Indonesia: Insurance

A high savings rate and a market with growing affluence are enough to offset risks of terrorist attacks and natural catastrophe losses in Indonesia, leading insurers to expect the industry will continue to grow with the help by favorable government policies.

Regulatory changes due by the end of 2010 would help both local and foreign insurers further develop the Indonesian insurance industry by increasing capital requirements for insurers, implementing compulsory licensing regulations for all agents and motivating citizens to own their own health insurance policies, said Randy Lianggara, chief executive of Axa Indonesia.

"Our goal is to become the number one player amongst joint ventures companies in Indonesia by 2012," said Lianggara. "We will continue to capitalize on our strong distribution networks of our joint venture partner and focus on growing our sales force to reach out to the Indonesian population."

Lianggara said the minimum level of capital required for both life and general insurers will increase from 40 billion rupiah (US$4.4 million) by the end of 2010 to 100 billion rupiah by the end of 2012. "This regulation will make insurance companies who wish to enter the market think thoroughly before entering," he noted.

In 2010, the Indonesian government will also implement a compulsory licensing regulation for all agents, and unlicensed agents will be unable to sell or distribute insurance products. "By this regulation, agents can no longer work for more than two insurance companies at the same time," said Lianggara, who is also in charge of Axa's Indonesian life business.

The Indonesian government also expects all citizens to own health insurance policies by 2014; this includes a 2011 deadline for all employees and 2012 for all self-employed, said Lianggara.

Although Indonesia has been targeted by terrorist attacks and experienced significant natural catastrophe losses in recent years, Lianggara said "our Indonesia business did well," claiming Axa's new business index was up 71% to 1.5 trillion rupiah in 2009, from 878 billion rupiah in 2008.

"Overall, it is a country with an increasing affluent market, high savings rate and low life insurance penetration," he said. "Therefore, we are confident that we will continue to expect growth."

Market Opportunities

Indonesia has a population of 220 million. Its total insurance penetration rate [premiums as a percentage of gross domestic product] in 2008 was 1.3%. Of that, life insurance was 0.9% and nonlife was 0.4%, according to a Swiss Re sigma report.

As of the first quarter of 2010, life insurance gross premiums in Indonesia reached 17.53 trillion rupiah, up 31.5% from 13.32 trillion rupiah in the correspondent period of 2009. First-quarter market penetration was 1.63%, compared with 1.55% in the first quarter of 2009, according to the Indonesia Capital Market and Financial Institutions Supervisory Agency.

In a diverse Asian market such as Indonesia, the mix of insurance distribution channels is better than a "one-size-fits-all" model, according to consultancy Deloitte.

Lianggara said Axa Indonesia's strategy is to leverage multidistribution channels, including tied agents, salaried sales force and tele- and direct marketing, to gain a strong foothold in the market.

The company has done business in Indonesia since 1995. It has four business operations, including PT Axa Mandiri Financial Services, a bancassurance partnership with the largest domestic lender, Bank Mandiri. The others include PT Axa Life Indonesia; PT Axa Financial Indonesia; and PT Axa Asset Management Indonesia.

"We are now running one of the most profitable bancassurance channels with Bank Mandiri, which has 1,000 branches and more than 10 million customers," said Lianggara. "[Our] shareholders' return on equity has been averaging in excess of 50% since our partnership in 2003. We achieved break-even after two years of operation, and by the fourth year, our shareholders' capital investment was fully repaid."

The bancassurance partners have started tele- and direct marketing with the bank's large credit customer base in 2009. Lianggara said this segment today is one of Axa Indonesia's fastest-growing channels, "contributing 19% to our new business index growth in the first quarter of 2010."

"From a business perspective, we would be able to create economies of scale from the Axa Group and Bank Mandiri's operations locally, regionally and globally," he said.

Other insurers such as Asuransi AIA and Prudential plc, are selling products in collaboration with domestic banks. As of 2008, 19 life insurers and seven nonlife insurers had partnered with banks, selling a total of 131 different products through 27 banks, said Deloitte in a report.

Takaful Openings

In countries with high or growing Muslim populations, such as Malaysia, Indonesia and Thailand, banks are teaming up with insurance companies to provide an increasingly wide array of Islam-compliant finance and takaful products, Deloitte noted.

Consultancy Ernst & Young said the global takaful market grew 29% to US$5.3 billion in contributions in 2008, and is expected to surpass US$8.8 billion in 2010 (BestWire, May 4, 2010).

Axa Indonesia has seen a huge potential to tap into the takaful market as Indonesia has the largest Muslim population in the world, said Lianggara, who added the insurer is distributing Shariah (Islamic law) products and services across more than 300 branches of Bank Syariah Mandiri, a subsidiary of Bank Mandiri.

The company offered its Islamic unit-linked products that are investing in takaful mutual funds and managed by Mandiri Manajer Investasi, an asset management company of Bank Mandiri, in June last year.

"For year ending 2009, these products contributed 226 billion rupiah or 30% of our new business index, which is quite substantial," said Lianggara, who added the company will continue to grow this sector by leveraging on the distribution of its bancassurance partner.

In addition, as a company with a French parent, AXA Indonesia started a distribution partnership with Carrefour, a leading French supermarket, at the end of 2009 to distribute its customer insurance products through its kiosk in the supermarket. It said it now has access to 29 out of the total 42 branches of the supermarket through this partnership.

For the year ended March 31, 2010, Axa Indonesia reported growth of 205% on its new business index to 545 billion rupiah, from 178.8 billion rupiah at March 31, 2009.