Insurance

Insurance / Indonesia

2014 Outlook: Indonesian Insurance

Sustaining Growth Momentum Amid Growing Pressure to Enhance Competitiveness
Outlook Report
Rating Outlook Outlook Remains Stable: Fitch Ratings believes that most of the credit profiles within the Indonesian life and non-life sector should be supported by steady market growth, manageable exposure to equity risk, and stable operating margins. Steady Growth to Continue: Growth prospects remain attractive in the medium- to long-term, driven by low penetration, improving risk awareness, and rising affluence. Total insurance penetration is estimated at only around 1.77% of Indonesias GDP much lower than the 6.03% for Singapore and 4.8% for Malaysia, for example. Pressure to Increase Competitiveness: The agency believes that it is becoming more important for Indonesian insurers to heighten their individual competitiveness as the region braces itself for regional economic integration following the ASEAN Economic Community framework in 2015. This move is crucial to prepare for the dynamics of a more open market, and to handle the intensifying competition from regional players. Roadmap to Universal Coverage: Fitch believes the Indonesian governments framework which aims to provide universal health coverage for all citizens through its new healthcare system beginning in 2014 as having only a limited impact on private insurers in the short- to medium-term. This is in view of Indonesias underpenetrated market , and that the limited comprehensive package might leave room for complementary protection products. Minimal Impact from Catastrophes: Fitch feels that the losses from the flooding in January 2013 should remain manageable and not lead to excessive financial strain on the balance sheets of Indonesian insurers. Life insurers are shielded from major losses due to the low casualty rate and low insurance penetration. Non-life insurers are also protected by their reinsurance coverage and the exclusion of flood risks in many of the insurance policies. Spurt of M&A: Fitch sees M&A activity continuing to surge in the short- to medium term as more foreign investors are attracted by the growth opportunities offered by Indonesias under penetration. This might also be spurred by the requirement for higher minimum capital as well as the incentive for local insurers to gain scale in order to increase competitiveness following upcoming market liberalisation. The foreign ownership cap, at 80%, is more generous than in many other regional countries.

S TABLE
(2013: S T A BL E )

Sector Outlook

S TABLE
(2013: NA)
Vast and under-penetrated market continues to offer attractive growth opportunities Demand also supported by a growing middle class and rising affluence Operating performance not significantly affected by catastrophes in 2013

Related Research
Other Outlooks
www.fitchratings.com/outlooks

Other Research
PT Asuransi Adira Dinamika (June 2013) PT Avrist Assurance (October 2013) 2013 Outlook: Indonesian Insurance Sector (October 2012) Risk Radar: Global Macro Factors Impacting Credit (September 2013) Global Economic Outlook: Shifting Growth Trends in Developed and Emerging Markets (September 2013)

Outlook Sensitivities
Catastrophe Losses: The industry has demonstrated resilience in its ability to withstand losses from the flooding catastrophes in 2013. Nonetheless, a significant, unexpected rise in insured losses from future catastrophe events in Indonesia could potentially lead to downward pressure on operating profitability, especially the non-life sector. Economic Shocks: The stable outlook reflects Fitchs expectation that Indonesias economic conditions remain manageable. The outlook could be revised to negative in the event of any extreme exogenous shocks. Potential equity market volatility which translates into huge operating losses and severe capital erosion for the sector as a whole, could also change the outlook.

Analysts
Cheryl Evangeline +62 21 2902 6409 cheryl.evangeline@fitchratings.com Siew Wai Wan +65 6796 7217 siewwai.wan@fitchratings.com

www.fitchratings.com

20 November 2013

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Key Issues
Mid-to Long-Term Growth Prospects Remain Attractive
Fitch expects premium growth to remain stable driven mainly by low market penetration. Swiss Re Sigmas estimates for 2012 indicate that Indonesias life insurance premiums and non-life insurance premiums equated to only a low 1.24% and 0.53%, respectively, of GDP. Total penetration, at 1.77% of GDP, compares with 8.18% for the US and 11.27% for the UK. Insurance penetration levels in neighbouring countries such as Singapore, Malaysia and Thailand, which are above 4% with much lower population numbers, continue to suggest vast growth potential for Indonesias insurance industry. Overall, Indonesian insurance accounted for 0.34% of the global market in 2012, versus 6.75% for the UK, for example.
Figure 1

