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 Ana lysis: Indonesia: Increa sing coverageJosh Franken, Oxford Business Group | Mon, 03/07/2011 10:33 AM

Solid economic growth bodes well for Indonesia’s insurance sector, with forecasts that insurance premium and

total asset levels will increase over the medium term. It is possible, however, that many of the smaller players in

the market could be squeezed as competition for clients, especially in the life segment, heats up.

Indonesia has long been seen as offering strong opportunities for the sector, especially given the low penetration

levels in some segments such as life and health coverage. That said, though there is strong potential for growth,

Indonesia is also a potentially risky market in which to operate, with the region prone to natural disasters such as

earthquakes, volcanic eruptions and tsunamis, which between them have claimed thousands of lives over the

past decade and caused substantial property damage.

Despite these risks, insurers are upbeat about Indonesia’s prospects. According to a recent survey on the

outlook for the industry in the Asia Pacific region, Indonesia rated third, after China and India, in terms of potential

for expansion.

The results of the survey, conducted by international legal firm the Norton Rose Group, and issued in mid-

February, found that 80 percent of respondents believed that Indonesia offered significant growth prospects.

Before those prospects can be turned into policies, however, the industry will need to do more to sell the concept

of insurance to the general public. Much of the sector is driven by automotive, property and business coverage,

which represent the bulk of policies underwritten, while the life segment remains under-represented.

Less than 10 percent of Indonesia’s population of around 240 million has life insurance. By contrast, some 40

percent of the Malaysian population is insured, according to the Life Insurance Association of Malaysia. Similarly,in Singapore figures from the Monetary Authority put the average annual payment of life policy premiums equal to

around 5.1 percent of GDP, as compared to less than 1 percent in Indonesia.

This f igure should increase as more of the population benefits from the country’s continued economic growth, with

increased prosperity serving to encourage a greater take-up of life coverage.

There are some 45 life policy-writers active in the Indonesian market. Many of the larger companies have links

with overseas insurers, while at the other end of the market, there are a number of smaller firms in the sector that

focus either on a particular segment or operate on a regional rather than national basis. More than a few of these

firms are undercapitalized and may had difficulty competing with the more powerful companies as they seek toexpand their reach across the country. This could result in a wave of mergers or acquisitions in the coming years

as the market becomes more lucrative.

One that has already felt that appeal is Bank Mandiri, one of Indonesia’s leading lenders. In January Mandiri

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conducted a US$1.6 billion rights issue, with the bank stating that at least part of the proceeds would be used to

expand its insurance arm. The bank already is a player in the sector, having taken a majority stake in AXA

Mandiri, its life insurance joint venture with AXA Indonesia, last August.

At the end of 2010 Zulkifli Zaini, Mandiri’s president director, flagged the bank’s intentions in an interview with an

Indonesian newspaper, saying that Mandiri was on the lookout for ways to increase its share of the insurance

market. “The plan is to expand AXA Mandiri, but we are open to the option of buying a general insurer in order to

accelerate the expansion,” Zulkifli said.

Mandiri is well placed to expand its policy sales with its present resources, having a client base of around 10

million, of whom only 800,000 or so hold insurance coverage through AXA. Further investments could see the

bank take an even larger slice of the market.

Though potential has been a watchword for the Indonesian insurance industry of late, there are obstacles as well.

A majority of respondents to the Norton Rose study cited the current regulatory regime as a barrier to greater

growth, though the report also noted that there had been improvements in the rules governing the sector over the

past few years. This could be seen as a positive trend, according to one respondent, in that it had strengthened

the industry.

Should this trend continue, alongside the continued growth of the Indonesian economy, the outlook for the

country’s insurance sector is bright, especially if the industry consolidates some of the small-scale operations

and becomes more national in nature.

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