How is Indonesia increasing insurance coverage?

Indonesia’s insurance sector holds considerable potential, given the country’s current low penetration rate, large domestic population and growing middle class. While the industry suffered a setback in early 2020 when allegations of a “pump-and-dump” scheme involving investment funds managed by two state-owned insurers came to light, the strong and immediate regulatory response should restore confidence in the market. It is also an opportunity for other insurers that have demonstrated sound management of customer premium to differentiate themselves. Meanwhile, rapid advancements in the country’s digital economy are helping to increase financial literacy and provide new distribution channels to reach Indonesia’s fast-growing consumer class.

Structure & Oversight

The non-banking arm of the Financial Services Authority (OJK) regulates the insurance sector. In January 2020 the regulator’s power was put to the test with the mismanagement and subsequent collapse of two of the sector’s longest-standing insurers, state-owned life insurer Asuransi Jiwasraya and Asabri, which handled social insurance and pension funds for the National Police, the military and Ministry of Defence employees.

The majority of life insurance policies issued in Indonesia are single-premium, unit-linked products tied to investments in government bonds, mutual funds and equities. This is in part because the concept of regular premium insurance remains a near-impossible sell in much of the country due to a lack of insurance literacy. The OJK estimates that just 15.8% of adults are familiar with the concept. Insurance is consequently sold more as an investment – and one that is sometimes marketed as ensuring guaranteed returns – than a form of financial protection. In January 2020 Asuransi Jiwasraya failed to pay out on more than Rp16trn ($1.1bn) in matured insurance policies, which left 17,000 policyholders empty handed, confirming systemic problems that had been brewing for years. The following month, the incoming president director of Asuransi Jiwasraya, Hexana Tri Sasongko, estimated that the losses incurred by mismanaged investments in penny stocks amounted to Rp13trn ($916.5m). An ongoing corruption investigation is looking into the involvement of the former president director, Hendrisman Rahim, and several of his senior colleagues, as well as two business owners that had companies tied to the penny stocks in question. Asabri was also implicated in a corruption scandal after recording losses of as much as Rp11.4trn ($803.7m) as a result of investments in a remarkably similar portfolio that also used inflated penny stocks to mask losses.

Restoring Confidence

The government is prioritising policyholder repayment, and its success in this will go a long way towards restoring confidence in the industry. Several options were on the table as of March 2020, including a government bailout of the firms. Reza Darm Putranto, head of intermediary and institutional business at Eastspring Investments, an asset management company, told OBG that substantial restructuring is needed in insurance and pensions, and that this must be done in tandem with an upgrade in the OJK’s regulatory capacity to monitor non-banking financial institutions. He believes that current regulations are too flexible, which allows for the inappropriate selling of policies. The OJK’s non-banking arm monitors over 1000 companies, indicating the scope of its oversight, which is only growing amid the proliferation of online financial products (see Fintech chapter). The OJK has agreed to tighten risk management, which could see the market pull back from unit-linked policies in the short term. A parliamentary committee is also reviewing the performance of five insurers, including Asuransi Jiwasraya and Asabri. Moreover, the government has appointed state-owned Bahana Pembinaan Usaha Indonesia as a holding company to assist state insurers in improving their finances. The idea of having a single firm act as a holding company for state insurers and pension funds is not new. Erick Thohir, the minister of state-owned enterprises, said that the firm would have an initial cash flow of up to Rp2trn ($141m). However, Asuransi Jiwasraya requires Rp32.9trn ($2.3bn) to pay back customers and lift its capital ratio to a minimum of 120%, and therefore requires a more comprehensive rescue plan. “It is worth saying that the larger insurers that make up the bulk of the market are not facing difficulties – at least according to their reported solvency – and they possess high levels of capital,” David Wake, lead adviser of financial services at PwC Indonesia, told OBG, adding that the challenges faced by some industry players will shine a positive light on others that demonstrate strong management. These companies will be able to earn customers’ trust as reputation becomes more important.

Regulatory Change

January 2020 also brought adjusted foreign ownership limits on non-publicly listed insurance companies. Under 2018 regulations, foreign ownership was limited to 80% and domestic partners were required to bear at least 20% of any increase in paid-up capital, unless the entity launched a domestic initial public offering. Under the new regulations, foreign companies that have already exceeded the 80% ownership limit can increase capital in line with their existing ownership percentage, up to 85%. According to the OJK, foreign ownership exceeds 80% in six general insurance joint ventures and 12 life insurance joint ventures. The regulation legalises the status quo, but it remains to be seen whether domestic insurance partners can be convinced to contribute the financing required for joint ventures to expand through capital injection. The regulation also clarifies that the same ownership limit rules apply to takaful (Islamic insurance) and re-takaful (Islamic reinsurance) companies.

