Growth mode: New opportunities and rising demand lead to sector expansion

While still small compared to its potential, Indonesia’s insurance market is attracting global underwriters and reinsurers. Only 6% the size of China’s market, according to SwissRe – at roughly Rp147trn ($14.7bn) in combined life and non-life premiums in 2012 – Indonesia’s market has sustained annual growth of over 20% in premiums and 26% in assets over the past five years, according to the Jakarta-based credit rating agency Pefindo. Yet with penetration of only around 1.3% for life and 0.47% for non-life in 2012 – according to the Life Insurance Association of Indonesia (AAJI) and the General Insurance Association of Indonesia (AAUI), respectively – growth prospects are significant. The global averages are 2.8% for life and 3.8% for non-life, according to accountancy Deloitte.

Small But Growing

The life segment, making up roughly two-thirds of premiums in 2012, is the market’s key growth driver with annual expansion of 25.6% in the decade to 2012, according to Japanese life insurer Dai-ichi Life. Growth was sustained into the first half of 2013 when combined life premiums and investment income rose 22.8% year-on-year (y-o-y) to Rp71.83trn ($7.2bn), according to AAJI, while premiums alone reached Rp57.6trn ($5.76bn) in the first half of the year, or 14.5% y-o-y growth. This makes Indonesia the world’s 30th-largest life market and Asia’s eighth, excluding Japan, according to Credit Suisse. Annual growth in non-life at the same time averaged 14.7%, rising 14.3% y-o-y in 2012 alone to Rp39.41trn ($3.9bn), according to insurance rating agency AMB est. Buoyed by rising capital markets returns, investment-linked (unit-linked) policies account for nearly 60% of life premiums, with endowment policies contributing an additional 27%, according to Credit Suisse. The prevalence of unit-linked policies, mostly single-premium products, helped shift investment risk to policyholders. “Unit-linked policies have been the best selling over the past five to seven years, which minimises underwriters’ asset-liability mismatches,” Luc St-Amour, Sun Life Financial Indonesia’s chief actuary, told OBG. “Yet Indonesians tend to use cash in unit-linked policies as short-term investment vehicles in a downturn, which is peculiar given the long-term nature of these for insurance products.”

New Growth

While motor and property lines still dominate the property and casualty (P&C) segment, accounting for 29.7% and 27.8% of premiums and growing 13.3% y-o-y and 12.3% y-o-y in 2012, respectively, according to AAUI, growth drivers lay in smaller lines in 2012. For example, personal accident (PA) and health gross premiums grew 33.4% y-o-y in 2012, followed by credit insurance at 28.2% and marine hull at 25.8%.

While both life and P&C underwriters can compete on PA and health lines, health riders are dominated by life insurers. The absence of compulsory third-party liability insurance for drivers has limited the size of the motor segment to around half that in peer countries.

“One of the main hindrances to growing the general insurance business is that the government has been slow to make motor insurance compulsory for drivers,”

Arizal ER, the president director of Asuransi Rama, told OBG. State-owned Jasa Raharja runs a limited scheme that levies part of the motor registration fees and covers third-party bodily damage, but proposals to start a compulsory commercial scheme have repeatedly been delayed. Yet more new vehicle sales have sustained double-digit growth in motor premiums. “Despite Bank Indonesia’s (BI) higher down-payment requirements for vehicle financing since 2012, we have not seen a slump in car sales and expect recent motor premium growth to be sustained in 2013,” Julian Noor, AAUI’s executive secretary, told OBG.

