Understanding Indonesia's insurance industry today

By Herris B. Simanjuntak

Following the monetary crisis, the ailing Indonesian economy in the second half of 1997 had a negative impact on a variety of businesses, causing zero growth in the financial sector. However, the negative impact on certain finance industries, such as banks, hardly affected insurance companies at all.

There was a significant boost in the gross premium of all insurance areas -- including general, reinsurance, life and social insurance -- to 21 percent to the tune of Rp 10.4 billion while in the same year the gross domestic product (GDP) only experienced a minor growth of 4.81 percent.

In 1998, the GDP experienced a negative growth of 13.68 percent, whereas the gross premium managed to experience a 141 percent growth, reaching Rp 41 billion. A significant growth of around 25 percent was seen in 1999. Life insurance experienced the most significant growth, at 54.3 percent.

Yet, despite these impressive developments, the insurance sector has not gained enough ground in the national economy compared with other financial sectors. Its contribution toward the GDP has stayed relatively small. This merely reflects the insurance industry's low penetration level, meaning that it has not yet contributed significantly to the Indonesian economy.

Data obtained from a Swiss publication, Sigma No.4/2000, shows that in 1998, the insurance industry's contribution to the GDP only reached 1.2 percent, far behind other ASEAN countries like the Philippines (1.4 percent), Thailand (2.3 percent), and Malaysia (4.2 percent), not to mention other Asian countries such as Taiwan (6.7 percent), and South Korea (13.5 percent). The low level of insurance industry penetration is due to several reasons.

First, our insurance sector was still in an initial stage of development and known nationwide only in the last decade, far behind the well-developed insurance sectors of advanced countries like the UK, Germany and France, which have had their insurance systems running for centuries.

Second, there is the presence of low-productivity levels and inefficiency. Indonesia's insurance businesses have outnumbered their counterparts in neighboring ASEAN countries. In 1999 alone, there were 18 insurance companies operating here, the highest number among the ASEAN countries; unfortunately, their level of performance has not yet reached an optimum level.

Insurance businesses in neighboring countries, despite their small number, can rake in a handsome profit from premium policies both in terms of life and general insurance. For instance, Sigma Nu.4/2000 showed that in 1998 Indonesia had 162 insurance companies, whereas Thailand only had 98 and Malaysia 71, but the profit generated from premium collected in both countries is twofold compared to that in Indonesia. This kind of condition will certainly lead to tighter competition among insurance companies, or it will create a highly competitive market among themselves.

Third, there is the structural concentration of the insurance industry. Despite their adequate numbers, most of the premium profits gained by the Indonesian insurance sector is still concentrated among the 10 or 15 biggest companies. In 1998, out of 107 operating insurance companies, only 10 dominated the 55.20 percent gross premium.

In life insurance, out of the 62 operating insurance companies, a 82.83 percent market share was amassed by the "big 10". This clearly shows that the rapid development of a number of insurance companies was not immediately followed by the development of a strongly structural and highly concentrated insurance industry. Most insurance companies were founded with limited capital, creating small-scale enterprises with limited minimum risk.

Fourth, there is an inadequate diversification of insurance products. The impressive development of financial industries and companies in Indonesia has nevertheless encouraged an increasing demand for insurance services and their products. A golden opportunity of this kind has not yet entirely been taken advantage of by the national insurance industry. Up to now, Indonesia's insurance businesses have paid too much attention to their traditional insurance products.

For general insurance alone, for instance, 4.85 percent was fire-insurance claims, 22.3 percent marine-cargo insurance and marine-hull insurance and 11.94 percent motor insurance, while other insurance products of great potential have not yet been fully developed to provide a significant contribution. Among them are insurance products concerning liabilities and personal lines (health, personal property and others).

One example is liability insurance for professionals (professional indemnity insurance) which is badly needed by physicians, accountants, insurance brokers, building contractors (developers) and other professions, as a consequence of new laws put into effect. The increasing quality of life for Indonesians has created the need for a variety of insurance products concerned with health and protection from financial losses for individuals involved in high-risk transactions, such as bankers and financial officers. For the latter in particular, the opportunity and need for these products is currently in great demand as export activities in the Indonesian financial sector increase.

The development of the insurance industry has not been compensated by an improvement of its "balance of payment". A deficit on the balance of payment of the insurance sector is happening, but declining.

The insurance sector's deficit was caused by several factors.

First, there is the limited insurance companies' equity. The limited capital was clearly shown by the data concerning the amount of equity in insurance companies. Data from 1998 showed that 33 percent of general insurance companies and 61 percent of life insurance companies were capitalized with less than Rp 10 billion.