As of 2018 there were 12 standalone takaful providers, one fully fledged sharia-compliant reinsurer and 50 companies offering such services in-house, comprising 23 life insurers, 25 general insurers and two reinsurance firms. Insurers must meet a 2024 deadline to separate their sharia-compliant operations from conventional activities. The OJK has said that failure to meet the deadline could result in licences being revoked, potentially dealing another blow to the image of the sector. While takaful remains a small part of the insurance industry, maintaining this segment is deemed essential in a country where more than 85% of the population identify as Muslim. Several industry participants expressed major concerns to OBG regarding the timeline, as divestment of the sharia-compliant arms of insurers would require significant expenditure in order to maintain quality, particularly in terms of staffing. OJK advice on how to proceed has been minimal, though there are hopes that greater emphasis will be placed on non-banking regulations to address this.

The global insurance industry is also taking on improved accounting standards. Changes within the International Financial Reporting Standard (IFRS) 17, scheduled to come into force on January 1, 2021, are set to revolutionise the sector by addressing major issues with profit and loss accounting. Indonesian insurers, while broadly positive about the changes, have asked for the implementation deadline to be delayed by four years on the basis that the industry is unlikely to overcome technical difficulties and talent-related cost issues in time.

Performance & Size

As of April 2020 the full impact of the global Covid-19 pandemic on Indonesia’s economy had yet to be seen, but there were indications that marine and travel insurers already felt the pinch from falling traffic, while health insurers were braced for an uptick in claims. A rise in non-life insurance claims, both in Indonesia and internationally, is also expected to impact prices in the reinsurance segment, according to industry forecasts. Although headwinds are expected in 2020, Indonesia’s insurance industry has witnessed solid growth in recent years. Gross industry premium rose by 6.3% in 2018 to Rp433.4trn ($30.6bn), according to OJK data, though this marked a slowdown from a compound annual growth rate of 17.6% in the previous five years. In 2018 the gross contribution of the sharia-compliant segment rose by 12.1% to Rp15.4trn ($1.1bn), 5.6% of the total.

Meanwhile, the insurance industry’s contribution to GDP, as a ratio of gross premium to GDP, decreased slightly from 3% in 2017 to 2.9% in 2018. The 2.77% insurance penetration rate in 2018 was down slightly from the 2.84% of 2017, according to figures from the General Insurance Association of Indonesia (AAUI), while OJK data put the rate at 3.01%. These low figures underscore the vast potential for growth in South-east Asia’s largest economy. Insurance is indeed developing into a highly competitive market in Indonesia’s urban centres, but it remains difficult to sell in rural areas. Nevertheless, the industry is confident in the trajectory of the market, with 80% of insurance professionals believing that conditions would improve or remain stable in the years to come, according to a PwC survey. However, it is important to note that this survey was released in 2019, before the Covid-19 crisis took hold of the region. Respondents also expected a shift from top-line growth to profitability, with overall macroeconomic conditions being the primary factor in this, coupled with attracting strong talent. Nonetheless, according to forecasts from Asuransi Central Asia gross written premium in Indonesia could drop by up to 30% in 2020 as a result of the impact of the pandemic, with businesses being forced to ask for insurance payments to be rescheduled and the possibility of credit default becoming very high. Furthermore, the insurer has stated that, in order to ensure stability, companies will need to hold at least six times their monthly working capital in reserves.

In terms of actuaries, there are currently just 300 fully accredited professionals in the country. This compares to 3400 in Canada, which has one-seventh of Indonesia’s population and faces less challenging climatic conditions and disaster vulnerability. In order to bridge this gap, Canada’s University of Waterloo has established the Risk Management, Economic Sustainability and Actuarial Science Development in Indonesia project to produce 745 new actuarial science graduates between 2019 and 2021.

Subsectors

By gross premium, life coverage accounted for 45.4% of the insurance industry in 2018, with social insurance representing 33.9%, nonlife and reinsurance 17.9%, and mandatory insurance 2.8%. AAUI data shows 169 brokers in the insurance market that year, alongside 42 reinsurance brokers and 27 loss adjusters. Industry investment stood at Rp1142trn ($80.5bn) in 2018, spread across a portfolio of government bonds (27%), mutual funds (24%), stocks (22%), time deposits (12%), non-government bonds (11%) and other investments (4%).

As of the end of 2019 there were 53 life insurers operating alongside 74 general insurers and six reinsurance companies, according to OJK data. Of the life insurers, 23 operated via joint ventures, while the general segment counted 22 joint ventures. The state manages one life insurer and two general insurers, as well as a single reinsurance firm. The remainder are domestic, private sector firms. OJK data values total industry assets at Rp1325trn ($93.4bn) as of the end of December 2019. The life segment totalled Rp553.2trn ($39bn) of this, while the majority of the remaining balance was in social insurance.