Comparison of Insurance Penetration

2012
(%) 14 12 10 8 6 4 2 0
Life Premiums in % of GDP Non-Life Premiums in % of GDP

5.25

2.27

2.84 4.52 1.6 4.43

6.87

9.17

8.44 3.65

2.76

2.07 2.95

1.72 3.08

2.84

0.78 3.17

1.26 1.7

0.53 1.24

South Korea

Japan

United Kingdom

United Singapore Australia Thailand Malaysia States

India

PR China Indonesia

Source: Swiss Re Sigma Report No 3/2013

Continued Protection Demand from Rising Wealth and Risk Awareness

A report from Boston Consulting Group released in March 2013 stated that the number of middle-class and affluent consumers (those with monthly spending of IDR2m and above) in Indonesia is projected to double between 2012 and 2020, from 74 million to 141 million. Some 8-9 million people are expected to enter the middle class each year. The number of insured people rose by more than 50% in H113 versus the same period in 2012, to 87.2 million, based on industry statistics. This is still considered low in view of Indonesias total population of more than 240 million, and suggests further growth potential. Fitch also feels that rising catastrophe risk-awareness from recent major catastrophes should drive steady demand for insurance protection.

Shifting Operating Landscape Highlights Need to Boost Competitiveness

Fitch believes Indonesian insurers are under increasing pressure to enhance their individual 1 competitiveness as the ASEAN Economic Community (AEC) framework approaches in 2015. This is in order to anticipate the dynamics of a more open market, and strengthen the ability of local players to compete not only with other local players but also those from regional markets. There are currently 10 ASEAN member countries, representing over 600 million people.

Introduction of New Healthcare System

Indonesia is poised to strengthen its healthcare system, with the first stage beginning in 2014. This follows the implementation of Law No. 40/2004 on National Security System (Sistem Sosial Nasional or SJSN) and Law No. 24/2011 on Social Security Administrative Bodies (Badan Penyelenggara Jaminan Sosial or BJPS). According to The World Bank, about 60% of the population is covered by health insurance.

The AEC aims to establish ASEAN as (a) a single market and production base, (b) a highly competitive economic region, (c) a region of equitable economic development, and (d) a region fully integrated into the global economy.

2014 Outlook: Indonesian Insurance November 2013

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The implementation of BJPS in 2014 would disallow insurance companies from selling those benefits covered by the programme. Nonetheless, Fitch views this development to have only a limited impact on the private insurers in the short to medium term considering Indonesias under-penetrated market and that the limited comprehensive package that is to be provided might leave room for complementary protection products offered by private insurers. The government is targeting universal coverage by 2019, while it might actually take longer to achieve given that Japan and Korea took more than 20 years to be fully covered. The development, implementation, management and oversight of the programme to ensure longterm fiscal sustainability could also prove challenging.

Indonesian Insurers Shielded from Catastrophes in 2013

The floods in Jakarta in January 2013 were markedly more severe than in 2002 and 2007. The areas affected were more extensive and concentrated towards inner Jakarta, whereby insurance coverage is higher than in rural areas.
Figure 2

Insured Flood Losses in Indonesia

Insurance Claims
(IDRtn) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2002
a

Industry estimates put economic losses at IDR32.0trn (USD3.3bn), while insured losses are expected by industry bodies to top IDR3.0trn. International catastrophe-modelling firms and local loss-adjusters continue to finalise the insured loss amount, while Fitch feels the losses should remain manageable and would not lead to excessive financial strain on balance sheets. Life insurers should not suffer a major hit, with the low casualty rate relative to the population size and the low insurance penetration. In addition, non-life insurers are protected from excessive losses as flood risks are not automatically included in many motor and property insurance policies in Indonesia leaving a high proportion of those affected remaining uncovered by insurance protection. Local non-life insurers were also shielded largely by protection from their reinsurance coverage. Industry statistics indicated that around 50% of the non-life industrys total gross premiums in 2012 were 2 being ceded , with a substantial proportion to foreign reinsurers and retrocessionaires as the low capital base of domestic reinsurers encourages reliance on overseas retrocessions.

