Captured potential: The life segment leads, with expansion taking place across the board

The country’s insurance sector stands out as the fastest growing and most promising in South-east Asia, even within a region widely seen as the most attractive for the world’s major underwriters. Supported by rapid economic growth spurred by domestic consumption in the past decade, the sector has averaged compound annual growth of 20% in gross written premiums and 26% in assets since 2007, according to Jakarta-based credit rating agency Pefindo.

ON THE RISE: While this consistently rapid growth, similar to sustained wider economic resilience, has produced healthy profits, overall insurance penetration has remained virtually flat, reaching a mere 1.8% (1.34% for life and 0.46% in non-life) in the first half of 2012, according to UK-based professional services firm KPMG. While the sector has a far lower share of the economy when compared with regional peers like Thailand (4.3%) and Malaysia (4.1%), Indonesia’s significantly larger economy and population means the overall market is the largest in South-east Asia in absolute terms. Existing policyholders are spending more on protection, with the average insurance density – average premiums per policyholder – rising 11.22% year-on-year ( yo-y) to Rp450,690 ($45) in life and 4% to Rp153,110 ($15.31) in non-life in the first half of 2012, according to the regulator, the Capital Market and Financial Institutions Supervisory Agency (Bapepam-LK).

This in itself has been enough of a draw for a number of foreign and local investors to enter the market. Furthermore, regulatory pressure to achieve the long-elusive economies of scale and technical capacity required to improve efficiency and access is opening up the sector to a growing number of foreign investors and local banks keen on expanding this most promising source of income. “It is a market that certainly captures our attention,” Chris Colahan, the regional chief executive of Canadian underwriter Royal & Sun Alliance, told local press in October 2012.

FRAGMENTATION: Although one of the most promising frontiers for regional insurers, the sector remains plagued by a legacy of fragmentation and inconsistent regulatory enforcement. Integration of all financial services regulations under a new body in 2013 is a significant step forward in enforcing recent regulations aimed at sanitising the sector.

As the already significant middle class continues to expand and prosperity rises, a growing share of Indonesians is likely to appreciate the benefits of insurance. The significant recapitalisation in the industry now under way will be crucial to capturing this potential.

LIFE IN THE DRIVING SEAT: Despite somewhat tempered growth in 2012, albeit still above 6% y-o-y, the sector is set to sustain its track record of resilient and rapid growth. Premiums grew some 15.5% y-o-y in the first half of 2012, generating Rp68.9trn ($6.9bn) in premiums. This was driven primarily by the life segment, in which premiums grew 16.4% y-o-y to Rp47.97trn ($4.8bn). According to figures from Bapepam-LK, the assets of the top 10 life insurers grew by around 24.6% y-o-y in 2011, while those of the top non-life insurers grew at a more modest 15.9%.

While the life segment’s outperformance of the sector is standards across the region, the non-life segment registered a healthy 13.6% y-o-y premium growth to Rp20.93trn ($2.1bn), almost double the growth in non-life in more mature markets like Thailand and Malaysia. Both the life and non-life associations – AAJI and AAUI respectively – forecast 25% growth in premiums for the industry as a whole in 2012.

EXPANSION ACROSS THE BOARD: The life segment’s dynamism is in large part linked to sustained expansion in credit and the associated upswing in bancassurance premium income. Total life premiums have grown dramatically in the past five years, rising from Rp61.73trn ($6.2bn) in 2009 to Rp94.43trn ($9.4bn) in 2011 and Rp47.97trn ($4.8bn) in the first half of 2012. The AAJI expects compound annual growth in life premiums of 25% over the next three years. While the lion’s share of premiums is generated in group life business associated with social security charges and corporate life policies, individual covers have shifted toward unit-linked policies, which link traditional life policies to units in mutual funds. The higher returns offered by such policies amidst rising equity and bond returns has been a draw for individual policyholders, who view them largely as savings instruments. Life underwriters, meanwhile, are able to offload most of the investment risk on their clients and thus minimise asset-to-liability mismatches. Yet in the past year, new sales of non-investment-linked policies have begun to rebound.

