Indonesia or bust?

The country's growing middle class and low insurance penetration make it an attractive prospect for general insurers looking to expand into South East Asia.

But Indonesia's insurance sector is currently undergoing significant regulatory change, while there are restrictions on the way foreign insurers can enter the market.

Stable growth
Indonesia has enjoyed stable economic growth of 5% to 6% per annum for the past five years and, with a population of around 242 million, is the most populous country in South East Asia.

Anna Tipping, a partner at Norton Rose (Asia), says that the penetration of non-life insurance in Indonesia is around 50% lower than in more mature markets, creating considerable opportunities for insurers.

"As they acquire more, they want to protect their investment and so turn to insurance for that protection." Tipping

Wealth factor
"As people's wealth increases, they spend more, particularly on material possessions, and as they acquire more, they want to protect their investment and so turn to insurance for that protection," she explains.

Gross premiums for non-life insurance business rose by 19.5% in 2011 to total IDR34.4tn (£2.2bn), according to the General Insurance Association of Indonesia.

Double growth
Premiums from motor insurance alone more than doubled between 2006 and 2010, and further strong increases are expected with the introduction of compulsory third-party liability motor insurance, which is expected in the near future.

There are also significant opportunities for commercial insurers. "Massive amounts of infrastructure development, by way of ports, roads, water plants and power plants, all create opportunities for commercial insurers," adds Tipping.

"These projects all require finance and, whenever finance is involved, the lenders demand insurance be purchased."

"The Indonesian insurance market offers significant potential, but it is also a market that faces a number of challenges in the short to medium term." Stewart

Islamic centre
As the most populous Islamic country in the world, there is also considerable potential for takaful, or Shariah-compliant, insurance, while Indonesia's rural population means there is likely to be a strong market for microinsurance.

Ian Stewart, a partner at Clyde & Co in Singapore, says: "The Indonesian insurance market offers significant potential, but it is also a market that faces a number of challenges in the short to medium-term."

Regulatory change
Among these challenges is the fact that the insurance sector is currently undergoing significant regulatory change.

The current regulator, Bapepam-LK, is aiming to align the industry's capital and solvency requirements with international standards.

As a result, insurance companies have to increase their minimum capital to IDR100bn (£6.4m) by 2014.

Jeff Yeung, a senior financial analyst at AM Best Asia Pacific, believes that, while the majority of large companies should be able to meet these solvency requirements, the move will drive market consolidation.

He adds that five insurance companies have had to surrender their licences after failing to meet the first stage of the process, and a further 29 may have to follow suit by the end of this year.

"I have heard of insurers that are insolvent by a considerable margin." Source

Independent regulation
At the same time, Indonesia is in the process of introducing a new, independent financial regulator, Otoritas Jasa Keuangan, which translates as the Financial Services Authority, to supervise the banking and insurance industry from 2013, adding further to the upheaval.

As part of the overhaul, the current regulator has said it will not grant any new insurance licences. Branches of foreign insurers are not permitted, and only an Indonesian incorporated company can apply for an existing licence.

Joint ventures
Foreign insurers' holdings in joint ventures are also capped at 80% of shares, although there are ways around the restriction.

"There are too many small insurers in the market and there are a good number of small insurers that are technically insolvent," Tipping explains.

"The Indonesian regulator wants to tidy up the market by forcing anyone who wants to come into Indonesia to take them over and improve them rather than giving out new licences."

While this may sound like a good opportunity for foreign insurers that want to enter the Indonesian market, it is not without problems.

One industry insider, who did not want to be named, said: "This route can be a bit of a financial liability.

"I have heard of insurers that are insolvent by a considerable margin, but their shareholders still want to be compensated handsomely for selling their shares."

"Local competition is the biggest issue for global players." Yeung

Busy place
The Indonesian insurance market is also overcrowded, and dominated by local players. The top five non-life insurance companies had a 37.5% market share in 2010, and more than 80 firms compete for the rest of the market, according to AM Best.

Out of a total of 87 companies, 69 were local insurers and 18 were joint ventures.

Insurance in Indonesia is still typically sold through the traditional channel of brokers and agents, giving established players an edge over newcomers, while the market is already highly competitive on price.

Local winners
"Local competition is the biggest issue for global players, as the domestic companies have a strong hold on local customers through their established agency forces and brand recognition," Yeung explains.

Dean Carrigan, a partner at Clyde & Co in Sydney, adds: "There are problems for foreign insurers in ensuring the quality of their agency distribution network, and putting in place the controls to ensure there are good recording and monitoring systems."

"There are problems for foreign insurers in ensuring the quality of their agency distribution network." Carrigan

Catastrophe issues
Insurers also face challenges on individual product lines, particularly in the area of catastrophe insurance.

Indonesia's generally low insurance penetration has limited the impact of natural disasters on insurers' business performance in the past.

But this low level of take-up means there is a lack of data, which makes it difficult for insurers to know at what level they should set premiums.

"The issue for insurers is that Indonesia's location and geography mean that 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," says Carrigan.

"If there is sufficient data it can be priced but, with the current low levels of insurance penetration, the question is would anyone buy it?"

General reluctance
Yeung agrees, adding that low demand, the lack of a government-backed scheme, and the lack of data for modelling, means that many insurance companies remain reluctant to develop catastrophe insurance.

But despite the challenges Indonesia presents, insurers are still keen to enter the market.

Earlier this year Ace announced the acquisition of 80% of top 10 Indonesian insurer Asuransi Jaya Proteksi, which has an extensive distribution system throughout the country, for $130m.

"Indonesia's strong economic and demographic trends provide an ideal environment for sustained growth." Sullivan

The race begins
Damien Sullivan, regional president of Ace Asia Pacific, said at the time: "Indonesia's strong economic and demographic trends provide an ideal environment for sustained growth across all our general and life insurance businesses."

UK-based RSA has also expressed a preliminary interest in entering the market.
Chris Colahan, regional chief executive of RSA Asia, said: "The market is growing by over 10% a year, making it the fastest growing market in Asia.

"We expect those growth rates will continue given the strength of the general economy and low insurance penetration rates. It is a market that certainly captures our attention."

Allianz, which has been active in Indonesia for a number of years, recently described the country as being "at the start of a long growth curve extending far into the future".

"There remains a great deal of interest in Indonesia, but international investors are adopting a cautious approach so as to ensure they have found the best possible target before they move forward," says Stewart.