Indonesia: Thinking small in insurance

Local business leaders and foreign investors alike are expressing confidence in the outlook for Indonesia’s insurance sector. Continued economic growth, low levels of penetration and strong performances from leading firms this year are all upside indicators. The market is a competitive one, and insurers are actively examining new strategies for capitalising on its considerable potential.

The IMF expects GDP growth of 6.4% this year and 6.3% in 2012 as Indonesia continues to power ahead despite the uncertainty surrounding the global economy, particularly the eurozone crisis. The country benefits from both strong domestic demand on the large local market and demand for its exports, particularly commodities, from abroad, including China and India. As the performance of the insurance sector is closely linked to overall economic conditions and incomes, there is good reason to be upbeat.

“The industry has experienced significant growth this past year primarily due to the country’s strong macro-economic fundamentals,” William Kuan, the president-director of Prudential Indonesia, a subsidiary of the UK-based insurer, told OBG. “Therefore, we are optimistic that the sector’s expansion will continue as various published reports say that the economic conditions are likely to remain very similar in 2012.”

Kuan has reason to be upbeat. In November, Prudential Indonesia announced that its premium income had grown 52.7% in the first three quarters of the year, to IR11trn ($1.3bn), while income from new business surged by 69% to IR6trn ($720m). Additionally, total funds under management grew to IR26trn ($3.1bn), up 18.6%.

The company attributed its success to the appeal of unit-linked products, as well as its “ability to efficiently recruit, train and activate new agents”. The company now has a licensed sales force of 130,000 servicing 1.3m clients.

Manulife Indonesia, part of the Canada-based financial services company, also announced excellent third-quarter results. New business premiums rose to IR3.8trn ($456m), up from IR2.1trn ($252m), over the first three quarters of the year. Annual premium equivalent increased to IR822bn ($98.6m) from IR553.4bn ($66.4m), while total insurance premium grew 49% to IR5.6trn ($672m).

Manulife Indonesia’s CEO and president-director, Alan Merten, said that the company expected to perform even better in 2012. Similarly to Prudential, he noted that an expansion in staffing had played an important role in its growth, with a 21% increase in the number of agents over the past 12 months. In a rapidly expanding and increasingly competitive market, recruiting and retaining staff is both a priority and a challenge for insurers, he said.

“Potential new entrants, as well as the expanding operations of existing players, all of whom have ambitious growth expectations, have created an extremely competitive environment, resulting in a strain on the availability of quality human resources,” Merten told OBG.

With growth rates high, international investors are showing considerable interest in the Indonesian insurance sector. In April, MS&AD, Japan’s biggest property and casualty insurer, acquired a 50% stake in the life insurance wing of Indonesian conglomerate Sinar Mas for more than $800m.

More recently, on November 10 the international press reported that LeapFrog Investments, a US-based investment fund with an insurance focus, was looking into buying minority stakes in Indonesian insurers. LeapFrog’s founder and president, Andrew Kuper, has said that the fund has up to $20m to invest in the country, which it sees as one of the best-performing markets in Asia and Africa.

LeapFrog is particularly seeking opportunities in the microinsurance segment, an area of increasing interest in Indonesia. While overall growth levels are impressive, insurers continue to wrestle with the question of how to increase penetration to strengthen the potential for long-term success. Penetration levels are still rather low, largely due to low incomes, and microinsurance is seen as a possible means of increasing the potential market.

In an October interview with the local press at a microfinance event in Jakarta, World Bank insurance specialist Vijayasekar Kalavakonda said that finding distribution channels for insurance was a particular challenge, given the proportion of low-income people who work in the informal sector and thus cannot make payroll-linked insurance contributions.

Industry leaders have drawn attention to other issues holding back insurance development, including pricing and the complexity of insurance products currently available, which are not always suitable to low-income clients. Indonesia’s Capital Market and Financial Institution Supervisory Agency is in the process of drafting new regulation that is intended to ensure fairer pricing and better distribution channels for microinsurance products.

While there are certainly challenges of regulation and access, and improvements to be made, successful microinsurance operations do exist: Allianz Life Indonesia has served 570,000 clients in the segment over the past five years. This suggests that insurers who innovate can reap the benefits of this fast-growing but competitive market.