Sector overhaul: Underwriters hope new rules will make motor insurance compulsory

Strong growth in Indonesia’s new vehicle sales in recent years has generated sustained growth in the motor segment. “Car sales have been increasing and in turn motor vehicle insurance has been growing rapidly,” Christian Wanandi, the president director of Jakarta-based general insurance company Asuransi Wahana Tata, told OBG. Yet motor’s share of total non-life premiums stood at 30.1% in the first half of 2012, far lower than 60% in Thailand and 46% in Malaysia in 2011.

MANDATORY COVER: While such figures in neighbouring countries include both own-damage and third-party liability, almost all motor policies in Indonesia cover own-damage only. The lion’s share of motor policies is sold bundled with bank or multi-finance company credit, compounding the tendency of clients to be forced to buy insurance rather than choose to, with a high rate of policy lapses.

Underwriters have long lobbied for enacting mandatory cover to unleash the segment’s potential. While such rules would still force clients to buy insurance, stricter regulation of underwriting practices inherent in such mandatory requirements would ensure healthier competition among underwriters. The absence of compulsory third party (CTP) insurance is widely seen as a reason for Indonesia’s low non-life penetration – 0.52% of GDP in 2011. With stiff pricing competition in a crowded market, the new regulator will need to enforce underwriting standards and implement compulsory coverage to ensure sustainable growth.

DRIVING GROWTH: Resilient economic growth, falling interest rates and, until recently, limited down payment requirements have supported a sustained expansion in sales of cars and motorcycles. Ownership of motor vehicles had already expanded some 80% in the four years to 2009, to 79 per 1000, according to the World Bank. Yet new sales have gone from record to record since then. The Indonesian Automotive Industry Association (GAIKINDO) expects the 17% annual growth in car sales in 2011 to 894,164 cars, to be sustained in 2012, with over 1m new car sales expected. While the Indonesian Motorcycle Industry Association (AISI) recorded 9% growth in new motorcycle sales in 2011 to 8.04m, this dropped 8.1% year-on-year (y-o-y) in the first half of 2012, and a full 36.8% by August 2012. This slowdown predated the introduction of caps on the value of new loans for vehicle purchases, indicating that the slowdown was linked more to commodity price falls rather than the new rules (see analysis).

This strong rise in new vehicle sales has been driving motor premium growth, given lenders’ requirement for third-party motor cover. Gross written premiums have grown from Rp8.16trn ($815m) in 2009 to Rp5.68trn ($568m) in the first half of 2012, or 17.2% growth over the same period of 2011, according to the General Insurance Association of Indonesia (AAUI).

A particular challenge for underwriters arises from the largest share of vehicle owners allowing policies to lapse, having originally taken the policy as bundled with financing. Especially in the absence of loss, drivers tend to avoid renewing their policies. Yet despite the rapid growth in the segment, intense competition between underwriters, combined with excessive commissions and discounting, have caused automotive insurance claims to surge by 9.9% y-o-y to Rp2.46trn ($246m) in the first half of 2012, according to the association. The segment’s cumulative loss ratio over the five years to 2011 reached 50.2%, according to reinsurance broker AON Benfield.

CROWDING OUT: Underwriters increasingly see this segment as saturated in the absence of CTP cover as most non-life insurers compete in this space. Motor insurers have usually focused on building relations with auto sales and leasing companies rather than reaching out to drivers directly. The biggest motor underwriters – Asuransi Jaya Proteksi, Adira Asuransi and Asuransi Astra Buana – are all tied to major auto dealerships and vehicle multi-finance firms and have been growing as fast as the rise in new vehicle purchases, close to 30% a year, given that motor policies account for over a third of their total premium income.

Despite the lack of mandatory cover beyond that tied to credit, Ernst & Young has found that those who do purchase motor policies tend to favour more expensive, comprehensive policies, such as those providing call centre and 24-hour roadside assistance. Competition has also driven innovation by some insurers, with new policies including the bundling of either extended warranty or vehicle registration fees with insurance. While car insurance includes cover for theft and accidents, motorcycle policies usually only cover theft in a market-led move to restrict excessive claims.

ENFORCEMENT: Despite strict regulations from Bapepam-LK on paper, capping commissions to dealerships and leasers at 25% of premium, enforcement has remained weak. Given ties to dealerships and leasing companies, leading motor underwriters have driven rises in commissions to 40% and above without incurring losses at the group level. This has pushed the market as a whole toward bigger discount structures, although this is often passed on to drivers through higher premiums. While the regulator revoked the licences of five brokers for excessive discounting on motor policies in 2010 and enacted new tariff regulations in March 2011 with the 25% caps, excessive discount rates have continued to cause concern. The introduction of CTP would allow for stricter control of policy pricing, rather than the weaker argument for regulating premiums on voluntary own-damage cover.

While underwriters have long predicted the enactment of CTP as imminent, regulatory action on the issue has been slow to come. Indonesia remains the only country in the region without CTP cover according to Ernst & Young. “The government tried to imposed CTP motor liability insurance in the early 1990s, but this was quickly revoked,” Eddy Handall, ratings director at Fitch. A minimal system of third-party vehicle insurance was established, funded by levies on vehicle registration fees and managed by state-owned insurer Jasa Raharja. Yet the scheme only includes cover for bodily injury with minimal compensation, while inadequate vehicle registration has caused funding shortfalls. By and large the market remains dominated by the standard own-damage policies that lenders impose on their clients. Inadequate enforcement of commission caps and policy tariffs has compounded the negative view of the industry for many Indonesians.

Rating agencies such as AM Best and Fitch expect the new regulator, Otoritas Jasa Keuangan (OJK), to impose CTP in the short term. This would likely boost non-life premiums as seen in other markets that have enacted such rules, and would sensitise consumers to the benefits of insurance cover. “If third party motor insurance was made compulsory, people would become accustomed to dealing with insurance companies, which in turn would make them more familiar with insurance products in general,” said Gunawan Chan, president director of Avrist General Insurance.

The shift to CTP would allow for stricter regulation of underwriting practices in the sector in the name of consumer protection. Underwriters have called for the inclusion of a “free choice” clause in any new legislation, which would require auto-finance companies to offer a range of different policies to foster competition in offerings and standardisation of prices.

Amidst a general move by underwriters towards retail non-life lines given intense competition for commercial business, underwriters are expecting the new regulatory body to push through measures that would sanitise the key motor segment. Healthier competition is needed, as are rules requiring mandatory coverage in the spirit of public safety.

Efforts made by other emerging economies in the region to impose CTP, such as the enactment of a CTP policy in Mongolia in 2012, have shed some light on the inadequacies present in the current Indonesian regulatory framework. Consolidation in the industry through higher capital requirements by 2014 will likely create even keener competition on popular lines. Additionally, micro-prudential regulations such as mandatory insurance lines will be needed to drive premium growth in the medium term and educate a reticent population on the needs for non-life insurance.