COVERING GROWTH: Sustained rapid economic growth has not only contributed to a rise in disposable incomes but also to expanding investments. This domestic dynamism has been accompanied by growth in non-life insurance that surpassed regional standards, although penetration remains very limited. “The middle class is growing, but insurance is still not seen as a priority,” Gunawan Chan, the president director of Avrist General Insurance, told OBG. “However we have seen a recent increase in popularity and policies are gradually becoming easier to sell.”

Premiums, if not profitability, have been dominated by motor and property insurance, linked to rising domestic consumption exemplified by rapid growth in vehicle sales and buoyant construction activity, both for residential property as well as for commercial and infrastructure projects. The segment as a whole, while still shy of the returns in life, increased premiums by 19.5% in 2011 to Rp29.65trn ($3bn).

The first half of 2012 showed some acceleration in growth, with Rp20.93trn ($2.1bn) in total premiums. Gross claims increased a modest 5.5% y-o-y in 2011 to Rp12.78trn ($1.3bn), according to AAUI, contributing to a marked improvement in the non-life segment’s profitability, which grew 29% over 2010 levels, to Rp3.22trn ($322m), according to Bapepam.

By the first half of 2012 motor and property lines accounted for 30.1% and 27.4% of total premiums, respectively, according to AAUI. Despite the lack of compulsory third-party liability cover for registered vehicles, growth in two- and four-wheeler sales has driven expansion in motor insurance (see analysis).

NON-LIFE LEADERS: Property insurance has been buoyed by rising investment in commercial and industrial property. Sustained investment in high-rise hotels, condominiums and malls is expected to drive medium-term growth in commercial property insurance in particular. Meanwhile, growing foreign and local investment in manufacturing will keep industrial property insurance healthy. Low awareness and willingness to protect homes has caused penetration in residential property to lag, though rising mortgage lending has spurred some growth in recent years, albeit from a low base.

The rise in property values, particularly in urban areas in Java, where most of the policies are concentrated, helped to push property claims to Rp3.47trn ($347m) in 2011, according AAUI, though this was lower than the extraordinary peak of Rp4.14trn ($414m) recorded in 2010. Above-average urban growth in other cities in the country, particularly in commodity-rich centres beyond Java and Bali, has created opportunities for growth in commercial and industrial insurance. While smaller in value than the top two policy lines, premiums from historically marginal lines such as personal accident (PA), health, aviation and marine insurance have led the non-life segment. PA and health in particular have grown the fastest, registering 35.15% y-o-y rise in premiums in 2011 and accounting for a 13.5% share of non-life premiums in the first half of 2012.

While only an estimated 3% of Indonesians hold private health insurance according to AXA in an October 2012 report, growing out-of-pocket expenses due to inadequate public health insurance cover presents strong potential for sustained health premium growth. While the PA and health segment is the only one in which both life and non-life underwriters can compete directly, life insurers have held an edge in selling such covers as riders on traditional life policies. Indeed, the biggest-selling rider for larger life insurers in recent years has been coverage for health and critical injury.

SMALLER PLAYERS: Smaller policy classes have also grown, with marine cargo, hull and aviation insurance accounting for 7%, 3% and 3% of non-life premium in the first six months of 2012. The imposition of cabotage rules for domestic shipping over the past two years has generated growth for insurers, led by Tokio Marine and AXA Mandiri. Marine cargo premiums grew 15.9% y-o-y to Rp2.18trn ($218m) in 2011 while marine hull grew roughly 20% y-o-y to Rp953.9bn ($95.4m).

The most spectacular growth, however, has been in aviation insurance. Premium growth ratcheted up from 16.3% y-o-y in 2011 to 131.2% in the first half of 2012, according to AAUI, driven by the very rapid expansion in fleet size for domestic carriers like Garuda and Lion Air. Much of the aviation risk is ceded offshore, however, with the largest player in this line being the reinsurance broker Jardine Lloyd Thompson. Following the January crash of a Merpati flight to Sampit Airport and a June crash of a Sriwijaya Air flight to Supiado Airport, however, claims in the first half of 2012 surged by 213.6%, to Rp154.47bn ($15.5m).

