Indonesian Life Insurance Update

The Indonesian life insurance business has been one of the most attractive in the world, offering high profits and growth. Management consulting firm McKinsey & Company suggests there are changes coming and lessons to be learned in this market.

McKinsey notes that life insurers in Indonesia have been consistently profitable and predicts that the market will continue to grow by more than 10% a year for the next five years, thanks mostly to the country’s relatively low penetration rates. The study warns, however, that the business environment may become more challenging.

Third-party distribution networks have been more profitable 
The market is becoming more competitive

McKinsey points out that third-party distribution networks have been more profitable for life insurers in Indonesia than in most other markets. "Between 2007 and 2012, adjusted annual growth in surplus from third-party distributors — particularly banks — was 44%, compared with just over 30% for dedicated agents," reads the report.

"This success is due in part to the fact that as banks grew alongside the insurance industry in Indonesia, they were more interested in building relationships with multinationals than in maximizing profits."

Although banks in Indonesia were once once eager to form partnerships with multinational insurers, the report argues that the market is becoming more competitive and forecasts a decline in margins for bancassurance. In this more mature market, McKinsey says Indonesian insurers will require a more sophisticated agency model in order to be successful. In other words, they need a sales force of professional advisors.

"Carriers should move toward hiring and training full-time professional agents to provide more sophisticated advice to affluent consumers and replace under-qualified agents," concludes the study. "They should also adopt digital tools to help lower costs and meet consumer demands for online access and competitive pricing."