Still Fragmented

With 81 licensed P&C underwriters and 46 life insurers by end-2012, the market remains highly fragmented for its size. Despite the many players, both markets are dominated by a handful: the top five life insurers held 45% of in-force premiums in 2011, according to Credit Suisse, while the top five P&C underwriters held 39.5% of premiums, down only slightly from their 41.5% share in 2009, according to AAUI. Foreign investors are allowed to hold up to 80% of an underwriter in Indonesia, but in practice they can exceed this by injecting additional equity and diluting the local partner’s stake. Foreign players’ influence in the life segment is more extensive than in P&C, with the foreign-controlled share of the life segment reaching 63.6% in 2011, far higher than their combined 4.4% in China, according to SwissRe. Foreign insurers make up less than 30% of non-life premiums, according to the reinsurer’s estimates. Four of the top five life insurers are foreign joint ventures (JVs), listed in order of premium value: Prudential, AXA Mandiri, Allianz Life and AIA. In contrast, all of the top five in non-life – Sinarmas, state-owned Jasa Indonesia, Astra Buana, Central Asia and Tugu Pratama (which is 65%-owned by state-owned Pertamina) – are locally owned and linked to either banks, the state or major vehicle distributors.

Foreign Impact

Although the number of players has not fallen significantly, over the past three years foreign direct investment (FDI) has driven a wave of mergers and acquisitions (M&A), likely to affect the pace of competition. Japanese investors have driven many acquisitions, taking advantage of their strong currency and high capital bases to buy into the Indonesian growth story. Mitsui Sumitomo’s MSIG bought a 50% stake in Sinarmas Life for $827m in April 2011; Mitsubishi’s Tokio Marine bought an 80% stake in Malaysian-owned MAA Life for $9.8m in March 2012, renaming it Tokio Marine Life; and Meiji Yasuda Life raised its stake in Avrist from 5% to 23% for $100.3m in May 2012. In June 2013 Dai-ichi Life bought a 40% stake in Panin Life for $340m and a 15-year bancassurance agreement with Panin Bank, with integration expected by December 2013. In P&C, NKSJ Holdings’ Nipponkoa Insurance bought Bank Permata’s 31% stake in Asuransi Permata Nipponkoato, raising its stake to 80%, in January 2011 for Rp63.47bn ($6.35m). NKSJ also holds an 80% stake in Sompo Japan Indonesia and has announced plans to merge the two eventually.

South Korea’s Hanwha Life acquired mid-sized Multicor Life for $13m in October 2012, while Singapore’s UOB sold its life subsidiary to local investment firm Bakhti Capital in October 2010 for an undisclosed value. Western investors have also been active, with Switzerland’s Zurich Life acquiring Mayapada Insurance (renamed Zurich Topas Life) and the UK’s Aviva buying Winthertur Life, both in 2010. In non-life, Mandiri AXA Life acquired non-life Asuransi Dharma Bangsa for Rp60bn ($6m), rebranding it Mandiri AXA, in May 2011. SHC Capital of Singapore bought 55% of non-life insurer Parolamas in December 2011, followed by Switzerland’s Zuellig Group’s acquisition of 80% in Asuransi Indrapura, a small insurer, in June 2012. The largest non-life buy-out followed the same month when US insurer ACE bought 80% of Jaya Proteksi, the ninth-largest non-life insurer, for $130m.

Preference

Foreign investors’ strategies have clearly prioritised underwriters owned by banks and with strong bancassurance channels as acquisition targets. With most major banks tied up in exclusive 10-to-15-year bancassurance deals, the appeal of bank-related insurers far outweighs standalone underwriters. This makes the three planned life insurer sales all the more appealing. Despite delays, in July 2013 Bank Negara Indonesia (BNI) reiterated its aim to sell up to 40% of its life subsidiary for as much as $500m alongside an exclusive bancassurance deal of up to 20 years. Although such valuations may prove prohibitive, Nippon Life, the only major Japanese life insurer not present in Indonesia, has shown general interest. Meanwhile, Malaysia’s CIMB Bank announced its intention of selling its 51% stake in its JV with Sun Life for up to $200m, while Sinarmas and CT Corp’s Bank Mega announced plans to sell an unspecified stake in their JV Mega Life to a foreign partner – both announced in September 2013.

Profitable

Both segments have recorded strong profit growth on the back of high operational margins and investment income driven by rising valuations on both fixed-income and equity markets. Life insurers are more exposed to fixed-income markets with some 80% of assets invested in government securities and around 5-10% in corporate paper, while P&C insurers have a higher exposure to equities and shorter-term time deposits, which account for up to 60% of investments. Life insurers, the third-largest holders of local-currency government bonds, near-doubled their share of outstanding bonds from 8.1% in 2005 to 14% by March 2013, according to the Asian Development Bank.

