Life lines: Rapid growth in unit-linked life coverage

Life insurance premiums in Indonesia have been growing faster than non-life for a decade. The Life Insurance Association (Asosiasi Asuransi Jiwa Indonesia, AAJI) estimates that there are around 33.2m policyholders nationwide, of which 9.3m have individual policies. There is room to expand the pool of 16.75m existing life insurance clients, which has already been growing rapidly – 48% year-on-year (y-o-y) – from 11.32m policyholders in 2009. “Most life clients are through group life, although individual demand is growing, driven by investment-linked products,” Oemin Handajanto, the president director of Zurich Topas Life, told OBG. Nonetheless, the sector is still small in relation to the vast domestic market’s potential, with life insurance penetration at a modest 1.5%, the lowest in the region. Although claims on life insurance policies grew 36% y-o-y in 2010 to Rp52.9trn ($6.35bn), underwriters hope this will fall in line with stronger economic activity. Indeed, the AAJI expects the life segment to grow 30% in 2011, driven by higher disposable income for the middle class and bullish capital markets.

KEY FOREIGN PLAYERS: The structure of Indonesia’s life insurance market, like in many countries, is much more consolidated than the general insurance segment. The 10 largest life insurance underwriters, all linked to foreign insurers, generated over 70% of insurance premiums in 2010. Competition, however, continues to be fierce: 44 underwriters compete in this small but dynamic market, down from 45 in 2010. Mergers and acquisitions within the industry, rather than driving consolidation, have attracted foreign underwriters. “Larger foreign players are likely to enter the market by snapping up smaller underwriters, as has happened in the banking sector,” Hendro Utomo, vice-president of financial institutions ratings at ratings agency PEFINDO, told OBG. Local insurers are the most susceptible to a foreign takeover, according to industry players. These insurers are usually smaller than the foreign joint ventures and form part of large Indonesian conglomerates that are reluctant to invest in life insurance for the long term. Alternatively, foreign insurers usually have a seven- to 10-year time horizon for achieving returns on investment. Potential takeover targets may include weaker underwriters like Bumi Asih Jaya, Kresna Life, Nusantara Life or Pasaraya Life.

INTERNATIONAL INTEREST: The only closure thus far in 2011 was achieved through regulatory pressure, when Capital Markets and Financial Institutions Supervisory Agency (BAPEPAM-LK) withdrew Asuransi Jiwa Bakrie’s licence, following over $30m in investment-linked losses. International interest in entering this high-potential South-east Asian market has resulted in a number of foreign acquisitions in recent times. Average return on investment for life insurance grew by 21% y-o-y in 2010, reaching a total of Rp25.41trn ($3.04bn).

Since the beginning of 2010, Mayapada Insurance (renamed Zurich Topas Life) was sold to Switzerland’s Zurich Life, UOB Life (renamed MNC Life) was sold to investment firm Bhakti Capital Indonesia and Winthertur was sold to UK-based AVIVA. In April 2011 leading Japanese insurer Mitsui Sumitomo Insurance Group and Aioi Nissay Dowa Insurance paid about $860m for a 50% stake in Asuransi Jiwa Sinar Mas, the latest acquisition in a regional buying spree. However, the impact of the 2011 tsunami on Japanese investment is unknown.

Large players like Mandiri AXA, a joint venture between Indonesia’s largest bank and the French insurer AXA, bought smaller underwriter Asuransi Dharma Bangsa, with Rp70bn ($8.4m) in assets, in 2011. Financial firms are also seeking opportunities in the sector. For instance, investment company Bhakti Investama announced an acquisition in mid-2011 (although this was later delayed), and Japanese insurer Daichi is said to be eyeing the market for acquisition opportunities.

UNIT-LINKED: Investment-linked life insurance products, known as “unit-linked”, continue to lead the life insurance segment, as has been the case for a decade. Unit-linked premiums accounted for over 62% of total life insurance premiums in 2010, growing around 53% y-o-y, outpacing the life insurance segment as a whole. Prudential Life is the largest unit-linked underwriter, having been the first to launch such products in 1999. The rate of growth in personal life insurance coverage has been negative for years now, as conversions to unit-linked insurance continue. Although group life insurance continues to dominate products that are not investment-linked, its share of total premiums is dropping. “In the past, insurance was just about protection,” Evelina Pietruschka, the chairwoman of AAJI, told OBG. “Now, with unit-linked products, insurance can also be a means to invest. Insurance agents now must be able to become financial planners for customers.”

Drops in Indonesia’s equity markets in 2008 and 2009 did not spur as high a sell-off of unit-linked policies as was seen in 2005, as policyholders tended to wait out the crisis. “The appetite of consumers is clearly towards unit-linked products,” Handajanto told OBG. “The market is more mature as more and more insurance companies sell unit-linked as insurance rather than investment products. We are no longer seeing the volatility in demand witnessed in 2005.”

BANCASSURANCE: Bancassurance has had the most impact on the life insurance segment, through the growth of credit life insurance. While agents and brokers continue to play a role, particularly in group life insurance, Indonesia’s sizable base of bank clients is proving particularly attractive to insurers.

While associated telemarketing has yet to take off in a significant way, bancassurance is continuing to grow rapidly (see overview). Major banks hold equity in underwriters to better synergise the cross-selling of their products. Bank Mandiri, for instance, has taken the majority stake in its joint venture with AXA in a bid to leverage its client base of over 10m. Meanwhile, Malaysia’s CIMB Bank and Canadian underwriter Sun Life Financial formed the joint venture CIMB Wed Life in May 2010. The market has witnessed very few exclusive bancassurance tie-ups, with underwriters preferring to sell their policies through a portfolio of banks. Most banks only sign exclusivity agreements with underwriters for one particular product, if at all. Only AXA Mandiri and CIMB Life have opted for exclusive partnerships, the first through Bank Mandiri, the latter through CIMB Niaga Bank. Prudential has partnered with UOB Life, while Asuransi Jiwa Manulife is working with 19 banks, including Standard Chartered Bank, Bank Danamon, HSBC and Bank DBS.

LOOKING AHEAD: Non-exclusive bancassurance relationships have the potential to create channel conflict, but underwriters have tended to prefer non-exclusive partnerships with major banks over exclusive tie-ups with smaller players. Regulations ensure a certain level of competitiveness in bancassurance and the competition to find banking partners is fierce. In credit life insurance, for instance, the regulator specifically requires banks to liaise with three underwriters. With keen interest from new and existing players, life insurance is set to play an increasingly important role in the development of Indonesia’s capital markets. “If our sector grows, we should be the primary institutional buyers in the capital markets, as in other countries,” Pietruschka said.