Indonesia: Risks in insurance rush

Reports that international insurers are seeing healthy growth in Indonesia suggest high expectations over how the market’s potential will be met this year and beyond. However, concerns over new regulations and the country’s susceptibility to major natural disasters underline a sector that is not without risk.

In late February Singapore-based insurance firm Allianz Asia-Pacific said the Indonesian market was “one of the fastest-growing life insurance markets” in 2012, with statutory premiums growing to a value of $994.27m, up 25% over the previous year.

Such figures confirm the outlook predicted for 2013 by Fitch Ratings, which stated in a report released in October 2012 that the market would see “steady premium growth” this year, grounded in the population’s rising affluence, the size of the “underpenetrated” market and increasing awareness in terms of natural disasters. Fitch also said the government’s plan to increase insurance companies’ minimum capital requirement to Rp70bn ($7.2m) by 2012 and Rp100bn ($10.29m) by 2014 would force smaller and weaker players to close or merge with larger counterparts.

The life insurance segment, which accounted for 60% of total gross premiums in 2010, is a particular area of growth in Indonesia. The Indonesian Life Insurance Association (ILFA) announced in November 2012 that revenue grew Rp90trn ($9.26bn) in the third quarter of last year, a year-on-year (y-o-y) rise of 23.6%. The ILFA targeted total revenue growth of 30% in 2012, expecting this to be fuelled by the increasingly wealthy middle class. While the association has yet to reveal its final figures for the year, total premium income in the third quarter increased 12% y-o-y.

Figures projected by market research firm Euromonitor in July 2012 predicted that middle-class families – those households with annual disposable income over $10,000 – will form more than 58% of the population, or 13.7m households, by 2020. This increasing affluence and the country’s young population, which has a growing awareness of the benefits of insurance, indicate the potential of the currently underserved sector.

Fitch noted there were just 45 licensed life insurers and four reinsurers as of September 2012. Meanwhile, according to PEFINDO, the Indonesian credit rating agency, life insurance coverage was still only around 15% of the country’s population of 242m people.

The non-life segment has also shown promise. Anna Tipping, a partner at law firm Norton Rose (Asia), told international publication Insurance Insight in October 2012 that the penetration rate of non-life products was 50% lower than in “more mature markets”. According to Tipping, “As Indonesians acquire more, they want to protect their investment and so turn to insurance for that protection”. She added that vast infrastructure developments underway present an attractive market entry point for commercial insurers.

Motor insurance is one area of potential growth in the non-life segment. The motor segment saw its market share rise to 30.1% in the first half of 2012, up from 29% the previous year. Auto premiums also more than doubled between 2006 and 2010 and are expected to grow further when compulsory third-party liability motor insurance is introduced to the country.

However, both international and domestic firms face stricter regulation under a new independent financial regulator, which will be established in 2013. The Financial Services Authority (Otoritas Jasa Keuangan, OJK) will take over the supervision of insurance firms from the central bank and capital market. The current regulator has said the new body will not grant any new insurance licences, and that only an Indonesian incorporated company will be permitted to apply for an existing licence.

Increased insurance investment in Indonesia also means heightened exposure to the risks associated with insuring countries that are vulnerable to natural catastrophes. Home to 17,000 islands that straddle the Pacific Ocean’s volcanic “ring of fire,” the vast archipelago sits on fault lines that make it more susceptible to seismic activity. In October 2010 alone, the country endured an earthquake, tsunami and volcano in two locations.

“A lack of detailed historical claims data [following catastrophes] makes it very difficult for insurers to model, and therefore appropriately price the risks,” Dean Carrigan, a partner at Australia-based law firm Clyde & Co, told Insurance Insight. “If there is sufficient data it can be priced, but with the current low levels of insurance penetration, the question is would anyone buy it?”

While foreign insurers may see a possible gap in the market as new minimum capital requirements squeeze smaller domestic insurers out of business, optimism should be tempered by the government’s propensity to protect Indonesian business interests.