Not All Lost

Meanwhile, unit-linked sales have driven profitability. “Conservatively, margins of 30-40% on regular premium unit-linked policies are not surprising. Of course the margin depends on the risk discount rate used by the companies,” Indra Tan, senior vice-president of corporate planning and risk management at Tokio Marine Life, told OBG. Both segments maintain manageable loss ratios of 43.9% in non-life and 48.1% in life, although claims rose 16% and 34% y-o-y in 2012, respectively, according to the AAUI and AAJI. Despite some Rp32trn ($3.2bn) in losses following Jakarta floods in early 2013, Fitch estimates insured losses remained a much lower Rp3trn ($300m). While this may cause an uptick in 2013 claims, the rating agency expects P&C loss ratio growth in 2013 to remain limited.

The 78 reporting P&C insurers recorded 21.9% y-o-y profit growth in 2012 to Rp4.8trn ($480m), according to AAUI, driven by a 76% rise in operating margins to Rp1.8trn ($180m) and 10.4% growth in investment returns to Rp3.28trn ($328m). New life premiums, which accounted for 70% of total premiums in 2012, grew 11.3% y-o-y, while investments by life insurers grew 15%. Aggregate figures obscure significant differences between JVs and locally-owned life insurers, however. According to data from AIG, JVs’ revenue has grown 24% on average in five years to end-2012 compared to a mere 8% for local underwriters, while profit margins have grown from 4% to 8% for the former compared to a drop from 4% to 1.7% for the latter.

The profitability of smaller JVs in the P&C segment reflects higher offshore reinsurance cessions, providing some scope for transfer pricing of profits to tax-efficient offshore centres like Singapore, Bermuda and Malaysia’s Labuan. “The insurance sector’s risk retention has not grown as fast as the industry’s capitalisation in recent years, a phenomenon the regulator is trying to understand,” AAUI’s Noor told OBG. “Over half of this deficit is linked to oil and gas insurance.”

Reinsurance

Despite the presence of four local reinsurers, domestic capacity remains limited. The 1992 Insurance Law requires underwriters to retain at least 10% of risk on their balance sheets and to cede 10% to local reinsurers. Three of these are part state-owned: Tugu Reasuransi Indonesia (TuguRe), backed by state-linked Pertamina-owned Tugu Group; Reasuransi Nasional Indonesia (NasRe), backed by state-owned small and medium-sized enterprise (SME) insurer Askrindo; and Reasuransi Internasional Indonesia (ReIndo), owned directly by the Ministry of State-Owned Enterprises. The fourth, oldest and only publicly listed reinsurer is Maskapai Reasuransi Indonesia (Marein), backed by foreign banks like UBS, ABN AMRO and RBS Coutts.

The largest reinsurer, with close to 50% of the market, is ReIndo. TuguRe and NasRe account for slightly above 20% of the market while MareIndo is the smallest, with below 10% of domestically reinsured premiums in 2010. The agency estimates that some 90% of domestic reinsured risk is non-life, mainly in smaller lines like marine, motor and liability risks. While all four have raised capital above the new mandatory floor of Rp150bn ($15m) by end-2012, their combined Rp600bn ($60m) would cover roughly two months’ working capital at Indonesia’s largest mine, Freeport-McMoRan’s Grasberg, in Papua. The Finance Ministry has also established several insurance pools for earthquakes (run by Maipak), terrorism, domestic shipping and traditional markets, which helps expand capacity.

