Indonesian life segment poised for significant expansion

Life insurance which has been the largest component of Indonesia’s insurance industry in recent years, recorded a significant decline in revenues in 2015. According to the Indonesia Life Insurance Association (AAJI), in the first nine months of 2015 the life insurance segment saw revenues decline by 26.3% in total, on the back of a 152.7% drop in investment yields. Indonesia’s life underwriters rely heavily on investment-linked products (ILPs), which, due to volatility on the Indonesia Stock Exchange (IDX) and a sharp fall in the rupiah, saw downward pressure in 2015.

More broadly, the decline in oil prices since mid-2014, as well as slowing Chinese demand for mining commodities, had a negative impact on Indonesia’s economic performance in 2014-15, with knock-on implications for the nation’s insurers.

Even when taking these issues into consideration, many local life underwriters are optimistic about the future of the segment. “We have found that, among insurers, there is a general assumption that the previous global uncertainty has started to stabilise and that next year will show an improvement,” Firdaus Djaelani, the commissioner for non-banking financial institutions at the sector regulator, the Financial Services Authority (OJK), told local media in December 2015. “The financial market is predicted to have calmer reactions ahead, so we hope this will have a positive impact on the insurance industry.”

Expansion 

Despite a decline in overall revenues, Indonesia’s strong fundamentals – namely the nation’s large population and the public’s increasing awareness of life insurance products – drove an overall expansion in gross written premiums (GWPs) of 16% year-on-year (y-o-y) in January-September 2015, on the back of growth of 16.7% in new business GWPs and 15% in renewal premiums. This follows on from more than a decade of strong expansion of the nation’s life insurance industry. Given this history, plus robust fundamentals and the end-2014 introduction of a new insurance law by OJK, the outlook for the life segment is generally considered to be bright. “Economic growth in 2016 will be driven by larger investment by the government and the private sector,” Firdaus told local media “We are the most populous country in ASEAN. The strong growth of the middle class should require services beyond banking, especially for insurance products to protect their assets.”

Segment Background 

As of end-June 2015 Indonesia was home to 50 life insurance providers, according to data from the global professional services firm KPMG. While the life segment is significantly smaller than the non-life segment in terms of total players, the former is larger than the latter as measured by most other metrics, including GWPs, claims and overall penetration. Over the past 10 years the life segment’s performance has roughly tracked fluctuations in Indonesia’s capital markets, due to the industry’s overwhelming reliance on ILPs. Indeed, some 99% of total premium income at Prudential Indonesia, the nation’s largest life underwriter, was generated by ILPs. Bearing this in mind, from 2006 through to 2012 Indonesia’s life segment recorded strong GWP growth, in line with the rapid expansion of the capital markets. Indeed, the Jakarta Composite Index, which tracks market movement at the IDX, recorded growth of 45% or more for four of the six years between 2006 and 2012.

Meanwhile, in 2013 and 2014 life GWP growth levelled out somewhat, largely as a result of negative growth on the stock exchange during late 2013 and early 2014. Over the course of the latter year, overall life premiums increased relatively slowly by Indonesian standards, at 8.1%, and new business premium income was negative. Moreover, 2015 saw improved premium income but declining sector revenues, according to KPMG. Various trends have contributed to the recent performance of the sector. For instance, the number of life insurance agents has increased significantly y-o-y, from 361,000 in September 2014 to 447,000 in 2015, according to AAJI data. This jump is a reflection of the insurance sector’s steadily increasing profile in Indonesia, and bodes well for future activity.

Bancassurance, whereby insurers sign agreements with local lenders to sell their products and services in bank branches, has also become increasingly common across the life segment in recent years. In the first three quarters of 2015 almost 37% of life insurance GWPs were generated via bancassurance distribution. Furthermore in an effort to unlink their industry from the stock market, many life underwriters have worked to expand their traditional protection product lines in recent years, according to KPMG.

Regulatory issues have also had a major impact on life insurers. Since taking over as regulator of the insurance industry at the beginning of 2013, OJK has issued a number of new policies. In October 2014 a new and more comprehensive insurance law came into effect in Indonesia, replacing the previous law, which dated back to 1992. The law includes a range of new requirements, including the stipulation that all insurance and reinsurance firms must spin off their sharia-compliant business into standalone entities within a prescribed timeline over the course of the next decade. This and other new requirements have implications for the life insurance sector.

Major Players 

Indonesian life premiums are concentrated among the largest underwriters, with the top 10 players accounting for around 75% of total GWPs in 2014, while the other 25% of the market was held by the remaining 40 firms. As in the non-life segment, multinational firms control a large percentage of life business. Prudential, with almost 23% of segment premiums in 2014 at Rp28trn ($2bn) has the largest share of the life market. Established in 1995, the firm controlled around half of the total licensed insurance agent force at the end of 2014, overseeing some 237,000 agents and more than 380 independent marketing offices across the country.

The second-largest firm in terms of 2014 GWPs was Allianz Indonesia Life, with around Rp11trn ($803m) in GWPs. Allianz set up shop in Indonesia in 1996, and since then it has developed a broad portfolio of products and services, with a 14,000-strong sales force.

Products & Distribution 

According to KPMG, as of 2014 – the most recent year for which comprehensive sector was available – ILPs accounted for almost 50% of total insurance premiums, followed up by endowment products. Given the simplicity of investment-backed policies, ILPs with riders that provide death, accident and medical protection are expected to remain at the forefront of GWP growth in the coming years.

According to KPMG’s analysis, the value of ILP premiums is expected to double on an annual basis, topping out at Rp120trn ($8.8bn) by 2020. Endowment premiums, meanwhile, are expected to continue to expand at a slower pace in the coming years, with KPMG forecasting a compound annual growth rate (CAGR) of 9% through to 2020.

Finally, the burgeoning takaful (Islamic insurance) life business is expected to post a CAGR of 26% over the next four years, making it the fastest-growing life insurance segment in the country as measured by GWPs. While takaful life products account for a minority of life insurance premiums currently, the Islamic segment is expected to grow at a rapid pace in the coming years. Other smaller life insurance product lines currently on offer in Indonesia include term and whole-life protection products, as well as health and pension products, which are expected to see slower growth partly due to the state’s 2014 local universal health reforms (see Health chapter).

Similarly, while licensed agents – both independent and linked to companies – accounted for the bulk of life insurance distribution in 2014, at around Rp50trn ($3.7bn) of the estimated Rp100trn ($7.3bn) market, distribution via banks will likely make up a growing percentage of the market.

While many life insurance underwriters have signed distribution deals with local banks, a number of the nation’s leading lenders, including some with large branch networks, have yet to be tapped. When these institutions align themselves with an insurance company, bancassurance uptake has the potential to grow dramatically. According to KPMG forecasts, life bancassurance will post a CAGR of 23% over the next four years, well above the growth rate of the market as a whole. As such, by 2020 bancassurance may well account for the bulk of life insurance GWPs.