Life is positive -- if you're prepared

By Simon Wellington

JAKARTA (JP): Mother said to always be prepared because "tomorrow you could be run over by a bus".

Although it could be considered a somewhat pessimistic disposition, she would argue that it was just being practical -- which was the reason why she had life and health insurance.

In our highly commercialized world, the financial pressures are fierce. We are entering contracts daily that bind us to a wide range of commitments. So what would happen if "mother's bus" came screaming around the corner one sunny afternoon and decided to turn you into a street decoration?

Well, you could be lucky enough to just end up in hospital and escape the experience with a few broken limbs and a mountain of medical bills. But then, you could also find yourself permanently unable to return to work or, worse still, dead.

The ramifications of unexpected events have far-reaching consequences. For this reason, the popularity of life and health insurance is on the rise, as more and more people recognize the importance of protecting themselves and their families to anticipate future uncertainty.

In Indonesia, the participation in life insurance is relatively low compared to more developed countries. Of course, the problem with life insurance is that it is not a tangible product. When you hand over the cash, you don't get anything in return except peace of mind, which doesn't stack up well against a new wide-screen television set.

Furthermore, many people do not understand the benefits of life and health insurances, confused about when and how it will help them.

There are indeed a wide range of products on the market. Some are traditional life insurance products, whereby a policyholder pays a premium and, should he die, a beneficiary receives an insured amount. There are also many forms of health insurance offering part or full payment of medical expenses.

Then there are packages providing more sophisticated benefits, and the development of new products that offer an investment component, whereby the policyholder can set his own premium payments, have more control over where the funds are invested and live to see the fruits of his spending.

Over the last few years, the Indonesian life insurance landscape has been changing dramatically, with significant growth rates being experienced by life insurance companies.

There are 62 life insurance companies operating in Indonesia. Of these, four are state-owned companies, 35 are local private companies and 23 are joint venture companies involving foreign ownership.

Foreign insurance companies are allowed to operate in Indonesia as joint venture enterprises, with a maximum stake of 80 percent. At least two joint venture companies, PT Asuransi AIA Indonesia and Manulife, have been here for over 20 years. Most of the other joint venture companies were established between 1990 and 1997, before the economic crisis.

The sudden influx occurred at a time when clearer regulations for the industry were introduced in 1992, combined with increased awareness of the attractive potential in Indonesia.

After 1997 some potential investors delayed or even canceled their plans to invest. With the tumult of 1997 slowly receding, it is expected that joint venture companies will start consolidating stronger positions in Indonesia.

Official data from the Indonesian Insurance Council (DAI) showed that the total number of people covered by life insurance grew by 16 percent in 1999 to 22.76 million, compared to 19.58 million in 1998.

The gross premiums in the life insurance industry dropped 13.84 trillion from 14.17 trillion in 1999, although there were increases of 41 percent in 1998, 21 percent in 1997 and 17 percent in 1996.

DAI's 2000 statistics are incomplete, with data only collected from 43 of the council's 58 members so far. Already, though, the information reveals interesting developments.

Although the number of premium holders is significantly lower than the previous year at 12.56 million, the number of individual policyholders, as compared to group insurance for company employees, has nearly equaled the 1999 figure.

One area that is showing promising growth is investment. In 2000, investment income reached Rp 1.72 trillion compared to Rp 0.87 trillion in 1999's audited results, a growth of 98 percent.

This investment pattern reflects a trend within the market seeking alternative investment opportunities, with trust in banks still low.

In 1998, Unit Link products were introduced to Indonesia, providing investors with more control of their funds than afforded by traditional life insurance products.

DAI Information and Promotion Department director Tri Djoko Santoso explains, "People are seeing life insurance as an alternative to banking products, as more and more products are heavily focused on investment and saving, and less on protection."

There are about eight companies offering these types of products in Indonesia.

One large joint venture company, PT Prudential BancBali, has placed a strong emphasis on this style of product through its PRUlink range, shifting focus from its traditional life packages.

PT Allianz Life Indonesia recently released SmartLink. "Unlike traditional life insurance products, with SmartLink customers decide the premiums they will pay and can choose where the funds will be invested," Allianz marketing director Handoyo Kusuma explained.

Allianz has been providing life insurance products in Indonesia since 1996. It currently has between 60,000 and 70,000 life customers and 60,000 individuals subscribed to group health products through over 400 businesses.

Handoyo said that in the first semester of 2001, the company had already exceeded its year 2000 premium levels. In 2001 the company expects growth of Rp 100 billion in new business for individual life products, after attracting new business valued at Rp 26 billion in 2000.

Djoko says that most insurers are increasing or even doubling their targets for 2001, in what they expect to be a very promising year for increased participation in life insurance products.

In May, PT Asuransi Cigna, reported that it had recorded a 13 percent increase in revenue during the first quarter. At the time, company finance director David Batubara said that the firm projected a 35 percent revenue increase to Rp 92 billion in 2001, from Rp 68 billion received in 2000.

In terms of gross premium income, the joint venture companies' market share increased from only about 35 percent in 1999, to about 47 percent in 2000, according to DAI.

This significant growth of joint venture companies could probably be attributed to one of the largest national premium holders, Lippo Life, entering a joint venture with American-based AIG.

It is predicted that the market share of joint venture companies will grow dramatically through acquisition or merger initiatives from leading foreign or joint venture companies.

One factor expected to prompt further acquisitions and mergers is a 1999 minister of finance decree stipulating that the solvency margin of insurance companies is to be calculated on the Risk Based Capital (RBC) approach.

The solvency margin is the ratio of a company's current assets, determined to be admissible by the RBC, against the minimum amount of funds required to cover claims and possible losses.

By the end of 2000, companies were required to have a solvency margin of 15 percent. This ratio increases to 40 percent by the end of this year, 75 percent in 2002, 100 percent in 2003 and 120 percent in 2004.

This will place significant pressure on local private companies, which do not have the substantial capital backing of larger foreign operators.

If they fail to meet the guidelines, companies may be forced to request a capital injection from shareholders, seek domestic or foreign partners, or merge with a larger insurance company.

There is also a reported shortage of qualified professionals operating within the Indonesian life insurance industry. Poaching of agents is rife within the sector, obviously affecting the weaker institutions even further.

However, despite these challenges facing many businesses, they are also seen as positive for the industry as a whole, leading to advances in technology application and stronger protection for customers.

"In general, the market will continue to have positive growth and continue to be dominated by traditional life insurance products. Within three to four years the Unit Link products are expected to experience a boom," Handoyo from Allianz said.

Overall, the future outlook for life insurance companies is very positive. With only 6 percent of the nation's 210 million population reported to be policyholders in 2000, that certainly provides a large potential market for the innovative range of products now on offer.