Total direct premium stood at Rp478.7trn ($33.7bn) in 2019, up from Rp430trn ($30.3bn) in 2018, while claims totalled Rp358trn ($25.2bn), having risen from Rp316trn ($22.3bn) in 2018. According to the OJK, commercial insurance premium rose by 8% in 2019 to Rp281.2trn ($19.8bn); life premium was up 4.1% to Rp179.1trn ($12.6bn); and general premium surged by 46% to Rp102.1trn ($7.2bn). While AAUI data was only available for the market as of end-June 2019, the organisation’s figures show that property premium rose by 27.5% year-on-year (y-o-y) to total Rp10.6trn ($747.3m), while the motor segment rose by 0.9% y-o-y to Rp9.3trn ($655.7m). Other growth areas were credit insurance, which was up 93.3% y-o-y to Rp5.8trn ($408.9m), and personal accident and health, which grew by 6.9% y-o-y to stand at Rp3.6trn ($253.8m).

Health 

Some 223m Indonesians are now covered by the national health insurance scheme (JKN), which is managed by the Social Insurance Administration Organisation (BPJS). It includes some medical and non-medical benefits, but excludes orthodontics, infertility treatments and drug rehabilitation (see Health chapter). While the BPJS can be commended for offering a measure of health care coverage, issues with the quality of service, financing and participation currently undermine confidence in the system.

The BPJS booked a deficit of Rp15.5trn ($1.1bn) in 2019 after receiving significant state support via presidential decree between August and December of that year, which helped cover some of the shortfall in subsidised premium for 96.8m poor and vulnerable households. In October 2019 the government announced changes to the scheme to address the deficit, effectively doubling the participation premium to Rp42,000 ($2.96) per month, and adjusting the monthly salary burden of payment from 3% paid by employers and 2% by workers to the employer bearing 4% and the worker just 1%. In addition, informal workers and the unemployed will also see their premium rise for all levels of hospital care.

As health insurance premium rises, the expectation of quality care is likely to rise in tandem, providing opportunity for foreign investors to bridge the gap. However, some restrictions remain on international investment in hospitals. Evidence from other markets such as India suggests that the introduction of universal health care has a positive effect on the uptake of private coverage, particularly if state coverage fails to meet expectations. The BPJS already partners with 30 private insurers on a Coordination of Benefit initiative that offers policyholders private insurance coverage for the amount between their BPJS tariff and the total cost of the medical procedure. Private health insurers are also improving customer experience by offering cashless payments and broadening their offering to include advice on health and wellness. For example, Prudential’s Pulse app offers users artificial intelligence-enabled self-help tools and realtime updates. “Bigger players are having success selling health coverage on the back of unit-linked policies, while deconstructing details on coverage and limits that were previously too complex for customers to understand,” Wake told OBG, adding that it remains to be seen how profitable these policies will be.

Social Insurance

In its 2019 “Investing in People” report, the World Bank names the initiatives that Indonesia has enacted to create a comprehensive social protection system, ranging from a conditional cash transfer programme for poor households (PKH); an educational subsidies programme for the poorest 25% of households (PIP); and a monthly food voucher programme (BPNT), which had provided 15.6m families with monthly stipends of Rp110,000 ($7.75) for rice and eggs as of the end of 2019, and is set to be widened in the years ahead. Furthermore, alongside JKN there is a work-related accident benefit system that covers medical treatment and cash payments, and death benefits are available to the heirs of both salaried and non-salaried workers.

However, the report notes that while this combination of schemes provides an adequate social safety net in theory, there are significant areas of exclusion that need to be addressed. For instance, the elderly in particular suffer from low and regressive pension coverage, while families without children are often ineligible for assistance. Moreover, Indonesia’s total spending on social assistance remains low, at 0.7% of GDP, compared to the average lower-middle-income country rate of around 1.5%. This is reflected in the relatively low coverage of other aspects of social insurance: the absence of unemployment benefits has driven early withdrawals from the country’s old age savings scheme, heightening the risk of poverty for the elderly population, for example.

The World Bank sets out the need for Indonesia to move towards a broader social insurance system that protects people as they age and when they are in between jobs. This is envisaged as a progressive social contract that would provide Indonesians with guaranteed minimum levels of protections to ensure they remain above the poverty line throughout their lives. This would be achieved by both rationalising PKH and PIP, and expanding BKH and BPNT with tapered benefits to address the current gaps in coverage. It would also include a transition towards pre-funded unemployment savings accounts to act as unemployment benefits. Furthermore, a publicly financed needsbased package could protect people up to the 70th percentile, falling to the 40th percentile as income levels rise over the next 25 years, according to the World Bank’s analysis. Mandated, individually financed social insurance could serve the remainder of the population. As the government embarks on wide-ranging labour reform, the World Bank also stresses the need for Indonesia to move away from traditional forms of social insurance for workers – such as severance pay and contributory pensions – given that a large portion of employment is likely to remain informal.