SIZE DISPARITY: However, these aggregate growth figures obscure wide disparities in performance across the industry. With a legacy of fragmentation on a par with the Philippines, the Indonesian insurance market remains much more crowded than that of Thailand, Malaysia or Singapore. The non-life segment remains close to twice as crowded as the life segment, with 82 underwriters to life’s 44. The larger players tend to capture the lion’s share of the sector’s profits: roughly a quarter of non-life insurers registered profit margins of above 10% in 2011, while foreign-linked life insurers in Indonesia are more profitable than those in China and India, according to SwissRe.

Only 22 underwriters, or 15% of the total, have registered net losses in the past three years, according to Pefindo, but the lower tier of small companies is struggling to demonstrate growth prospects. Even among larger underwriters, risk retention remains low, with the majority of risk ceded abroad rather than to one of the country’s four reinsurance companies (see analysis).

The best-capitalised top tier of the market continues to dominate premium income, with the top 10 life underwriters controlling 52.5% of premium and 56.9% of the segment’s assets in 2010, compared to the top 10 life insurers’ 61.9% and 66.3% respective market shares, according to Pefindo.

Recent years have cemented this lead: KPMG estimates that the assets of the top ten life insurers grew 24.6% in 2011 while those of the leading non-life players rose 15.9%. The mid-market has been subject to new investment from both foreign and local sources, but the prospects for the smallest tier of uncompetitive underwriters are dubious – Bapepam-LK announced in September 2012 that nine life and 22 non-life insurers had yet to meet higher capital requirements set for year-end 2012. The state-owned non-life underwriters, meanwhile, have increasingly been squeezed, with their share of non-life premium income dropping from 14.89% in 2011 to 9.49% by September 2012, according to AAUI, which estimates the drop is mainly caused by the insurers’ reliance on corporate policies to the detriment of faster growing individual policies.

MERGERS & ACQUISITIONS: While very limited consolidation in the sector has taken place in the past decade, insurers see consolidation as theoretically necessary but likely only to transpire with regulatory pressure by raising capital requirements. Thus far, merger and acquisition (M&A) activity has mainly been driven by foreign investors seeking market access in the absence of new licences.

Foreign players are more dominant in the life segment than in non-life, accounting for 70% of premiums compared to about 30% on general lines. While all but three of the top ten life underwriters are foreign-linked, large foreign non-life underwriters in Indonesia such as Allianz, Zurich and Tokio Marine remain smaller than local players such as Astra Buana, the leader in motor lines, Sinar Mas, a leader in property, and bank affiliates such as Asuransi Central Asia and Panin Insurance.

The acquisition by Australia’s ACE Insurance of a leading motor underwriter, Asuransi Jaya Proteksi, in 2012 may indicate growing foreign interest and competition in the segment, however, with expectations of more large acquisitions rife by late 2012. Foreign ownership of underwriters is capped at 80% since 2007, a high ceiling by regional standards, although in practice exemptions to the rule have been granted particularly to insurers on the market prior to the 2007 rules such as Manulife, which holds 99% of Asuransi Jiwa Manulife, for instance. Bapepam-LK pledged in 2012 not to follow the example of the banking sector in setting caps in shareholding for underwriters, although such reforms are expected in the longer term.

MULTI-CHANNEL DISTRIBUTION: Insurance has historically been sold through a network of agents and brokers, a system that cemented established underwriters’ lead in the market. Yet over the past decade this has started to change, first with the involvement of banks as sales channels (particularly for life policies) and more recently with the introduction of alternative methods such as telemarketing. With most underwriters now adopting a distribution strategy that employs different channels for selling specific products to certain target markets, competition has become more fluid. Selling policies through banks has lower distribution costs for underwriters, while the bundling of PA and life insurance with bank loans offers an attractive captive market. The development of bancassurance reached a watershed for life policies in 2012, when premiums from this channel (40.6%) overtook those of agencies (39.2%) for the first time (see analysis). Bancassurance distribution remains relatively minor for non-life products however, with underwriters selling mainly PA and health policies (in which they compete directly with life insurers) through this channel.

