Insurance Industry in Indonesia

1. Summary

This report will provide an overview of the Indonesian economy and society, detailed insight on opportunities and challenges in the Indonesian insurance industry information. We introduced the industry’s history with great development, and it main challenges will face in Indonesia. Regulations and capital requirements are challenges. Life sector and growing GDP provide tremendous potential. Other prosperous sectors such as trade and manufacturing also indirectly help.

It is clear. With Indonesia’s enormous natural resources, cheap labor and growing middle class, the potential is exceptional. If the challenges can be handled, the opportunities are too big to neglect. Indonesia and its insurance industry is absolutely attractive and I would recommend for future investments.

The report has limitations. This provides general overview of Indonesia based on limited data. Other challenges found but not discuss here are corruption, infrastructure and the legal system. All these are critical to Indonesian development. Indonesia seems to be slowly improving on all these issues. Anti-Corruption in Indonesia are rapidly increasing in range and intensity with more democratic society.

2. Introduction of Indonesia

The country of Indonesia stretches across more than 13,000 islands between the Indian Ocean and the Pacific Ocean. With more than 220 million people, Indonesia has the fourth largest population in the world, behind China, India, and the United States. The islands of Indonesia were formed along a line where two continental plates meet on the ocean floor. The islands are
highly volcanic. The soil around the volcanoes is rich in nutrients, and the rainy, tropical climate along the equator is ideal for farming. Indonesia’s rice paddies produce crops year-round, and other crops include soybeans, sugarcane, and peanuts as well as rubber, coffee, tea, and tobacco. Many of the islands are covered in tropical rainforest, with a rich diversity of plants and animals.

Throughout its history, Indonesia has been a center for trade and exchange of ideas, and the islands still have a mix of traditions today. The Buddhist and Hindu religions traveled to Indonesia from 600 to 1500 CE. In the 1200s, Muslim traders brought Islam, and the religion spread throughout Indonesia, except for the island of Bali, which remained predominantly Hindu. European explorers arrived in the early 1500s, and by the end of the 1600s, the Netherlands (also known as “Holland”) in Europe controlled most of the islands. The Netherlands ruled the islands of Indonesia for nearly 350 years, until Indonesia declared its independence in 1945 after World War.

In recent decades, Indonesia has been viewed as one of Southeast Asia’s most successful highly performing and newly industrializing economies. It is the largest economy in Southeast Asia and a member of the G-20 major economies. It features a developing market economy, with strong influence from the government.

The government plays a vital role by owning more than 164 enterprises. The government controls the prices of many basic products, such as rice, electricity and fuel. Domestic consumption is one of the major driving forces behind the country’s economic growth. Although Indonesia’s economy grew surprisingly fast during the 1980s and 1990s, it experienced considerable trouble after the Asian financial Crisis of 1997, which led to political reforms.

The global financial crisis in 2008- 2009 had a relatively small impact on Indonesia because of its heavy reliance on domestic consumption as the driver of economic growth. Although the economy slowed from the 6 percent growth rate recorded in 2007 and 2008, they managed to withhold a 4 percent growth rate in 2009.

Indonesia outperformed its regional neighbors and joined China and India as the only G-20 members posting growth during the crisis. The government made economic advances under administration of President Yudohoyono, introducing reforms in the financial sector, including tax and custom reforms, the use of treasury bills, and capital market development and supervision. Indonesia’s debt- to- GDP ratio in recent years has declined steadily because of increasingly robust GDP growth. Indonesia is working toward expanding the coverage of their safety net.

The workers will be better protected In case of losing their jobs, government introduced various forms of unemployment insurance. Indonesia has a large economy that many analysts predict will grow further in the future. Especially, they believe the country’s democratic political system and natural domestic market will encourage stable economic expansion.

Indonesia has made great strides in economic growth and development. In the past twenty years, it has achieved it development objectives. The income per capita has risen from US$ 1898 in 2007 to US$ 3509 in 2011.

3. Insurance Industry

Asuransi is an Indonesia word for insurance.Insurance started in the Dutch colonial period, associated with the success in the plantation sector and its related trading business;. Historically the oldest domestic insurance company was established at the beginning of 1912, and later on, the company is known as Bumiputera 1912.During World War II, activities of insurance practically stalled, mainly because of the closure of the insurance companies owned by Dutch and British. In 1984, American International Assurance Co., Ltd. (AIA) made joint venture with the forerunner of Avrist and became the first multinational insurance company. Billion Rp | 2010|.

Life| 183,091 |
Non-Life + Re| 47,931 |
Social + Civil| 168,670 |
Total| 399,692 |

By the end of 2010, there were in total of 46 Life insurers, 91 Non-life & Reinsurers, and 5 Social & Civil and armed forces insurance companies. In Indonesia, insurance regulator and associations are: Ministry of Finance – Insurance Bureau, Indonesia Life Assurance Association, and General Insurance Association of Indonesia. In 2011, the parliament passed a bill to create a new, independent financial regulator, Otoritas Jasa Keuangan (OJK). It will supervise capital markets, insurers, pension funds and other nonbank institutions in 2013 and oversee commercial lenders starting in January 2014.

For the Law and regulations to consider, there are restrictions on foreign shareholders. Under prevailing insurance regulations, at establishment, the foreign ownership of an insurance company must not exceed 80%. Foreign shareholders in an Indonesia insurance sector company must operate in the same area of insurance. Any proposed transfer of shares in an unlisted Indonesia insurance company requires approval of the Ministry of Finance. Also, anti-Monopoly Law prohibits any mergers, consolidations and share acquisition which could result in a monopoly situation or uncompetitive business practices. Insurance companies must also comply with a risk based capital adequacy framework with certain minimum capital requirements.

