ENTERING A NEW DECADE, SHOULD INDONESIA FINALLY EMBRACE INSURANCE? DEVI ASMARANI INVESTIGATES

In a nation where flooding and earthquakes are frequent occurrences, and where rough roads, high seas and unpredictable markets threaten our business cycles, Indonesia has remained relatively underinsured.

Of its 232 million population, only about 15% of Indonesians have some form of life insurance, while some 20% are covered by risk insurance. Indonesia spends 1.6% of its gross domestic product on insurance, compared with 7.6% in Singapore and  
3.1% in Malaysia. Most risk insurance policy holders are linked to banks or financial institutions, through loans for homes, businesses or motor vehicles.

“The awareness of the need of insurance for protection is still very low, compared to that in more developed countries,” says Frans Wiyono of the General Insurance Association of Indonesia. Insurance is still seen as a secondary expense, he notes.

Tono Maryudi, for instance, gave up his car insurance once the loan was paid off. “I have to pay about three million rupiah (US$300) a year to insure my car, which is now probably worth 100 million rupiah. That’s too much for me.”

But if the unexpected hits, having assets insured may be the only thing keeping businesses afloat. After the 2004 earthquake and tsunami, economic losses reached more than US$13 billion (131 trillion rupiah), according to Munich Re and Swiss Re. Less than 30% of the damage was insured, with billions of dollars worth of property lost because small businesses were not insured or had inadequate coverage.

University of Indonesia’s Bambang Hermanto cites a recent study that he conducted on insurance users. “Most who are not covered by insurance are either not aware of the importance of it, or worried that they would get ripped off. Or they assume it is too expensive.”

The insurance industry has enjoyed strong growth in the past three decades, especially after the 1998 Asian crisis. Life insurance has enjoyed an upsurge, especially investment-linked policies. In these unit-linked plans, part of the premium goes towards the sum assured, with the balance put into investments of your choice.

When first introduced to Indonesia in 1998, three insurance firms offered unit-linked products; now there are more than 22. According to the Indonesian Life Insurance Industry Association (AAJI), unit-linked sales have doubled to 6.07 trillion rupiah (US$606 million) in merely two years. “We believe unit-linked products will still be one of the most important products boosting the life insurance industry in Indonesia in the future,” says Chris Lossin, president of PT Sun Life Financial Indonesia.

But the global financial crisis has impacted on the insurance business, especially life insurance, which invests in financial markets. According to the July 2009 issue of Infobank, the life insurance industry went from 57% growth in 2007, to 8.8% in 2008, with income down 29% over the period. Says insurance analyst Alberto Hanani: “The growth is still there, but there is a major contraction in companies’ net asset value, some up to 50%.”

Sun Life’s Chris Lossin remains optimistic, saying insurance is a long-term business. “We have a widely diversified investment portfolio, which minimizes the impact from losses on policyholders. We have strong risk management practices in place to minimize the damage to our business from this market volatility.”

Non-life insurance fared far better last year, growing by 25% in premiums and 22% in profit, due to more conservative investments. But if car and property sales slow, this year could see growth trimmed to around 15%, says Wiyono.

Competition will likely tighten. In the past, this led to a premium tariff war. Aggressive marketing, combined with more limited financial capacity, have seen the government enforce stricter regulations to protect consumers, including solvency requirements and agent licensing.

In 2008, a government regulation required all insurance companies to raise their equity in staggered deadlines over three years. Industry players called on the deadline to be postponed. The companies were later given until the end of 2010 to raise their equity to 40 billion rupiah (US$4 million), and to 100 billion rupiah billion (US$10 million) by 2014.

Insurance companies have since been under pressure to get fresh injections of funds or merge, though the latter is deemed less feasible. Today, around 40 insurance companies still have equity of less than 40 billion rupiah.

Given stronger regulations and healthier companies, a huge market still awaits. According to a 2006 study by Allianz and UNDP, there may be two million micro-insurance policies in Indonesia by 2010, and four million by 2012. Following the tsunami, an insurance company specializing in earthquake insurance was founded. PT Asuransi Maipark Indonesia is owned by all the country’s risks insurance companies, targeting quake-prone areas.

The industry is also busy increasing awareness and improving its agents through training and certification. Potential customers are advised to look at the health and track record of an insurance company before buying. “Pick companies with risk-based capital of at least over 120 billion rupiah (US$12 million). Find out whether it has offices in your city, and see the agent is trustworthy and reliable,” says Wiyono.

Also, check the company’s history of claim settlement, he adds. Then scrutinize all terms and conditions, clarifying uncertainties. While the future may never be crystal clear, your coverage certainly should be.

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