awareness about the benefits of insurance coverage; as well, there are obstacles to foreign investors, including adapting to Indonesian culture and building a qualified workforce. Financial education by the government and private sector is now beginning to help Indonesians view insurance as a tool for financial planning and business protection. In addition, foreign investors continue to increase their presence in this promising marketplace.

Opportunities in Indonesia’s General Insurance Sector
The Indonesian general insurance sector has been developing more slowly than the life insurance sector, yet there is great potential for growth, given the current low penetration in Indonesia at 1.2% when compared with that of Malaysia and Thailand at 4% and 3% respectively.

The Financial Services Authority (Otoritas Jasa Keuangan, or OJK), a newly-established independent regulator of Indonesian financial services, indicates that in 2012 total assets of the insurance industry increased 15% to US $67.3 billion. General-insurance assets accounted for approximately 45% of that total; yet, general-insurance assets are growing at a slower pace than life-insurance assets (See The Prospects for Indonesia’s Insurance Industry). According to data from the Indonesian Insurance Institute (AAMAI), vehicle insurance represents 30% of the market with property insurance accounting for 27% and personal accident insurance making up 13%. The Indonesian general insurance sector has been developing more slowly than the life insurance sector, yet there is great potential for growth, given the current low penetration in Indonesia at 1.2% when compared with that of Malaysia and Thailand at 4% and 3% respectively. The non-life niche of the Indonesian insurance market currently represents only 40% of total insurance premiums paid (A.M. Best, Special Report, 2012), although it is expanding rapidly as more Indonesians join the middle class and experience concerns about protecting wealth and guaranteeing a standard of living through products such as health insurance, property insurance and vehicle insurance.

The Regulatory Environment

In Q1 of 2013, the effects of increasing minimum capital requirements, as required by Regulation No. 39 of 2008 and the 2012-2014 Master Plan of the Capital Market and Financial Institution Supervisory Agency (Bapepam-LK), are continuing to result in mergers, acquisitions and partnerships between Indonesian insurance companies and better-capitalized foreign insurers. For 2014 the capital requirements are scheduled to rise to $103 USD million, placing further pressure on the remaining mid-size insurers. The Negative Investment List No. 36 of 2010 allows foreign investors to control up to 80% of non-pension-fund Indonesian insurers, as long as the foreign company has existing operations in a similar business niche. As a result, there has been a steady stream of ventures announced such as that between AXA and Bank Mandiri.

The OJK is to eventually replace both Bapepam-LK and Bank Indonesia regarding regulation of insurance services and financial services, respectively. One of the stated goals of the OJK is to provide the public with financial literacy and advocacy including helping increase consumer and business awareness about using insurance to mitigate risk. The body will also help insurers comply with norms for the international insurance industry envisioned under ASEAN's upcoming free trade agreement in 2015. Further recent insurance regulatory changes in Indonesia include heightened requirements for automobile liability coverage, workers' compensation insurance, compulsory insurance for passenger accidents and air-travel delays, and an earthquake tariff levied beginning in 2010; such changes have spurred Indonesian insurers to form relationships with foreign insurers.

Vehicle Insurance

In 2013, vehicle insurance continues to grow rapidly, due in part to the overall growth in sales of new automobiles based on financing, as well as the Indonesian government's move toward compulsory-insurance for automobiles and motorcycles to be mandated throughout the ASEAN region (See Automotive Industry: Driving Manufacturing). The government has also created a system to cover risks from uninsured motorists, which is funded by a mandatory surcharge on vehicle registrations. In 2012, total automobile insurance premiums collected in Indonesia rose more than 13%, reaching $1.19 billion USD.

