Understanding Indonesia's insurance industry today<\/p>\n
By Herris B. Simanjuntak<\/p>\n
Following the monetary crisis, the ailing Indonesian economy
\nin the second half of 1997 had a negative impact on a variety of
\nbusinesses, causing zero growth in the financial sector. However,
\nthe negative impact on certain finance industries, such as banks,
\nhardly affected insurance companies at all.<\/p>\n
There was a significant boost in the gross premium of all
\ninsurance areas -- including general, reinsurance, life and
\nsocial insurance -- to 21 percent to the tune of Rp 10.4 billion
\nwhile in the same year the gross domestic product (GDP) only
\nexperienced a minor growth of 4.81 percent.<\/p>\n
In 1998, the GDP experienced a negative growth of 13.68
\npercent, whereas the gross premium managed to experience a 141
\npercent growth, reaching Rp 41 billion. A significant growth of
\naround 25 percent was seen in 1999. Life insurance experienced
\nthe most significant growth, at 54.3 percent.<\/p>\n
Yet, despite these impressive developments, the insurance
\nsector has not gained enough ground in the national economy
\ncompared with other financial sectors. Its contribution toward
\nthe GDP has stayed relatively small. This merely reflects the
\ninsurance industry's low penetration level, meaning that it has
\nnot yet contributed significantly to the Indonesian economy.<\/p>\n
Data obtained from a Swiss publication, Sigma No.4\/2000, shows
\nthat in 1998, the insurance industry's contribution to the GDP
\nonly reached 1.2 percent, far behind other ASEAN countries like
\nthe Philippines (1.4 percent), Thailand (2.3 percent), and
\nMalaysia (4.2 percent), not to mention other Asian countries such
\nas Taiwan (6.7 percent), and South Korea (13.5 percent). The low
\nlevel of insurance industry penetration is due to several
\nreasons.<\/p>\n
First, our insurance sector was still in an initial stage of
\ndevelopment and known nationwide only in the last decade, far
\nbehind the well-developed insurance sectors of advanced countries
\nlike the UK, Germany and France, which have had their insurance
\nsystems running for centuries.<\/p>\n
Second, there is the presence of low-productivity levels and
\ninefficiency. Indonesia's insurance businesses have outnumbered
\ntheir counterparts in neighboring ASEAN countries. In 1999 alone,
\nthere were 18 insurance companies operating here, the highest
\nnumber among the ASEAN countries; unfortunately, their level of
\nperformance has not yet reached an optimum level.<\/p>\n
Insurance businesses in neighboring countries, despite their
\nsmall number, can rake in a handsome profit from premium policies
\nboth in terms of life and general insurance. For instance, Sigma
\nNu.4\/2000 showed that in 1998 Indonesia had 162 insurance
\ncompanies, whereas Thailand only had 98 and Malaysia 71, but the
\nprofit generated from premium collected in both countries is
\ntwofold compared to that in Indonesia. This kind of condition
\nwill certainly lead to tighter competition among insurance
\ncompanies, or it will create a highly competitive market among
\nthemselves.<\/p>\n
Third, there is the structural concentration of the insurance
\nindustry. Despite their adequate numbers, most of the premium
\nprofits gained by the Indonesian insurance sector is still
\nconcentrated among the 10 or 15 biggest companies. In 1998, out
\nof 107 operating insurance companies, only 10 dominated the 55.20
\npercent gross premium.<\/p>\n
In life insurance, out of the 62 operating insurance
\ncompanies, a 82.83 percent market share was amassed by the \"big
\n10\". This clearly shows that the rapid development of a number of
\ninsurance companies was not immediately followed by the
\ndevelopment of a strongly structural and highly concentrated
\ninsurance industry. Most insurance companies were founded with
\nlimited capital, creating small-scale enterprises with limited
\nminimum risk.<\/p>\n
Fourth, there is an inadequate diversification of insurance
\nproducts. The impressive development of financial industries and
\ncompanies in Indonesia has nevertheless encouraged an increasing
\ndemand for insurance services and their products. A golden
\nopportunity of this kind has not yet entirely been taken
\nadvantage of by the national insurance industry. Up to now,
\nIndonesia's insurance businesses have paid too much attention to
\ntheir traditional insurance products.<\/p>\n
For general insurance alone, for instance, 4.85 percent was
\nfire-insurance claims, 22.3 percent marine-cargo insurance and
\nmarine-hull insurance and 11.94 percent motor insurance, while
\nother insurance products of great potential have not yet been
\nfully developed to provide a significant contribution. Among them
\nare insurance products concerning liabilities and personal lines
\n(health, personal property and others).<\/p>\n
One example is liability insurance for professionals
\n(professional indemnity insurance) which is badly needed by
\nphysicians, accountants, insurance brokers, building contractors
\n(developers) and other professions, as a consequence of new laws
\nput into effect. The increasing quality of life for Indonesians
\nhas created the need for a variety of insurance products
\nconcerned with health and protection from financial losses for
\nindividuals involved in high-risk transactions, such as bankers
\nand financial officers. For the latter in particular, the
\nopportunity and need for these products is currently in great
\ndemand as export activities in the Indonesian financial sector
\nincrease.<\/p>\n
The development of the insurance industry has not been
\ncompensated by an improvement of its \"balance of payment\". A
\ndeficit on the balance of payment of the insurance sector is
\nhappening, but declining.<\/p>\n
The insurance sector's deficit was caused by several factors.<\/p>\n
First, there is the limited insurance companies' equity. The
\nlimited capital was clearly shown by the data concerning the
\namount of equity in insurance companies. Data from 1998 showed
\nthat 33 percent of general insurance companies and 61 percent of
\nlife insurance companies were capitalized with less than Rp 10
\nbillion.<\/p>\n
Second, there is the lethargic performance of domestic general