Strong agency forces remain central to underwriters’ efforts to reach beyond urban centres and existing banked population. The number of registered agents has been growing apace, particularly since BapepamLK’s introduction of new certification procedures in 2011 in an effort to improve underwriting standards. There were roughly 258,000 life and 25,000 non-life agents by 2012, according to the two associations. Agents are also only able to represent one underwriter, either in life or non-life, which has also contributed to growth in agency forces particularly in life.

FEWER BROKERS: Faced with stiffer competition from alternate channels, the number of direct brokers has dropped from 143 in 2006 to 138 in 2010. The number of reinsurance brokers has staid relatively stable at 25, given the significant demand for speciality risk covers as well as inadequate capacity to cover larger risks domestically. Direct brokers’ margins have been under pressure, however. While brokers have traditionally charged commissions as a share of total premiums paid, larger corporate clients have sought to harmonise incentive structures by agreeing on flat rates for policies to pressure brokers to shop for the best deal from underwriters. Direct brokers continue to handle a significant share of larger corporate risks but have also been expanding towards the larger tier of medium-sized enterprises in recent years, according to Lloyd’s.

Particularly in life, underwriters such as AIA, Allianz, Cigna and Prudential have increasingly experimented with new direct sales channels such as telemarketing and online sales. Particularly successful for PA and health, telemarketing accounted for 2% of life premiums in the first half of 2012 according to AAJI. Larger non-life insurers like ACE and Chartis have also been attracted to this medium. Following the example of South Korea and, closer to home, Thailand, underwriters are also planning to launch direct-TV marketing (including TV adverts channelling clients to inbound call centres) in the coming year. While such innovation in roll-out strategies is a welcome development, regulatory efforts to develop the sector may prove more successful in expanding access and penetration.

REGULATORY INTEGRATION: Consolidation into a smaller number of more efficient players has long proved elusive, and one of the most significant developments in the coming year will be the establishment of a new financial services regulator covering insurance under the same roof as banking, capital markets and other non-bank financial institutions. The new regulator, the Otoritas Jasa Keuangan (OJK), took over functions from the existing regulatory bodies for the sector, Bapepam-LK and the Ministry of Finance, in January 2013. This is expected to quicken the pace of implementation of agreed recent reforms.

In the short to medium term, the new regulator will push on with enacting the state’s strategy for the sector, enshrined in Bapepam-LK’s five-year plan to 2014, in anticipation of the planned common ASEAN free trade zone in 2015. Improvements in financial, technical and human capacity, in both life and non-life are seen as a priority in anticipation of greater competition. Major improvements are expected in risk management, an area where local insurers have traditionally lagged behind their peers, as the regulator moves to tighten requirements under the risk-based capital (RBC) framework and migrates sector accounting standards closer to international norms (see analysis).

Bapepam-LK has taken a gradual approach to raising capital requirements to avoid disruptions to the market and small underwriters especially. Following delays in enforcing a new capital structure for the industry since reforms were tabled in 2007 under the Insurance Law, the regulator has enforced a minimum requirement of Rp40bn ($4m) for underwriters since end-2010. While still a low threshold, this was due to rise to Rp70bn ($7m) by end-2012 and Rp100bn ($10m) in 2014, while the requirements for reinsurers were to rise from Rp100bn ($10m) in 2010 to Rp150bn ($15m) and Rp200bn ($20m) in the same period.

Meanwhile, requirements for takaful,or sharia-compliant insurance, underwriters have been maintained at Rp50bn ($5m) and will rise to only Rp75bn ($7.5m) in 2014, in order to support the development of the nascent segment. While smaller underwriters will struggle to mobilise fresh capital to comply, strong growth prospects and relatively low penetration are likely to attract further interest from both foreign and local investors, particularly given that Bapepam-LK has by and large stopped awarding new licences.

