Single market to lead to gradual regionalisation of insurance in Indonesia

The ASEAN Economic Community’s (AEC) launch in 2015 is likely to have an impact on the region’s insurance industry. As the single market emerges, financial services will become borderless, products from one country will be sold in others, labour will be portable and companies will branch out into markets outside their home jurisdictions. However, the method and pace of regionalisation in the insurance sector remains open to debate. While the industry will not experience sudden shift, as financial services have been given a 2020 deadline with some flexibilities built in, insurance is expected to become incrementally regional.

Different Approaches

In Indonesia the sale of non-admitted insurance is not allowed unless the product is not locally available, and Indonesians are not supposed to buy policies abroad unless they live out of the country. However, due to the country's liberal investment policies, foreign insurers may buy up to 80% of local insurers. Foreign ownership rules are more restrictive in some parts in region (Thailand and Malaysia) and more relaxed in others (Singapore), and there is a range of rules on non-admitted policies.

There are signs that Indonesia is becoming more open. In early 2014 the Financial Services Authority (OJK) indicated it would allow branches of foreign insurers to operate domestically. However, the country is also considering limiting access. Due to the restrictions on foreign ownership in other ASEAN countries, Indonesia is considering lowering its own foreign ownership cap, by more strictly enforcing the 80% rule or even decreasing it to 49% in the name of reciprocity.

Uneven Progress

While most countries in the AEC are excited about the prospect of the common market and have committed to participating in it, the uneven progress and disparity of intentions suggest that actually advancing the regional project in the insurance sector may be difficult. AM Best reported in early 2015 that of the 10 countries in the AEC, only Indonesia and the Philippines have committed to the liberalisation of the major insurance sub-sectors, including life, non-life, reinsurance, intermediation and auxiliary services, and the strength of a broader commitment was unclear. “There are substantial doubts on when, what and how liberalisation will ultimately take place. There is some thought that the concept of AEC may skew too much of an advantage toward larger and financially stronger foreign players,” the insurance ratings agency wrote.

Industry executives in Indonesia note that insurance is, by its very nature, a local product; people do not tend to cross borders to purchase policies, even when it is an option. Nevertheless, ASEAN is working towards breaking down these barriers and solving the many technical issues that present obstacles to the successful regionalisation of the sector.

For example, discussions are under way to harmonise human resource standards to allow for freer movement of talent. “Each member country has a different set of regulations and policies on allowing cross-border talent. Right now, there are important ongoing talks on this,” Evalina Pietruschka, secretary-general of the ASEAN Insurance Council, told Malaysian press.

Local Outlook

Attitudes amongst ASEAN insurance industry executives on single market development remain largely positive. In a survey published by US-based consultancy Milliman in early 2014, some 42% of respondents believed the AEC would be good for the life insurance sector in their jurisdiction, while just 17% disagreed. A full 70% saw the benefit of harmonised regulations in the region. Nearly half (47%) of those surveyed expect Singapore to profit the most, followed by Indonesia, with 17%.

“The findings suggest there may be clear winners, with Singapore, Indonesia, Myanmar and multinationals all featuring prominently,” the study noted. However, Milliman also detected considerable scepticism in the sector. Disparity in the maturity and sophistication of markets was cited as the primary obstacle to common insurance regulation, and many of those polled felt that sector integration could be held back by political wrangling and a lack of consensus on reciprocity.