The life insurance market in Indonesia enjoyed a strong annual growth rate of over 30 percent during 2002-07. This growth was evident across all product lines, but most noticeably in investment-linked products, which alone accounted for 42 percent of gross premium growth. The proportion of investment-linked premiums in total gross premium increased from 9 percent in 2002 to 31 percent in 2007.
Indonesia is a relatively consolidated market dominated by foreign players. In 2006, the top seven players accounted for about 58 percent of the market in gross premium; four of the top seven AIG, Prudential (UK), Manulife, and Allianz - were multinational insurers.
Growth prospects remain bright; we forecast gross premiums could expand by 25 percent annually from 2007 to 2012, driven by continued economic growth and high market potential as indicated by a current low premium penetration at 1.1 percent of GDP.
Growth is also expected to come from the development of Shariacompliant takaful insurance, which allows life companies to tap into the 200-million strong Muslim population of the most populous Muslim country in the world. Penetration of Islamic banking and takaful is still low compared to neighboring Malaysia. At the moment this is a small market segment, accounting for just over 1 percent of Indonesia's gross life premium but it grew 34 percent annually from 2001 to 2006, compared with a 25 percent growth rate in the overall life market.
To sustain this growth, government support is needed to increase transparency and develop the Islamic banking system, as well as increase the service quality of takaful players so that they are competitive with conventional insurance offerings. Islamic insurance is not limited to local insurers. Multinational players such as Allianz, Manulife, and Prudential (UK) are also committed to developing this market. Indonesia Insurance Association
Despite the various peculiarities in each of the Southeast Asian markets, they have as much in common as they have differences. The three major themes across the region are:
- Growth opportunities via diversified product portfolios
- Increasing competition between foreign and local players
- Channel upgrades to reach more customer segments
However, it is important to note that most of these multinationals entered in a period when they had significant first-mover advantages. This dynamic is changing somewhat; while foreign incumbents have a tight stronghold, local players are becoming savvier. New players contemplating entry will encounter greater challenges than those that went before them.
Growth Opportunities via Diversified Product Portfolios
Between 2002 and 2007, the Southeast Asian life insurance markets grew at an astonishing average pace of 15.4 percent per annum. While fundamentals played an important part in this growth, life insurers' efforts to reach new customer segments also played a significant role. Increasingly, insurers are designing products catering to specific segments in Southeast Asia, from micro-insurance for rural areas to takaful insurance for the Muslim population in the region. Indonesia Insurance Association
There is good reason to be optimistic about the fundamentals in this region. For a start, the economy grew between 5 and 8 percent per annum in real terms from 2002 to 2007, which is comparable to the growth rate in India at 8.3 percent and China at 8.8 percent. Despite increasing insurance sales, the current level of market penetration remains low at 1.8 percent of GDP. Furthermore, product awareness and understanding of life insurance benefits is still nascent among consumers. Consumers are increasingly making use of life products as savings vehicles and to capture taxation benefits, but protection coverage remains low.
The urban population has traditionally been the target customer segment for life insurers. Part of the challenge in the future will center on how to move beyond the large city centers into the more rural areas. To some extent, traditional tied agents, such as Lili Lim, had tapped the rural markets through personal relationships, traveling to rural areas regularly to visit their networks, but large-scale, systematic distribution to these segments will require changes in both distribution and product offerings. In this aspect, some players have been quick to move and gain market share.
AIA, for example, is aggressively targeting rural markets in Thailand and has devised a new, single-premium insurance product. The new product, 1 Pay Life, which is targeted at farmers whose incomes may not be consistent, will provide lifetime coverage for 99 years on the payment of a one-time premium. The launch of this product coincides with the record margins being earned by farmers from the increase in rice prices and AIA is hoping to significantly increase the share of premium from rural areas from the 5 percent it accounted for in 2007.
Another insurer joining the bandwagon is Muang Thai, which has started selling to lower income customers and is also active in rural areas. The insurer intends to recruit one agent per village - the agents themselves actually being from these villages. This can be quite important, since 60 percent of the Thai population lives in 70,000 villages spread across the country. The policies sold have a low face value and are no-frills products, so volume is key. For example, one product is designed purely to help finance cremation costs. In 2007, up to 20 percent of Muang Thai's clientele was from rural areas and this was their fastest-growing segment.
Meanwhile, an emerging middle class has driven insurers to create tailored products that bundle risk and savings. Thus, in Malaysia, insurers are offering retirement, education, takaful, and other product combinations. Prudential (UK), for example, launched PRUVantage, which is a combined traditional and investment-linked product that allocates a portion to a traditional, guaranteed-return account and the remainder to an investment-linked account. Another popular product in this region is the combined protection and education savings plan.
Finally, the small but burgeoning Islamic finance sector will see increased penetration particularly among the significantly untapped Muslim population in Malaysia and Indonesia. To find out more, you can check Indonesia Insurance Association.