REGULATORY CHANGES: The establishment of the new regulator has spurred the potential for a new, comprehensive sector strategy, which the Ministry of Finance already hinted at in 2011. “The government should issue a white paper on the insurance sector to provide a comprehensive policy to develop the sector,” Clifford Rees, director of PricewaterhouseCoopers’ Indonesia Advisory service, told OBG. “We would expect changes to rules on asset allocation, shareholding and the government’s role in the sector.”

Indeed, while piecemeal reforms have been enacted in recent years beyond capital requirements such as risk management, accounting and asset allocation rules, the argument for a wholesale new act has been gathering steam. Underwriters argue that a long-term strategy should be spelled out, with supporting reforms such as waiving the tax on mergers and acquisitions and a standardisation of the tax code.

Some cautious liberalisation of insurers’ investment guidelines has already taken place, however, with new rules in 2012 allowing for limited investment in foreign securities just as investments in firms affiliated with underwriters have been capped at 10% of assets to curb the potential for excessive concentration of risk. Life insurers have traditionally been more exposed to capital markets volatility than their non-life counterparts, given their higher exposure to mutual funds and stocks compared to safer instruments like bonds and time deposits. Underwriters are now allowed to invest in 17 asset classes, six more than in 2011, including alternative instruments such as private equity.

REALISTIC PRICING: While ongoing regulatory reforms are significant, proper enforcement and implementation of existing rules is more pressing yet, particularly in non-life. In a fragmented market where underwriters tend to crowd into similar policy lines such as motor and property, competition has led to excessive discounting and commissions for new business.

Although Bapepam-LK has capped acquisition costs at 25% of premiums (already higher than in countries like Thailand, which caps commissions on compulsory third party motor liability at 12%, for instance), these have been pushed to between 40% and 60% for motor and property in practice, according to most underwriters. This has led to some of the lowest premium rates in Asia, according to insurance rating agency AM Best.

Total claims rose 18.2% to Rp39.88trn ($4bn) in the first half of 2012, according to Bapepam-LK figures, although the non-life segment’s loss ratio (gross claims as a share of gross premiums) has dropped from around 45% in 2009 to 37% in 2011. This drop is mostly due to the rapid expansion in premium income and the slow nature of claims settlement, rather than a reflection of adequate pricing. The rapid expansion in premiums also accounts for relatively contained loss ratios on motor lines, at 42.9% in 2011.

In practice, larger-volume underwriters have compensated for losses through investment income, but stricter regulatory enforcement is expected in coming years. The appointed management of the new regulator, OJK, has announced its intention to clamp down on excessive discounting in the industry. It plans to require underwriters to publish their policy pricing formulas in a bid to harmonise underwriting and pricing across all players. A strong emphasis is also placed on consumer protection, which will likely place the spotlight on intermediaries such as brokers and agents.

NATCAT RISK: Better pricing should enable underwriters to expand coverage to take account of the natural disaster risks present in Indonesia, rated by international reinsurers as a high-risk area. Located on the earthquake-prone “Ring of Fire” (home to 13% of the world’s active volcanoes), Indonesia experiences an array of regular natural disasters. Earthquakes, forest fires, storms and floods have caused $11.3bn, $9.3bn, $9.3bn and $6.9bn in damages respectively since 1982, according to the US Agency for International Development and World Bank’s International Disaster Database.

Low insurance penetration has limited resulting claims on underwriters. Indeed, less than 1.5% of the $4.5bn damages caused by the 2004 tsunami in Sumatra were insured, while only 6% of damages caused by the most insured tsunami thus far, in Bengkulu in 2007, were covered. “The issue for insurers is that Indonesia’s location and geography mean it is exposed to a range of natural catastrophe events and a lack of detailed historical claims data makes it very difficult for insurers to model, and therefore appropriately price, the risks,” Dean Carrigan, a partner at Clyde & Co’s Australian operation, told local press in October 2012.