Second, there is the lethargic performance of domestic general insurance companies coinsuring among themselves. Those companies have a tendency to reinsure overseas rather than optimizing their local insurance capacity/reinsurance companies, under the pretext of a lack of credibility toward local insurance companies.

Third, domestic insurance/reinsurance companies have not yet earned the public's trust in general. This is because the majority still insure their interests overseas directly or through insurance brokers.

Fourth, there is the aggressiveness of foreign insurance companies in expanding themselves. Foreign insurance companies, well-equipped with capital, technology and reliable human resources tend to expand aggressively. They tap into the potential target market in Indonesia and the market shares seized from among national insurance companies.

The last decade has witnessed a more colorful Indonesian insurance industry resulting in a more competitive market.

First, the number of "players" in the insurance market has kept increasing. Unfortunately, the greater number of insurance companies were not compensated by a greater number of insurance professionals, resulting in low professionalism. Consequently the competition became more heavily accompanied by malpractice.

Second, the greater role of insurance brokers. They sometimes also serve as reinsurance brokers placing the risks directly overseas, in open or hidden practice, resulting in a keener competition in premium rates of various kinds of insurance.

Third, more insurance companies are acting as fronting companies. There is a tendency for more and more general insurance companies to act as fronting companies for insurance business with multinational companies. This is particularly executed by joint-venture insurance brokers or insurance companies.

Fourth, the limited "free market". Indonesia's insurance market is unique since most is occupied by a captive market or an exclusive market which are taken up by certain business groups. These groups are currently dominating between 50 percent to 60 percent of the market, leaving the remaining 40 percent to 50 percent for the free market. However, so far, this year has witnessed an effort to open up exclusive markets like the energy, oil and gas market.

In facing the deteriorating economic condition, the Indonesian insurance sector must enhance immediately both its comparative as well as competitive edge to protect itself from competitors who would snatch its market share merely to survive in the global competition. The supremacy needed to maintain such an edge, however, must be properly implemented if domestic insurance/reinsurance companies wish to grasp the golden opportunity available in businesses grounded overseas, particularly in the Asia-Pacific Region. Obstacles facing the national insurance industry in the global market include availability of capital and human resource problems.

Minister of Finance decree Nu.48/KMK 017/1999 dated October 7, 1999, stipulates that the solvency margin calculation for insurance and reinsurance companies is in the form of a solvency margin calculation through the means of a Risk Based Capital (RBC) approach. This RBC adoption as stipulated accordingly will be gradually put into effect with a minimum 5 percent from the minimum solvability degree at the end of the first quarter in the year 2000, 15 percent by the end of 2000, 75 percent by the end of 2002, 100 percent by the end of 2003, and 120 percent by the end of 2004. Through the RBC approach, the capital need will vary from one company to another, depending on the risk degree bore by respective companies.

Insurance companies have no obligation whatsoever to boost their capital. The stipulated paid-up capital is approaching Rp 3 billion for national private companies and Rp 5 billion for joint-venture companies. Their capital, however, will be in accordance with the RBC. The government will particularly stipulate a minimum capital of Rp 100 billion for new insurance companies and Rp 200 billion for reinsurance companies. With the RBC in effect, insurance companies should be extra careful in their operations. If not, they will end up boosting their capital, restructuring balance, balancing their operation or merging with other bigger insurance companies.

A company can boost its capital by various means, including through the injection of capital from company shareholders or by seeking strong associates, domestic or foreign, or through a merger with other domestic insurance companies. But it is important to bear in mind that merging is not an easy thing to do due to the various technical or nontechnical problems involved.

Human resources have become a chronic problem in Indonesia's insurance sector to due to the specific qualifications and requirements needed. The number of professionals in general and life insurance companies is considered inadequate. The industry requires a great number of human resources with a strong academic background to fulfill the needs of 100 general insurance and 62 insurance companies as well as other supporting services of the insurance industry in Indonesia.

Indonesia's insurance/reinsurance companies also need to enhance their abilities in information technology (IT). Applied technology is badly needed in technical as well as nontechnical insurance. This is also needed to fulfill the demands of the current society in welcoming the 21st century. The technological transformation mentioned includes the improvement of almost all areas.

In short, insurance companies must have vision and a clear mission so they will know where they are heading. The birth of an effective strategy will, in turn, generate a clear vision and mission in marketing, underwriting, finance and other services. A business process must always be present to create a state-of-the- art and well-directed company, which in turn will create a competitive edge in a very competitive insurance market.