Form above graphs, we can see Indonesia is an expanding market for insurance companies. Here are some supporting factors found in maintaining the growing performance: Frist, there is strong domestic economy. About 80% of Indonesia’s economic activities are consumed domestically. Economic growth is projected to remain robust in 2012 with 6.3% – 6.5% forecast.

Indonesia has gone through the 2008 global financial crisis relatively unscathed, and this should help to provide some experience and confidence in handling similar situations. Second, there is low penetration of insurance coverage and the young demographics of population. By 2010, GWP to GDP ratio only reached 2.0%, and Life GWP to GDP ratio was 1.2% which was one of the lowest in comparison to Asian neighbors. The median age of population of 28 years supports business growth, and among the youngest clusters in the region.

Life sector also support the growth of insurance industry. The exponential
growth in life insurance was a result of increased levels of education and awareness among the growing middle class;. The popularity of the asset class as a platform for savings and investments was another pulling factor influencing sales.

Besides, stable growths in GDP coupled with rising spending on personal property, and expanding government outlay, have primed the growth of the non-life insurance sector.

4. Opportunities and Challenges

The outlook of Indonesian insurance industry remains stable, but with caution. The new capital requirements shift the industry from the current state of fragmentation to a sector of scale: Regulator imposes the earliest minimum capital requirement of 70 billion Rp by the end of 2012, followed by 100 billion Rp by the end of 2014, however, about 30 companies (20% of industry participants) have not met the criteria by the end of 2010; Such a regulatory change creates opportunities for large foreign multinationals with significant capitals to quickly re-enter the market, but reinforces the competition;

Those with large capital are able to dominate market share, and the rest are struggling to survive. The lack of capital also results in majority of reinsurance premiums going to overseas, highlighting the opportunities lost. (Table 1 and 2).

The potential of micro insurance is an exciting prospect, finding the correct method to get the product to consumers surely pay dividends. With nearly half the population living in rural areas, together with regulatory support from government and raising awareness, the micro insurance is another untapped sector with great potential;.

However, the types of product on offer have been limited with main focus on life insurance and health coverage in the form of vouchers for one time coverage. Development of simple, affordable and easily understood products for lower income class is encouraged, but requires talents with local knowledge which is currently lacking of. Product distribution is another key challenge because of Indonesia’s diverse population, distributed across a vast archipelago.

The Shari’a-compliant insurance (Takaful) industry is in a state of flux. In other predominantly Muslim countries, such as Malaysia, the Islamic insurance market has proved a roaring success, and the global takaful industry is predicted to growing at 20% annum. However, despite a plethora of offerings in Indonesia, the world’s most populous Muslim nation, Islamic insurance concept is still in its infancy. Lack of a formalized structure is the key issue. Indonesia’s regulator is opting for equality between Shari’a-compliant and conventional financial products in a balanced and healthy competitive environment, enabling Islamic insurance to grow in line with the conventional insurance.

5. Conclusion and Recommendations.

Indonesian insurance industry is stable, considering the large business growth potentials, sound capitalization, adequate profitability, and limited impact from the global financial crisis, which are also supported with stable macroeconomic conditions and recovering capital markets. Although the market size is still small compared to other countries like China or India, it has been growing steadily since pre-Asian crsis. Definitely it will continue the growth.

For the better development of Indonesia insurance industry, there are some recommendations. Insurance companies should enhance their market position. Since the company’s market share in the industry could determine the strength of its business franchise and brand image, stable premium growth rates and number of policy holders would be used to measure its ability to grab potential customers and expand its business. Besides, they should build a strong distribution channels which can create economies of scale of its product sales. Also, it should enable itself to maintain competitive cost structures.

In addition, the insurer’s investment strategy should also provide contribution to total company earnings and at the same time maintain the risk of its portfolio at a manageable level. Lastly, explore more on micro insurance and takaful insurance, as it already confirmed as a trend for future Indonesia.

Considering the factors mentioned above, as well as improving macroeconomic conditions and stable interest rate environment, I believe that the industry would have the capacity to grow while continuing the consolidation process and improvements of is necessary components, such as risk management, underwriting, IT system and distribution channels…etc

Appendix

References :
1) http://www.calperfs.berkeley.edu/learn/k-12/pdf/2010/Gamelan_Cudamani_Study)Guide_1011.pdf 2) http://en.wikipedia.org/wiki/Indonesia
3) http://www.fdi.net
4) http://www.bkpm.go.id
5) http://eiti.org/Indonesia
6) http://www.ausaid.gov.au/country/indonesia.cf
7) https://www.cia.gov/library/publications/the-world-factbook/geos/id.html 8) http://www.aseansec.org
9) http://www.globalis.no/Land/Indonesia
10) http://www.landsider.no/land/indonesia/fakta/okonomi/ 11) CIA- The World Factbook ,
https://www.cia.gov/library/publications/the-world-factbook/geos/id.html 12) OECD Economic Surveys, http://www.oecd.org/document/60/0,3746,en_2649_34573_46261052_1_1_1_1,00.html 13) UN Partnership for Development http://www.un.or.id/sites/default/!les/UNPDF%20INDONESIA%202010-2015.pdf 14) Factsheet on Indonesia, Australian Government, 2012.

15) Background Notes on Indonesia, U.S. State Department, The United States Government 16) “Economic Oligarchy Hinders Indonesia”, September 16, 2010, Jakarta Post. 17) “Indonesia: Investing for Growth,” HSBC Global Research, March 16, 2010. 18) “International Business Indonesia: Challenges and Opportunities,” 2010/2011, International Business, Norway.

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