Non-life insurers established a national earthquake insurance pool in 2003 with support from the Finance Ministry, establishing an independent company Asuransi Maipark Indonesia to manage it the year after. Backed by all non-life underwriters and the four reinsurers, the members must cede between 5% and 25% of earthquake insurance premiums to the pool, up to a maximum of $2.5m per risk. The policies sold have been standardised as stand-alone covers, with rates ranging from 0.1% to 0.33% depending on location and building type, and covers loss and damages on property as well as business interruption for corporates. Rated at the sovereign level of BBB+ by Fitch, Maipark’s premium income has continued to grow steadily by 31.6% y-o-y to Rp77.6bn ($7.8m) by August 2012. Despite consistent growth, the sums insured pale in comparison to total property risk, accounting for a mere 2.2% of 2011 property premium. Underwriters have stopped short of aggressive marketing of such policies, citing low demand and an absence of catastrophe modelling systems and inadequate time series.

POSSIBLE MODELS: Although a new flood insurance pool was proposed by the AAUI several years ago, progress in establishing such a scheme has stalled. However, the government has prioritised the development of disaster risk management. The World Bank offered a number of alternatives for a natural catastrophe (NATCAT) scheme in October 2011, including direct insurance support through a natural disaster reserve fund or joint disaster reserve fund in conjunction with private insurers. Underwriters have promoted the idea of public-private partnership, whereby the state would backstop losses beyond a certain level.

“We have prepared a catastrophe model with the Ministry of Finance, we see Taiwan’s catastrophe reinsurance system as a successful model to replicate,” said Frans Sahusilawane, the president director of Maipark. “By our calculations, the risk premium that should be provisioned under the scheme should be at least around Rp1trn ($100m).” While a decision on the form of such a NATCAT scheme was still pending in late 2012, underwriters are keen for more government promotion of such covers to expand demand and create economies of scale needed for such a scheme to succeed.

EXPANDING ACCESS: Growing penetration of more conventional insurance types is a more immediate goal for both the government and insurers. While a quickly growing middle class has spurred double-digit growth in life, property, motor, PA and health, the vast majority of Indonesians remain uninsured. The number of policies is not growing as fast as total premium value, which indicates that existing policyholders buying more insurance is the key driver of growth, according to Prudential Life Assurance. More will need to be done to extend financial inclusion.

SECTOR CHALLENGES: With some 60% of the population living on less than $2 a day, according to the UNDP, and 53% of workers employed in the informal sector, according to the World Bank, underwriters are seeking new models for providing lower-cover policies to a wider breadth of citizens. Part of this is due to lack of awareness, but it is also due to a slow development of smaller-premium policies with limited coverage, known as microinsurance. “Microfinance is an area of finance that is rapidly developing, therefore Askrindo as an insurance company owned by the state has been developing insurance for microcredit,” Antonius CS Napitupulu, the president director of local reinsurance broker Askrindo, told OBG. “It is assisting people in rural areas by providing access to financial support from all banking institutions whereas they would not have previously been eligible for any sort of loans.”

A growing number of underwriters have developed products in this line, although premium revenue in this class remains low. An estimated 85% of micro-premiums stems from the life segment, primarily focused on life, health and PA policies. Allianz Life has been an early mover in micro since 2010, rolling out group life endowment and group credit policies (including a takaful variant) through a network of 66 partner micro-financial institutions (MFIs) and rural banks, with monthly premiums as low as Rp3000 ($0.30) per policy.

By the first half of 2012 the scheme had covered 860,000 low-income Indonesians, growth of 56% y-o-y, mostly in villages on Java, generating some Rp29.2bn ($2.9m) in premiums, or 63% y-o-y growth. While this sizable pool of policyholders accounts for a quarter of Allianz clients in Indonesia, the revenue generated under the scheme accounts for only 1% of its gross premiums. The underwriter expects its micro-client base to reach 1m by the end of 2012, with Rp65.7bn ($6.6m) in premium income. Life insurer Asuransi Jiwasraya has followed suit in cooperating with 200 MFIs and has 500,000 micro-policyholders in Java and Kalimantan.

