Customers' trust vital for insurance business

Andi Herlina Rosa Contributor Jakarta

Burial benefits may be the first kind of life insurance known to humans. This type of life insurance was popular among Greek and Roman religious societies in ancient times. Neither these religious societies nor any other premodern systems for paying death benefits employed actuarial calculations.

They were frequently financed on a postassessment basis, meaning contributions were made by all surviving members following one member's death. As a result, funds were not always available to pay claims.

Later, in the seventeenth century, Lorenzo Tonti, an Italian banker living in Paris, created a new investment system related to life insurance. It was called Tontine Annuity. Although originally meant for gambling, Tontine Annuity was the first system that utilized the law of averages and the principle of life expectancies in establishing annuities. Under the Tontine system, associations of individuals were formed without any reference to age and a fund was created by equal contributions from each member. The sum was invested and at the end of each year the interest was divided among the survivors. The last remaining survivor received both the year's interest and the entire amount of the principal.

These early beginnings marked the birth of life insurance companies. The first American life insurance company -- established in 1759 in North America -- was called Corporation for the Relief of Poor and Distressed Widows and Children of Presbyterian Ministers.

In Indonesia, insurance companies existed long before the country's independence, but real growth started around 1968. However, before the 1990s, not more than two percent of the country's population were covered by life insurance policies. From early 1990s onward, this number surged upward to reach about 10 percent.

A 2002 report issued by the finance department and the Indonesian Insurance Board showed that in 2001 close to 13.5 percent of Indonesia's population, or 28,924,961 people, were insured. The total amount of premiums reached Rp 9.8 trillion. Further growth of 30 percent annually is hoped for.

However, the number of insurance companies in 2000, totaling 62 (comprising one state-owned company, 39 private domestic companies and 22 joint ventures between domestic and multinational companies) declined in 2001 as 10 private domestic companies ceased to operate.

In 2002 the largest market share, 21.45 percent, belonged to Bumiputera 1912, followed by Jiwasraya with 11.26 percent, while position number three was held by Indolife Pensiontama with its 9.28 percent market share.

The dwindling number of insurance companies was caused by, among other things, worldwide mergers and acquisitions. One example of this, in its gigantic form, was the purchase of AllState by Prudential.

Another factor was Minister of Finance Decree No. 481/1999 concerning risk based capital (RBC), which was stipulated to be 100 percent. This regulation, applied since 2000, "killed" six insurance companies, while 15 companies had to improve their financial standing. With the upcoming regulation that will impose a 120 percent RBC, at least 10 percent or 20 percent of companies will be put in jeopardy.

A not-less-important factor is the skeptical attitude of Indonesian consumers toward life insurance. Highly sensitive to subjects like death, they express their "discomfort" by keeping a good distance from products related to this certain occurrence.

Several insurance companies based on Islamic law, or shariah, have cropped up to cope with the issue of what is proscribed and allowed according to the religion held by the majority of the country's population. Compared with similar companies established earlier in countries with a majority Muslim population -- in Sudan and Saudi Arabia in 1979, Malaysia in 1984 and Brunei in 1992 -- the Indonesian counterparts are quite late. However, the establishment of such companies is expected to improve market penetration and increase awareness of Indonesian consumers about the need for life insurance policies.

Insurance companies have for some years now realized that they have to be more soothing in their marketing. Insurance products, including their features, have been improved and tend to be more investment-related. Another strategy is to re-educate the sales force and agents so that hard-sell tactics that previously used a serious and frequently even frightening tone are now discarded. The increase of the number of insurance agents in 2001, from 71,307 people in the first quarter to 78,218 at the end of the year, was another improvement.

Customer-oriented selling approach are now used both during one-on-one sessions as well as on companies' websites. Various investments combined with a number of extra benefits from life insurance policies are available on their menus. Customers can now even invest in blue-chip bonds and a wide range of mutual funds are also offered. This way a life insurance policy, besides providing protection, is perceived as a lucrative investment with handsome returns.

The current small figure -- 13.5 percent -- of insurance coverage in Indonesia should, in fact, raise real optimism among insurance companies as opportunities abound in the world's fourth most populous country. However, only reputable companies with beneficial products communicated through credible campaigns will turn out as the final winners. A relationship can be lasting based on a number of elements. Trust is of utmost importance to win the hearts of loyal customers. For insurance companies this is inarguably their lifeblood.