\ninsurance companies coinsuring among themselves. Those companies
\nhave a tendency to reinsure overseas rather than optimizing their
\nlocal insurance capacity\/reinsurance companies, under the pretext
\nof a lack of credibility toward local insurance companies.<\/p>\n
Third, domestic insurance\/reinsurance companies have not yet
\nearned the public's trust in general. This is because the
\nmajority still insure their interests overseas directly or
\nthrough insurance brokers.<\/p>\n
Fourth, there is the aggressiveness of foreign insurance
\ncompanies in expanding themselves. Foreign insurance companies,
\nwell-equipped with capital, technology and reliable human
\nresources tend to expand aggressively. They tap into the
\npotential target market in Indonesia and the market shares seized
\nfrom among national insurance companies.<\/p>\n
The last decade has witnessed a more colorful Indonesian
\ninsurance industry resulting in a more competitive market.<\/p>\n
First, the number of \"players\" in the insurance market has
\nkept increasing. Unfortunately, the greater number of insurance
\ncompanies were not compensated by a greater number of insurance
\nprofessionals, resulting in low professionalism. Consequently the
\ncompetition became more heavily accompanied by malpractice.<\/p>\n
Second, the greater role of insurance brokers. They sometimes
\nalso serve as reinsurance brokers placing the risks directly
\noverseas, in open or hidden practice, resulting in a keener
\ncompetition in premium rates of various kinds of insurance.<\/p>\n
Third, more insurance companies are acting as fronting
\ncompanies. There is a tendency for more and more general
\ninsurance companies to act as fronting companies for insurance
\nbusiness with multinational companies. This is particularly
\nexecuted by joint-venture insurance brokers or insurance
\ncompanies.<\/p>\n
Fourth, the limited \"free market\". Indonesia's insurance
\nmarket is unique since most is occupied by a captive market or an
\nexclusive market which are taken up by certain business groups.
\nThese groups are currently dominating between 50 percent to 60
\npercent of the market, leaving the remaining 40 percent to 50
\npercent for the free market. However, so far, this year has
\nwitnessed an effort to open up exclusive markets like the energy,
\noil and gas market.<\/p>\n
In facing the deteriorating economic condition, the Indonesian
\ninsurance sector must enhance immediately both its comparative as
\nwell as competitive edge to protect itself from competitors who
\nwould snatch its market share merely to survive in the global
\ncompetition. The supremacy needed to maintain such an edge,
\nhowever, must be properly implemented if domestic
\ninsurance\/reinsurance companies wish to grasp the golden
\nopportunity available in businesses grounded overseas,
\nparticularly in the Asia-Pacific Region. Obstacles facing the
\nnational insurance industry in the global market include
\navailability of capital and human resource problems.<\/p>\n
Minister of Finance decree Nu.48\/KMK 017\/1999 dated October 7,
\n1999, stipulates that the solvency margin calculation for
\ninsurance and reinsurance companies is in the form of a solvency
\nmargin calculation through the means of a Risk Based Capital
\n(RBC) approach. This RBC adoption as stipulated accordingly will
\nbe gradually put into effect with a minimum 5 percent from the
\nminimum solvability degree at the end of the first quarter in the
\nyear 2000, 15 percent by the end of 2000, 75 percent by the end
\nof 2002, 100 percent by the end of 2003, and 120 percent by the
\nend of 2004. Through the RBC approach, the capital need will vary
\nfrom one company to another, depending on the risk degree bore by
\nrespective companies.<\/p>\n
Insurance companies have no obligation whatsoever to boost
\ntheir capital. The stipulated paid-up capital is approaching Rp 3
\nbillion for national private companies and Rp 5 billion for
\njoint-venture companies. Their capital, however, will be in
\naccordance with the RBC. The government will particularly
\nstipulate a minimum capital of Rp 100 billion for new insurance
\ncompanies and Rp 200 billion for reinsurance companies. With the
\nRBC in effect, insurance companies should be extra careful in
\ntheir operations. If not, they will end up boosting their
\ncapital, restructuring balance, balancing their operation or
\nmerging with other bigger insurance companies.<\/p>\n
A company can boost its capital by various means, including
\nthrough the injection of capital from company shareholders or by
\nseeking strong associates, domestic or foreign, or through a
\nmerger with other domestic insurance companies. But it is
\nimportant to bear in mind that merging is not an easy thing to do
\ndue to the various technical or nontechnical problems involved.<\/p>\n
Human resources have become a chronic problem in Indonesia's
\ninsurance sector to due to the specific qualifications and
\nrequirements needed. The number of professionals in general and
\nlife insurance companies is considered inadequate. The industry
\nrequires a great number of human resources with a strong academic
\nbackground to fulfill the needs of 100 general insurance and 62
\ninsurance companies as well as other supporting services of the
\ninsurance industry in Indonesia.<\/p>\n
Indonesia's insurance\/reinsurance companies also need to
\nenhance their abilities in information technology (IT). Applied
\ntechnology is badly needed in technical as well as nontechnical
\ninsurance. This is also needed to fulfill the demands of the
\ncurrent society in welcoming the 21st century. The technological
\ntransformation mentioned includes the improvement of almost all
\nareas.<\/p>\n
In short, insurance companies must have vision and a clear
\nmission so they will know where they are heading. The birth of an
\neffective strategy will, in turn, generate a clear vision and
\nmission in marketing, underwriting, finance and other services. A
\nbusiness process must always be present to create a state-of-the-
\nart and well-directed company, which in turn will create a
\ncompetitive edge in a very competitive insurance market.<\/p>",
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