Premium income expected to increase to 35% this year

Sudibyo M. Wiradji, Contributor, Jakarta

Indonesia's life and health insurance industry has been reporting robust growth since companies introduced more varied products that combine life and financial protection.

Even though a number of life and health insurance companies are facing tough times, struggling hard to meet the government required minimum risk based capital (RBC) of 100 percent by this year, the overall industry is expected to enjoy between 30 percent and 35 percent growth this year.

Hotbonar Sinaga, chairman of the Indonesian Insurance Council (DAI), said the projected robust growth would partly be the result of the introduction of more attractive insurance products in the country.

He said the number of new policyholders had increased significantly over the past five years, as people had more choices that not only offered benefits to protect their life but also their health and wealth.

According to the latest data issued by Indonesian Life Insurance Association (AAJI), the industry's total premium income rose by 30 percent to Rp 8.4 trillion (about US$988.25 million) in the third quarter of 2002, from Rp 6.4 trillion in the same period of 2001. Total claims paid reached Rp 4.1 trillion in the third quarter of 2002 from Rp 3.7 trillion in the same period of 2001.

The full 2002 and fourth quarter report will be available in May.

Experts say the increase in premium income indicated a growing trust in the country's insurance companies, despite the financial difficulties faced by some of the country's insurance firms.

According to the association, the increase in the number of insurance alternatives, particularly investment-linked insurance products, has had a significantly positive impact on the number of policyholders.

Alternative investment instruments offered include mutual funds and fixed income bonds.

"Compared to bank deposits, for instance, the rate of return is better," Sinaga said. "This is why investment-linked insurance, or Unit Link, has become the new prima donna of premium generators for insurance firms."

The number of companies providing products that combine life insurance and savings or investment is on the rise. Of the 56 life and health insurance firms, about 15 sell Unit Link products.

Data from AAJI also showed that individual insurance policies rose by 120.41 percent to 1.13 million in 2001, compared to 946,399 in 2000. Group insurance policies increased by 120.85 percent to 8.05 million, compared to 6,667,163 in 2000.

Despite these significant increases over the last two years, the number of policyholders in Indonesia remains small, accounting for less than 10 percent of the country's population of 200 million.

By comparison, in most advanced countries the number of individual policies is often double the population.

"This means that in those countries, each individual holds at least two policies," he said.

As a whole, public awareness about insurance remains poor and the purchasing power of most people remains low.

"But when the economy grows and the public's purchasing power increases, more people will set aside their income to buy insurance products," Sinaga said, adding that most people buying individual insurance products were from the middle and upper classes.

He said that looking forward, the prospects for the insurance industry here were very good. With the vast market potential, the insurance sector remains attractive to foreign investors. Of the 56 life and health insurance companies here, 22 are joint ventures.

"Despite the low rate of investment return in the insurance sector, the sector remains attractive to foreign investors. This shows that Indonesia is a promising market for insurance," Sinaga said.

According to the government ruling, insurance companies have been working to raise their capital to meet the minimum risk based capital requirement of 100 percent.

When the RBC ruling was first issued in 2000, companies had to have a minimum RBC of 25 percent, which was raised to 50 percent in 2001, 75 percent in 2002 and 100 percent in 2003. By 2004, the required minimum RBC will be 120 percent.

AIG Lippo, which ranked second in terms of premium in 2001, has set its RBC target for this year at 200 percent, far above the required minimum of 100 percent. The company's RBC reached 198 percent in 2002 due to the distribution of dividends.

"Essentially, AIG Lippo's RBC is targeted at 200 percent, which is far above the government set RBC," said AIG Lippo vice president director S. Budisuharto.

The company's premium stood at Rp 1.7 trillion in 2002 compared to Rp 1.4 trillion in 2001, or a 22 percent increase. Its reserve funds totaled Rp 2.55 trillion in 2002, compared to Rp 2.18 in 2001.

Currently, AIG Lippo has approximately 936,000 policyholders and is targeting approximately 1.2 million customers by the end of 2003, or about 28 percent growth.

S. Budisuharto attributed the company's growth to its multichannel distribution system, product innovation, an extensive and extremely productive sales force, quality after- sales service, superior information technology (IT), and system and market segmentation.

To attract customers, AIG Lippo has financial advisers advise potential customers on the importance of financial family planning, all free of charge.

"This strategy has turned out to be very effective in attracting new customers. For instance, for one of our products, called Rezeki, we sell 15,000 a month," Budisuharto said.

AIG Lippo's market segment are families with total incomes of above Rp 5 million a month.

"The number of families with incomes above Rp 5 million only accounts for 1 percent of the total population," he said.

Unlike most life and health insurance companies, AJB Bumiputera is excluded from the RBC ruling because the company was set up as a mutual insurance firm that does not require paid- up capital.

"Our solvency is assessed based on liquidity," said Ana Mustamin, head of AJB Bumiputera's public relations office.

In 2002, the company's liquidity was 141.21 percent, far above the government's minimum requirement.

PT AJB Bumiputera 1912's premium in 2002 stood at Rp 2.06 trillion, an increase of 21 percent from the Rp 1.703 trillion of the previous year. Its 2003 targeted premium has been set at Rp 2.4 trillion.

The company's policyholders in 2002 totaled 9.7 million, a 16 percent increase from the 8.3 million policyholders the previous year.