Offshore

Offshore cession for non-life risk was 53% of premiums in 2012, according to Singapore’s Asia Capital Re (ACR). Simpler risks like residential property are reinsured locally, but the lion’s share of complex risks are ceded offshore. “For complicated risks like oil and gas, only around 5% is kept onshore,” Mira Sih’hati, director at Marsh Indonesia, told OBG. Some 25 reinsurance brokers were licensed as of 2012, but larger global brokers like AON Benfield, WillisRe and Howden dominate alongside smaller local reinsurance brokers like IBS and TalaRe. With most risk ceded offshore is placed on a facultative basis rather than annual treaties, the market remains fluid. AMB est estimates facultative reinsurance was 72.5% of offshore-ceded risk in 2011.

New rules from the regulator requiring underwriters with proportional reinsurance treaties to secure natural catastrophe excess-of-loss programmes from 2013 will further stimulate demand for reinsurance capacity. While major reinsurers like SwissRe, MunichRe, ACE’s TempestRe and the London Lloyd’s market have traditionally attracted the lion’s share of risk, Singapore has gained market share in recent years. Lloyd’s Asian platform in Singapore now hosts 21 syndicates, while major regional reinsurers like ACR and BestRe have expanded their share of Indonesian business. Though global reinsurers can attract complex corporate business from regional offices in Singapore, the world’s two largest reinsurers, MunichRe and SwissRe, plan to incorporate locally in 2014. This will allow both to capture more retail lines, where premium growth has been strongest, starting with life before expanding to P&C.

Bapepam-LK To OJK

Authorities are in the midst of implementing far-reaching regulatory reforms aimed at placing the sector on a sound footing for long-term growth. Similar to the oversight of other non-bank financial institutions, regulation of the insurance industry was detached from the Ministry of Finance, which oversaw the previous regulator, the Capital Market and Financial Institution Supervisory Agency ( BapepamLK). Since January 2013 a new independent regulator, the Financial Services Authority (OJK), was given jurisdiction over insurance and capital markets, before gaining oversight over bank supervision from January 2014. While the OJK will be funded from the government’s budget for the first several years, the authority is preparing plans to levy a charge (at 0.03% of assets) on insurance companies as a means of funding. Its budget is set to double to Rp2.4trn ($240m) in 2014 when it assumes BI’s regulatory role, and it recruited 500 new staff in 2013 to fulfil its existing role.

Macro-Prudential

This comes at a key time for regulation. Indonesia moved to a risk-based capital (RBC) framework with minimum capital levels based on types of risk in 2005, but has only required underwriters to hold 120% of risk-weighted capital from 2012. The industry has been required to file reports compliant with international finance standards since the third quarter of 2012. Life insurers must now segregate their reporting of investment returns from premiums, a significant change to their reporting of liabilities for the dominant investment-linked products particularly. It also requires insurers to mark their securities holdings to market rather than pricing them at maturity, which can alter their reported asset positions significantly – particularly for life insurers holding long-tenor bonds. “While the marking of assets to market and the segmentation of unit-linked from premiums, the move to gross premium valuation on the liability side did not have a great impact when implemented. The mark-to-market caused some stress on RBC ratios once interest rates started to rise from June,” St-Amour told OBG.

Although a grace period was reportedly extended to mid-sized life insurers, the impact on reported income and assets may be significant. OJK withdrew several licenses from smaller underwriters in 2012, but the highest-profile case involved withdrawal of Malaysia’s MAA, a non-life insurer, in mid-2013.

The underwriter has also offered policyholders a 60% haircut on their policies, but the case has been transferred to intra-government negotiations. In October 2013 OJK gave life insurer AJB Bumiputera 1912 three years to raise its solvency to above RBC standards, threatening to restructure it from a mutual company to a limited liability company (LLC) and risk bankruptcy if it fails to do so. Bakrie Life, while technically in breach of RBC rules, has so far been able to retain its licence, although it is now barred from writing new business.