2007

2013a

Projected Source: AAUI, Industry estimates

M&A Activity to Continue

Fitch believes that the M&A surge is unlikely to subside, as more foreign investors continue to be attracted by the Indonesian market and look to diversify out of more established and mature markets. Smaller local insurers may also merge to fulfil regulatory requirements or gain scale in order to be more competitive. This follows the planned market liberalisation and further increase in insurers minimum capital requirement to IDR100bn by end -2014 from IDR70bn. Foreign investors are also attracted by a more generous foreign ownership cap for insurers. At 80%, this is much higher than in other Asian countries such as India and Thailand (26% and 49%, respectively). An exception to the regulation also allows existing foreign shareholders in insurance companies to increase their shareholdings beyond the 80% limit by injecting more capital into the company. Nonetheless, Fitch feels that the frequency of M&A will be kept at a controllable level as the Indonesian insurers do not typically have an M&A culture, and look to maintain their foothold in the growing market. This shift could reinforce the development of the Indonesian insurance sector into a more sophisticated and established market through the sharing of technical expertise and knowledge, and lead to greater competitiveness among local companies. However, Indonesias operating environment remains a key challenge. Corporate governance, market transparency and public disclosure have improved gradually, but are generally limited compared with developed markets.
2

Transferring a portion of risk in insurance policies from a primary insurer to a reinsurer in exchange for a pre-defined premium

2014 Outlook: Indonesian Insurance November 2013

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Takaful Market Growth Constrained by Operating Environment
Figure 3

Market Share of Indonesian Sharia Insurance by Industry Premiums

Percentage of Sharia Life Insurance Percentage of Sharia Non-Life Insurance Percentage of Total Sharia Insurance

Indonesias takaful (insurance concept based on Islamic principles) market offers vast untapped potential, with the largest concentration of Muslims in the world representing more than 80% of the population, or over 200 million people. Total takaful insurance gross premiums still accounted for less than 5% of the total Indonesian insurance market premiums, albeit up five-fold from IDR1.4trn in 2007 to IDR6.5trn in 2012. Total takaful insurance assets grew from IDR1.9trn to IDR13.1trn. Fitch views the lack of a well-developed Islamic financial market and investment instrument as an ongoing challenge as companies manage their asset/liabilities duration and look to invest the cash flows received from policyholders into sharia-complaint products. Other key challenges include developing a strong distribution network to compete with conventional peers with a more entrenched market position; and improving their product innovation in order to create distinctive products with competitive advantages or that supplement conventional insurance products.

(%) 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2007 2008 2009 2010 2011 2012 Source: Indonesia Sharia Insurance Association (AASI), OJK

Concurrent Regulatory Developments

Spin-Off Sharia Insurance Units
Indonesia is expecting the spin-off of takaful windows into fully fledged operations by end-2014, three years after the implementation of the Law of Insurance Business. As of end-2012, there were five fully fledged sharia insurance companies and around 40 insurance companies with sharia units. Fitch believes this development could provide a stimulus for steady takaful growth in 2014. Nonetheless, the extent of growth will depend on the way the bill is finalised and reinforced.

Further Increase in Paid-up Capital Requirement

Insurance companies will be required to meet a further increase in capital to a minimum of IDR100bn by 2014, following the increase in the minimum capital requirement from IDR40bn in 2010 to IDR70bn in 2012. Meanwhile, the new minimum capital requirement for reinsurance companies has risen to IDR200bn from IDR150bn. This regulation should benefit the industry in the long run as insurers develop a greater ability to manage capital sources, while creating a higher buffer for claims settlements. It could also enhance the competitiveness of Indonesian insurers as they prepare for the impending market liberalisation.