Asuransi Central Asia (ACA) has adopted a different approach by partnering with the affiliated Super Indo convenience store chain as well as post offices to sell scratch cards offering limited dengue fever cover. By selling such cards through an established store network and requiring clients to call in to activate the policy cover, ACA has limited distribution costs while systematising policy terms and claims settlement procedures, with annual premium of Rp50,000 ($5) per policy and cover of up to Rp2m ($200). Underwriters widely view micro-insurance as part of their corporate social responsibility plans rather than a serious driver of premium income, though opportunities for cross-selling higher-yielding policies over the longer term could develop.

Major life underwriters, such as Prudential and Manulife, are planning to launch their own schemes, while non-life insurers like Chartis are also rolling out their own PA and health micro-policies (in a takaful format), partnering with sharia-compliant Bank Muamalat’s subsidiary Baitulmaal Muamalat. The bank sees the potential for 2.1m micro-insurance customers for the policy class in the short term. Bapepam-LK has encouraged such initiatives, though it has yet to issue dedicated regulations for the policy class.

BROADENING TAKAFUL: Beyond developing the lower-end mass market, takaful presents a number of opportunities in a country where roughly 90% of the population is Muslim. Underwriters see the potential for such policies to extend beyond the Muslim population as well. “Takaful is not a religious product, per se; it is just a system that allocates the risk differently,” Shaifie Zein, the chairman of the Association of Sharia Insurance of Indonesia, told OBG.

While the policy class has lagged behind the strong development in neighbouring Malaysia, where higher levels of government support and subsidies for takaful have encouraged development, Indonesia’s combined takaful class is expanding faster, with tenfold growth in contributions since 2006, according to Fitch. Indeed, takaful increased from Rp498.9bn ($50m) that year to Rp4.97trn ($497m) in 2011, slightly higher than the global industry’s 28% growth. The segment’s assets have grown from Rp1.89trn ($189m) in 2007 to Rp9.2trn ($920m) in 2011, or roughly 3.21% of industry assets. The number of underwriters offering takaful products has also grown apace, from 30 in 2006 to 43 by 2012.

Takaful policies are structured under the wakala model of principal agency, in which premiums are split between an administrator fund financed by fees on the insured and a policyholder fund for claims settlement. While the lion’s share of takaful premiums are generated by agents, takaful bancassurance is developing on the back of sustained growth in Islamic banking.

TAKAFUL REGULATION: The regulator plans on establishing a specific regulatory framework for takaful in 2013, circulating a draft to the industry in 2012, with some similarities to Malaysia’s strong guidelines, including the valuation of liabilities, operational framework and financial reporting. New regulations in 2010 requiring takaful operators to establish sharia boards and strictly segregate equity from policyholder funds were important first steps in regulating takaful operations, as were stricter approval processes for takaful products in 2011, but underwriters are awaiting more comprehensive reforms to the new rules.

While capital requirements for takaful companies are set to increase more slowly than those for conventional underwriters, the regulator is expected to stop short of subsidies for takaful, as in Malaysia. With most takaful underwritten by windows within conventional underwriters rather than by specific subsidiaries, the new OJK is also expected to require all insurers to make their takaful businesses a separate entity within three years of enacting the new rules. Integration of all regulatory oversight in one body will likely spur a more holistic approach to the development of sharia-compliant financial instruments, with the development of investment instruments being key to takaful’s longer-term success.

OUTLOOK: The fundamentals and growth prospects for Indonesian insurance are widely acknowledged. One of the world’s most stable and rapid economic growth rates, coupled with rising incomes, will prove fertile ground for insurance. Strong regulatory enforcement will be crucial to addressing the low penetration. If the long-awaited consolidation into better capitalised underwriters is able to aid greater innovation in products and distribution channels, Indonesia’s current rapid growth should increase exponentially. While there is no shortage of investors eagerly seeking out further opportunities in the insurance sector, difficulties could prevent themselves in finding the right acquisition to leverage the country’s rapid and promising economic growth.