Disaster & Crop

Jakarta has historically had flooding problems, such as the heavy rains over the 2019-20 New Year that placed much of the city under water. Insurers anticipated only a moderate rise in claims as a result of the floods, in part because the majority of property and motor policies do not cover flood risk, and the AAUI projected a bill of $79m. Although this gap in coverage provides a number of opportunities for enterprising insurers, the higher premium attached to such policies could limit demand and insurers may find it difficult to price risk. According to the National Board for Disaster Management (BNPB), Indonesia suffered 3622 natural disasters in 2019, resulting in 475 fatalities and 108 missing persons – fewer than in 2018, when devastating earthquakes, tsunamis, landslides and other natural disasters led to the death of around 4231 people. BNPB estimated that the 2018 Central Sulawesi earthquake and tsunami alone resulted in financial damage worth $1.3bn.

The majority of those disasters were hydrometeorological phenomena, thus small but progressive efforts are being made to broaden the coverage and understanding of weather-related insurance products. For example, as part of broader efforts to encourage sustainable farming, a collaboration between the Syngenta Foundation for Sustainable Agriculture, ACA Asuransi and CU Rahayu is offering weather index insurance to farmers in two locations of Java in order to protect their crops against insufficient rainfall.

In a related move, a memorandum of understanding was signed in Jakarta in January 2019 to strengthen the crop insurance system for rice, of which Indonesia is the world’s third-largest producer. Under the agreement, insurance giant Swiss Re and the Japan International Cooperation Agency will collaborate with local institutions to recommend policies in line with the National Medium-Term Development Plan 2020-24 to help small-scale growers.

A lack of education and weak faith in the institutional mechanisms necessary to ensure farmers receive payouts on their claims are major obstacles to widening the penetration of crop insurance. Indonesia is attempting to change this through participation in the Remote Sensing-based Information and Insurance for Crops in Emerging Economies project, an initiative led by the Indonesian arm of GIZ, Germany’s international sustainable development agency, and domestic insurer Jasindo. The scheme works to protect farmers from drought and floods by indexing lost crops to sensor-based data rather than land area, thus providing them with a tool that can assist with the process of proving claims. In November 2019 the World Bank approved a $160m loan for the Indonesia Disaster Resilience Initiatives Project to complement other government investments in disaster risk financing and insurance. The government is proceeding with a plan to shift part of the financial risk of catastrophes to private insurance and reinsurance players. By late 2019 the government had reportedly secured some $770m of coverage against earthquakes, floods, fires, riots and terrorism attacks for 1360 state buildings owned by the Ministry of Finance (MoF), which was achieved by spreading the risk across 56 insurance and reinsurance firms. The MoF paid a fixed premium in excess of Rp21bn ($1.5m), according to local media. The government hopes to duplicate this arrangement across additional ministries in the coming years, and will seek to make sure that construction of the new capital in Kalimantan is insured in similar fashion.

Indonesia remains acutely vulnerable to catastrophic events and has yet to formulate an adequate financing framework to mitigate the impact of natural disasters. One solution is the sale of catastrophic bonds based on the parametric model, which rather than indemnify against actual losses incurred, offer coverage based on the probability of a predefined event occurring, with payouts based on a predetermined scheme. State insurer Jacindo is currently piloting parametric models but there are significant skills-based challenges, and progress is impaired by limited demand for this more innovative method of coverage.

Reinsurance

In the reinsurance segment, such premium ceded abroad rose by 9.4% to Rp17.1trn ($1.2bn) in 2018, with commission and claim recovery from this amount reaching Rp2.2trn ($155.1m) and Rp5.1trn ($359.6m), respectively, for a net deficit of Rp9.8trn ($690.9m). Reinsurance transactions received from abroad achieved a net surplus of Rp2.3trn ($162.2m), resulting in an overall balance of payments deficit of Rp7.5trn ($528.8m), according to OJK data. The deficit ratio of inward and outward reinsurance to gross premium was 9.66%, versus 9.54% in 2017. This demonstrates the challenge for Indonesian reinsurers to convince the industry to place more of its risk onshore.

Outlook

A lack of digital and financial literacy, as well as mistrust of financial institutions – a legacy of the 1997-98 Asian financial crisis – hinder greater insurance penetration. However, 115m of Indonesia’s 268m people no longer live in poverty and one in five of the country’s population are now middle class. Sustained commitment to the government’s reform drive, along with astute adjustments to the social safety net, should support the steady macroeconomic growth necessary to keep expanding the pool of people who both understand and are able to afford insurance. Technological innovation looks set to overcome the challenges posed by this large and growing market, while efforts continue to address Indonesia’s acute vulnerability to climate change and natural disasters.