Establishment of New Insurance Rating Agency

The Financial Services Authority (OJK) will establish an insurance rating and statistics agency, with operations expected to begin by 2014. This agency would be responsible mainly for determining the premium benchmark for the insurance industry and collecting past and current industry statistics. The data obtained will then be used to better regulate floor and ceiling premium prices and prevent underpricing driven by tight market competition.

Introduction of Micro-Insurance Blueprint

The OJK introduced a blueprint in October 2013 to provide clearer distinction and guidelines for the support and implementation of micro-insurance. The blueprint stipulated the premium payable for a micro-insurance policy not to exceed IDR50,000 (USD4.40), and the benefits not to surpass IDR50m per customer. Among more than 120 insurance companies in Indonesia, only 16 were reported to have marketed their own micro-insurance products.

2013 Review
Total industry gross premiums have grown steadily in the first half of 2013. Life premiums grew by 14.48% yoy while non-life were up 10.2% yoy from H112. New life premiums rose by 7.1% to IDR37.41trn while renewals were up 31.25% to IDR20.18trn. Life insurance claims amounted to IDR35.37trn while the non-life insurance industry subsequently reported claim of IDR7.67tn in H113, a 1.2% increase from the previous year.

2014 Outlook: Indonesian Insurance November 2013

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Appendix
Figure 4

M&A Deals, 2011- Oct 2013

Date announced Acquirer Apr 11 Mitsui Sumitomo Insurance (Japan) May 11 Bank Mandiri & AXA (France) Amount of stake (%) 50 60/40 (Mandiri/ AXA) 55 80 80 80 80 80 70 40 75 20

Target PT Asuransi Jiwa Sinarmas PT Asuransi Dharma Bangsa

Sector Life Non-life

Dec 11 Mar 12 Jun 12 Jun 12 Jun 12 Oct 12 Apr 13 May 13 Jul 13 Oct 13
Source: Fitch

SHC Capital Ltd. (Singapore) Tokio Marine HD (Japan) ACE Limited (Bermuda) Zuellig Group (Hong Kong) ACE Limited (Bermuda) Hanhwa Life Insurance Co Ltd (Korea) Tune Ins Holdings Bhd (Malaysia) Dai-ichi Life Insurance Co Ltd (Japan) Bank Central Asia (BCA) (Indonesia) Mapfre Insurance Company (Spain)

PT Asuransi Parolamas PT MAA Life Assurance PT Asuransi Jaya Proteksi PT Asuransi Indrapura PT Asuransi Jaya Proteksi PT Multicor Life Insurance PT Batavia Mitratama Insurance PT Panin Life PT Central Sejahtera Insurance PT Asuransi Bina Dana Arta

Non-life Life Non-life Non-life Non-life Life Non-life Life Non-life Non-life

Figure 5

Total Indonesian Insurance Industry Gross Premiums

(IDRtn) 160 140 120 100 80 60 21.9 39.4 34.5 Life gross premiums Non-life gross premiums

28.7
20.8 76.0 94.2 107.7 57.6

40
20 0

60.2

2009

2010

2011

2012

H113

Source: Indonesian Life Insurance Association (AAJI); General Insurance Association of Indonesia (AAUI)

Figure 6

Issuer Ratings
Issuer PT Asuransi Adira Dinamika PT Asuransi Ekspor Indonesia (Persero) PT Asuransi MAIPARK Indonesia PT Asuransi Sinar Mas PT Avrist Assurance PT Tugu Pratama Indonesia PT Tugu Reasuransi Indonesia
Source: Fitch

Rating/Outlook/RW (Current) AA(idn)/Stable BBB-/AAA(idn)/Stable BBB+(idn)/Stable AA+(idn)/Stable AA(idn)/Stable AA(idn)/Stable A(idn)/Stable

Rating/Outlook/RW (End-2012) AA(idn)/Stable NA BBB+(idn)/Stable AA+(idn)/Stable AA(idn) /Stable AA(idn) /Stable A(idn)/Stable

2014 Outlook: Indonesian Insurance November 2013

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2014 Outlook: Indonesian Insurance November 2013