Further Requirements

Meanwhile, the regulator stands mid-way in hiking the industry’s capital requirements. Having raised the floor for underwriters from Rp50bn ($5m) to Rp70bn ($7m) and from Rp100bn ($10m) to Rp150bn ($15m) for reinsurers by end-2012, OJK intends to enforce a higher Rp100bn ($10m) for underwriters and Rp200bn ($20m) for reinsurers by end-2014. While some grace period may be afforded to smaller underwriters, the move will prompt mid-sized underwriters to seek equity injections or M&A opportunities. “If smaller insurance companies cannot comply with capital requirements then they shouldn’t be competing. Proper enforcement of such requirements is key in helping the insurance sector narrow the developmental gap with the banking sector,” said Fadjar Gunawan, the president director of Panin Life. A number of other new rules have been issued, including new “know your customer” guidelines in 2012 requiring higher due diligence standards from underwriters, and a new consumer protection rule in July 2013 requiring more transparency in explaining contracts and fees, protecting consumer data and instituting a new complaints and dispute resolution mechanism through OJK. The authority is also seeking to train 1000 new actuaries in three years in collaboration with universities, to fill the gap in actuaries needed for RBC reporting.

New Act

More far-reaching changes are pending with the passage of a new Insurance Business Act, which would replace the 1992 law, including new requirements for sharia-compliant insurance underwriting and other reforms. The most contentious political issue is a proposal to reduce the FDI ceiling in the insurance sector, although it is unlikely to be retroactively applied if enacted. Another item of discord is the proposal to require all underwriters, including mutual company and cooperative structures presently allowed, to incorporate as limited liability companies. The new regulator is also implementing new rules on product pricing for P&C policies, focusing on the property class in particular. OJK will establish a new rating and statistics agency in 2014 to set price benchmarks for fire insurance. This is likely to contain any deterioration in property premium growth as a result of lower house sales in 2013. “While we expect a slowdown in property premium growth in 2013 due to tighter mortgage origination, this will likely be offset by higher premium levels driven by more realistic pricing of risks and thus lower loss ratios,” Noor told OBG. Meanwhile, the association has issued standard motor and earthquake policies to attempt standardisation of policy pricing across underwriters, though adoption remains voluntary.

Multi-Channel Mix

Regulations updating the 1992 Act are needed given the shift in distribution channels in the past five years. The share of agents and brokers, traditionally dominant distribution channels, has fallen as banks have grown their share of new premiums since first introducing such products in the late 1990s. This trend is particularly pronounced in the life segment, where bancassurance’s share of premiums overtook that of agents in 2012 for the first time. Growth in bancassurance life premiums averaged 38% in the three years to 2010, according to Ernst & Young, outpacing the 13% growth via other channels. By 2012 the bancassurance channel accounted for 41.5% of life premiums, up from 25% in 2007, and 12.5% of non-life premiums, according to market research firm Finaccord. The share of investment-linked sales via banks, however, is higher, at above 50%. Bancassurance deals come in both exclusive and non-exclusive forms, though a majority of major banks are now tied up in 10- to 15-year agreements, reflecting intense competition for such deals.

AXA Mandiri’s life underwriter commands the highest share of bancassurance sales, followed by Manulife and AIA. While AIA works through three bank partners, the other two have locked in exclusive partnerships. Manulife partnered with Bank Danamon in July 2012, following the expiry of Danamon’s 10-year deal with Allianz, which maintains non-exclusive agreements with CIMB Niaga and Bank Central Asia. Allianz Life meanwhile signed an Asia-wide 10-year exclusive partnership with HSBC in October 2012. Products sold via banks must not only be approved by OJK, but also by BI, and all bank branches selling investment-linked products must have one certified agent since new rules in 2010. With much of the banking sector’s commanding heights locked up, underwriters are now competing for more targeted deals with smaller regional banks.

Agents

The agency channel remains significant, however, both for life, where it accounted for roughly 39% of premiums in 2012, and also for non-life. Agents are only allowed to represent one underwriter and in the past three years have been certified by the relevant association. By September 2013, some 16,210 non-life and over 260,000 life agents had been certified, according to both associations. The channel is particularly important for underwriters’ outreach beyond urban centres, but also in selling more complex life products and motor policies at the point of sale. Although Bapepam-LK had set ceilings for commissions at 25% of premiums in non-life, these are routinely exceeded – up to 60% – by categorising additional payments as miscellaneous costs. This practice has pushed Indonesian retail P&C rates to among the lowest in Asia, according to AMB est. Underwriters have increasingly focused on developing direct sales, both through branch expansion and telemarketing. Manulife has made a particular push in expanding its branch network, while life insurers like AXA Mandiri, Allianz and BNI have focused on agency sales alongside bancassurance. Telemarketing sales have been most successful for simpler PA and health policies sold by both life insurers and P&C underwriters like ACE and AIG, although first-year renewal rates are reportedly below 50%. By June 2012 telemarketing accounted for 2% of life premiums, according to AAJI.

