Capital requirements to drive tie-ups between local and foreign insurers in Indonesia

Despite the talk of restrictions on foreign investment in insurance in Indonesia, international companies remain interested and active in the sector. A number of significant deals were completed in 2015, with others in the works, suggesting that the market’s potential outweighs the risk of ownership limits being put in place. For local insurance companies, capital pressures and competition in the sector are increasingly driving them towards deals with foreign insurers. While the recent international deals have been well below the current 80% ceiling for foreign ownership, majority acquisitions could face questions if the limit was reduced to 49%, as some in the country have suggested.

Tuning In

In May 2015 Malaysia-based Tune Insurance purchased 50% plus one share of Indonesia’s Asuransi Staco Mandiri (ASM), a general insurer, for Rp82.86bn ($6.9m). Founded in 1990, ASM has fire, marine cargo, general accident and other non-life lines, in addition to a sharia-compliant business unit, and posted net profit of Rp4.42bn ($365,500) in 2014.

Founded in 2009, Tune Insurance acquired Oriental Capital Assurance in 2012, before officially introducing its brand later that year and listing on Bursa Malaysia in 2013. The company's primary shareholders are Tune Group, which owns a wide variety of assets, including AirAsia and a hotel company, with 16.64%; AirAsia itself, with 13.65%; and the public holding the remainder.

Tune has demonstrated a keen interest in regional expansion, having already made a foray into Thailand in 2014 when it bought 49% of Osotspa Insurance. It plans to acquire other local firms, list on the Thai stock exchange in 2016 and become one of the Thailand’s largest insurers. This is part of a broader strategy to develop a regional platform; following AirAsia to countries the airline serves and Tune Hotels to places it has properties. India is already being targeted for tie-ups or partnerships, as the country is underinsured and general public awareness remains low.

The company’s market entry strategy generally relies on selling travel insurance before expanding its offer into other policy lines. While it only has one foreign stake, Tune is active in some 36 countries. Indonesia is a good fit for its broader strategy, as it is both a major destination for the airline and a rapidly growing market.

According to Tune, the acquisition, which is pending approval from the Financial Services Authority (OJK) and Malaysia’s central bank, was prompted in large part by the OJK’s decision to increase minimum capital requirements for Indonesian insurers; as of end-2014, the limit was raised to Rp100bn ($8.27m) for conventional insurers, up from Rp40bn ($3.3m) in 2010.

While the new rule has triggered a large degree of merger and acquisition (M&A) activity in the market, this appears to be slowing down. “It is unlikely that we will see any further M&A activity in the insurance sector unless the OJK introduces larger minimum capital requirements,” Christian Wanandi, president-director of Asuransi Wahana Tata, told OBG.

Down Underwriting

Also in May 2015, Insurance Australia Group (IAG) purchased a foothold stake in Asuransi Parolamas, its sixth purchase in the region. The size of the shareholding in the small, family owned general insurer was not published, but IAG executives put the deal at around a few million dollars. Rather, the purchase can be viewed as an important step in IAG's broader regional expansion strategy.

IAG had been on an Asian acquisition spree in recent years, purchasing 98% of Thailand's Safety Insurance in 2006 and forming a 49:51 Malaysian joint venture (JV), AmGeneral, that same year. It entered India in 2010 through a JV with the State Bank of India, and in 2012 the company bought out 20% of China's Bohai Property Insurance and 30% of Vietnam's AAA Insurance.

In total, the company has spent close to A$1bn ($886.6m) in a decade expanding its regional footprint. It set aside A$100m ($88.7m) for the Indonesian market, as it sees great potential in the country’s large population and rapid economic growth. However, given the regulator’s reluctance to issue licenses for new insurers, the company was forced to find another way in. IAG officials say its modest investment in Parolamas is only the beginning in Indonesia, and it hopes to use the company, and its 27 branches and 19 sales offices, as a foundation on which to build a larger operation.

Trending

Foreign insurers have long been interested in the market, and their historical roots run deep. Foreign firms continue to own the majority of the insurance business in the country, and there are over a dozen foreign names in the life and non-life segments, including Prudential and AIA. Japanese players are the most recent to show up in force. Dai-ichi Life and Sumitomo Life both made significant acquisitions in 2013.

With the passing of the new Insurance Law in 2014, a return to stricter adherence to the 80% limit has become more likely. The limit had been ignored for more than a decade due to the local need for capital and the inability of Indonesian shareholders to match contributions made by international partners. Although some parties have suggested lowering the limit to 49% to mirror the regulations of other ASEAN countries, foreign insurers have remained engaged and have continued to enter the market, expanding their existing footprint in the country through a variety of strategies. According to Indra Baruna, president-director of Adira Insurance, the origin of capital should not be the main focus. “It really does not matter where equity comes from, whether foreign or local entities. In the end, insurance companies in Indonesia need to able to grow their businesses, provide job opportunities for Indonesians and raise the standards of quality,” he told OBG.

Open For Business

The UK’s Aviva set up a 50:50 JV with Indonesia's Astra in 2014 to sell life insurance, hoping to become one of the top-five insurers in the market. Meanwhile, South Korea’s Hanwha Life Insurance, which opened its Indonesian business in 2013, is expanding its marketing team to pursue rapid business growth. In early 2015 the company announced plans to double its sales force and open several new outlets.

For its part, Malaysia's Maybank Ageas plans to enter the Indonesian and Philippines markets via acquisitions as early as 2016, and is already in discussions with possible targets. Echoing comments by other foreign insurers, the company's executives believe it is too difficult to obtain local insurance licenses and will instead seek to acquire local firms with good distribution networks and strong operations at relatively low valuations.

Strong distribution networks are particularly important in terms of reaching uninsured customers in more remote areas of the country, as Antonius CS Napitupulu, president-director of Askrindo, told OBG. “Having a community-based approach is essential for banks and insurance companies to expand in rural areas. Financial institutions need to consider old cultures and traditions when doing business in rural areas.”

Big Deal

Perhaps the most significant deal in the works is Bank Rakyat Indonesia's (BRI) search for an insurance company to acquire and an international partner to co-invest. In April 2015 the country’s second-largest bank announced plans to commit Rp3trn ($248m) to the proposed acquisition. As it currently stands, BRI is heavily dependent on banking and is seeking inorganic growth in different business lines. It has expressed interest in state life insurer Jiwasraya in 2014, and said in early 2015 that it was in discussions with three domestic life companies for possible acquisition.

According to comments made to local press by BRI executives in May 2015, the state lender is looking for an international partner for its new life subsidiary. BRI is reportedly in talks with several candidates from Asia, Europe and North America; however, it has expressed plans to retain majority control of the new venture.