View from the Top: Indonesia's sustained momentum

The number of insured people rose by more than 50% in H113 versus the same period in 2012, to 87.2m. The figure is still considered low in view of Indonesia's total population of more than 240m.

Indonesia's life insurance premiums and non-life insurance premiums equated to a low 1.24% and 0.53%, respectively, of GDP. Insurance penetration levels in neighbouring countries such as Singapore, Malaysia and Thailand, which are above 4% with much lower population numbers, continue to suggest vast growth potential for Indonesia's insurance industry.

As the frequency and severity of natural catastrophes has increased nationwide, so too will demand for insurance in the country, which is prone to natural disasters such as flooding and earthquakes. With the number of middle-class and affluent consumers (those with monthly spending of 2m rupiah/$172 and above) in Indonesia projected to double from 74m to 141m between 2012 and 2020, the industry is expected to benefit from steady insurance protection demand.

80% foreign ownership
In view of an increased number of foreign investors drawn to the growth opportunities offered by the Indonesian insurance market, Fitch envisages a trend of strong merger and acquisition activity in the short- to medium term. Indonesia's foreign ownership limit, at 80%, is more generous than in many other regional countries. M&A will also be driven by the requirement for insurers to hold minimum capital of 100bn rupiah/$8.6m by end-2014 compared with 70bn rupiah/$6bn currently, in addition to local insurers trying to increase their scale and competitiveness ahead of the impending ASEAN Economic Community launch in 2015.

As South-East Asia braces itself for regional economic integration, Fitch feels that it is becoming increasingly important for Indonesian insurers to raise their individual competitiveness so they are better prepared for the dynamics of a more open market and more intense competition from regional players.

Fitch believes that Indonesia's operating environment remains constrained by limited levels of institutional transparency, public disclosure and risk management. Nonetheless, strengthening regulatory requirements and initiatives along with increasing foreign investor interest are likely to see the national insurance industry gradually developing into a more established market.

Microinsurance
Recent regulatory initiatives include the introduction of a micro-insurance blueprint which could provide clearer distinctions and pave the way for growth in micro-insurance in Indonesia. Indonesia is reported to account for the eighth-largest micro-insurance market in the world as of end-2012. With the planned establishment of a new insurance rating agency by 2014 to enhance the industry's premium benchmark setting, it could lead to improved underwriting performance, especially for non-life insurers, as it minimises the market's high tendency of price-cutting.

Overall, steady market growth, manageable exposure to equity risk, and stable operating margins are expected to continue to underpin the Indonesia insurance sector. This is based on the assumption that Indonesia's economic conditions remain manageable. Like other emerging markets, Indonesia is more susceptible to any extreme exogenous shocks.

Maintenance of prudent investment strategy is  paramount for insurers to shield themselves from potential equity market volatility that could translate into huge operating losses and severe capital erosion.

While the industry has demonstrated resilience in its ability to withstand losses from the flooding catastrophes in 2013, Indonesia's full ability to withstand potential losses from its catastrophic risk exposure remains to be seen. The agency believes that the sector could benefit from further strengthening of areas such as catastrophe modeling and reserving techniques to prevent any significant, unexpected rise in insured losses from future catastrophes that could lead to downward pressure on operating profitability, especially in the non-life sector.

Cheryl Evangeline (pictured) has been an analyst at PT Fitch Ratings Indonesia since May 2012