Competition among vehicle insurance providers is increasing as more companies have entered the sector. The Association of Indonesian General Insurance Companies (AAUI) lists at least 77 firms now offering automotive insurance. Insurance companies are enticed by the simplicity of these insurance sales and their premium yield, since the coverage is typically only for comprehensive risk and total risk. With an eye on this growing market, foreign investors are forming new relationships with weaker Indonesian insurers in need of increased capital. For example, the 50% partnership deal between Japan's Mitsui Sumitomo Insurance Corporation and PT Asuransi Jiwa Sinarmas announced in 2011 was finally approved in 2012, which greatly increased the company's automobile, motorcycle, health, and general casualty underwriting capability.

Likewise, motorcycle coverage is also increasing, albeit at a slower rate than that of four-wheeled vehicles; as Bapepam-LK insists on stricter loan-to-value requirements for motorcycle financing than car financing, fewer new motorcycles are fully legalized with insurance at the time of their purchase. Although individual losses through motorcycle thefts and collisions are widespread, still, the government's insistence on third-party insurance against bodily injury is driving motorcycles owners to acquire insurance. As an indication of the heightened international profile of Indonesian motorcycle insurers, the Generali Insurance Company recently announced its sponsorship of the MotoGP motorcycle race team and events.

Within automobile insurance in Indonesia, there are opportunities for medium sized insurance players to work with local companies to offer innovative products as well as to share their expertise in underwriting. PT Asuransi Allianz Utama, is positioning itself to become a leading Indonesian auto insurer by using a Western approach to underwriting, by calculating premiums based on the vehicle's make, model and current value as well as assessing individual driver risk. Such an approach is proving popular among Indonesian consumers and presents further scope for more sophisticated underwriting techniques for the future.

Marine, Cargo and Aviation Insurance

General insurance coverage within the transportation sector is also expanding rapidly including marine cargo and marine hull insurance as well as aviation: although aviation insurance represented only about 2.8% of the total general premiums collected in 2012, several industry changes are expected to boost the importance of aviation coverage. As of January 2012, Transport Regulation Number 92 of 2011 requires that airlines compensate passengers for takeoff delays of longer than four hours. This presents an opportunity for insurers, since a handful of airlines have not yet finalized coverage arrangements. Also, air casualty and liability coverage are expected to increase through 2013, as carriers including Lion Air, Garuda Indonesia, and Mandala launch more aircraft and expand routes (See Indonesia’s Commercial Airline Industry). Yet, insurers remain wary, since aircraft claims in 2012 rose significantly faster than premiums measured year-on-year from 2011, due to large payouts regarding recent air disasters and a satellite claim.

Indonesia's general insurance sector is changing and reflecting the transformation of the country in terms of business maturity and consumer lifestyles. Opportunities for premium growth, technology development and efficiency-based gains are attracting foreign investors for joint ventures with local firms, yet previous attempts have highlighted the significant challenges posed in adapting corporate cultures to the fragmented Indonesian marketplace. Multinational insurers also face the task of finding and hiring enough qualified staff while introducing new programs across a large, culturally-diverse nation. Pressured by the government's timetable for increased capitalization requirements and underwriting standardization in advance of the ASEAN agreement pending for 2015, Indonesia’s medium sized and independent insurance companies still present potentially lucrative opportunities to collaborate with international partners that can offer expertise within technology, marketing, product development and risk management to effectively penetrate Indonesia’s still largely untapped general insurance market.

Global Business Guide Indonesia - 2013

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Indonesia Finance Snapshot - Insurance

Total Assets: 853 trillion IDR (2015)
Life Insurance Growth: 17% (Q2 015)
General Insurance Growth: 10% (2015)
Number of Life Insurance Companies: 50
Number of General Insurance Companies: 81 (2015)
Conventional Insurance Penetration : 2.51% (2015)
Islamic Insurance Penetration: 0.08% (2015)
Government Bodies: Bank Indonesia, Ministry of Finance, Financial Services Authority (OJK).
Relevant Law: Presidential Regulation No. 39 of 2014 on the Negative Investment List permits foreign ownership up to 80% in the sector, excluding pensions, and the 2014 Insurance Law introduced increased protection for policyholders.