Brokers

While brokers’ share of retail lines has been eroded by bancassurance, they remain a dominant force in larger corporate accounts and, according to research firm Axco, increasingly in the under-penetrated SME segment. Despite the large number of licensed brokers, the market remains dominated by a handful. “While there are 165 licensed brokers, only around 30 are really active,” Sih’hati said. “The top 10 control 30-40% of the broker market.” The largest broker is Marsh, followed by AON, Howden and Willis; the first two dominate oil and gas insurance broking. Jardine Lloyd’s Thompson, which specialises in property and marine hull business, acquired two local agencies in May 2013 to expand its share of the employee benefits market. The largest local brokers include MIR, the oldest local broker; SGU; Indosurance and KBRU. The latter, part of the Sinarmas group, commands roughly 70% of the commercial property broker market. Bapepam-LK had proposed new rules requiring each broker to have at least two directors and two commissioners each, which would prompt consolidation in the fragmented sector.

Scaling Down

While both segments have witnessed sustained growth in premiums, the number of policyholders remains limited. The AAJI estimates that 87.2m Indonesians held life policies by June 2013, a rise of 54.5% y-o-y, of which 14.7% were individual policies, though only 8% of households held any form of P&C insurance in 2012, according to financial services firm PwC. “The affluent and upper-middle-class segments are fairly well covered by current distribution platforms,” St-Amour said. “The main area of competition will be for the next 80m customers, where distribution will be crucial.” The key to expanding penetration will be scaling down policies, striking the right balance of affordability and cost-efficient distribution. With 53% of Indonesians working in the informal sector in 2011, according to the World Bank, and 60% living on $2 a day, the potential for micro-policies is significant.

While new rules framing micro-insurance policies are expected from OJK in mid-2014, some underwriters already have rolled out low-cost and limited-coverage policies. Most have been credit life policies rolled out via micro-finance institutions (MFIs), like Allianz’s group life endowment and credit life policies sold in 66 institutions in Java since 2010, and Jiwasraya’s credit life policies sold via 200 partner MFIs in Java and Kalimantan. “Microfinance is an area of finance that is rapidly developing. It is assisting people by providing access to financial support from banking institutions, where they would not have previously been eligible for any sort of loans,” Antonius CS Napitupulu, the president director of Askrindo, told OBG.

Other underwriters like AIG, Prudential, Manulife and Bumiputera 1912 are also rolling out PA and life policies. The new OJK rules are expected to establish an insurers’ pool for micro-insurance and could extend to a planned system of crop insurance. A pilot scheme is planned under the 2014 budget where state-owned Jasindo will cover some 20% of Indonesia’s rice fields. The government will cover 80% of the Rp188,000 ($18.80) annual premium per ha starting in April 2014, while farmers will pay the remaining Rp36,000 ($3.60). Covers will extend to losses up to Rp6m ($600) per ha for farmers losing over 75% of crops.

Outlook

Despite rising competition Indonesia’s insurance sector is yielding profit growth in both segments. The country ranks eighth in AON Benfield’s global country opportunity index, well ahead of India, Thailand and South Korea. Double-digit premium growth is expected to continue in the coming decade: Japan’s Dai-ichi expects above 15% annual growth in life premiums, while MunichRe expects above 10% growth in non-life over this period. Stricter regulations imposed under a comprehensive framework by the new regulator will bolster underwriters’ financial and technical capacity to garner this growth, while growing affluence, rising awareness of natural catastrophes and the need for financial planning will be key drivers of long-term growth.