Mellani Puspitasari / 1306420056

Insurance Business in Indonesia : Challenges and Future

A. Introduction
Various conditions and changes in the business environment improve the competition in
insurance industry. As a result, many companies would have to contend with different ways
to achieve strategic competitiveness and generate maximum profit. This also applies to
insurance industry in Indonesia where they have to make some changes and implement better
strategy due to competitive environment to maintain their sustainability.
Besides, crisis and financial fluctuation happen. Foreign funds flowed out and this trend of
capital outflows weakened the rupiah against the U.S. dollar and the stock prices fall in the
Indonesia Stock Exchange (Investor Magazine, July 2013, edition XV/241 page 44). Inflation
on June 2013 was 5,90% (yoy) and increased significantly to 8,38% (yoy) in December 2013
(http://www.bi.go.id/id/moneter/inflasi/data/Default.aspx). The increment of inflation rate
was triggered by the increment of subsidized fuel price starting from 22 June 2013 and also
put the pressure on interest rate. Increment of tariff and subsidized fuel price will weaken
peoples purchasing power. (Investor Magazine, July 2013, edition XV/241 page 44).
Insurance industry cannot be separated with macro economics condition. It means that if the
economic and purchasing power is growing rapidly, they will give positive impact in
insurance industry, and vice versa. Whenever crisis happens and the purchasing power of
society weakens, industry of insurance will be impacted. Financial turbulence does also
depend on the conditions of each insurance company. Effect of capital outflow itself has also
put impact on stocks. Fall of stocks has caused decrement in value of investment products in
capital market, which includes unit link products. However, the investors character in
insurance industry is slightly different with those investor from stocks as those who invest
through insurance company mostly take investment as a longer term purpose. In the future,
some challenges will occur and impact insurance industry, but this wont cause the
decreasing of performance in insurance industry, even it will keep growing because there are
many opportunities that will increase the development of insurance industry.

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B. Challenges
Aside of the obstacles and macro economic conditions as described, the development of
insurance industry in the future will face other obstacles, such as:
1. Insurance capital
Capital is still a major concern in insurance company in Indonesia. OJK has stated to
charge an explicit act on companies who are not capable of fulfilling capital requirement.
Incapability to conform to this regulation will result in that certain company having to
merger with other companies or invite foreign investors. According to the regulations, an
insurance company has to own a minimum capital of 100 billion by the end of 2014.
Whenever insurance industry stays solid, not only that crisis can be avoided, but it can
also be a prevention to crisis itself, as those funds collected from insurance can be a great
strength to a country. The impact of the policy will decrease the number of insurance
company where small company will join with other company to fulfill the new capital
regulation or they will out from the industry. In long term, the policy will help the
company to develop the risk awareness and help the company to increase their ability in
managing the capital.
2. Market Penetration is still low
Penetration of insurance market in Indonesia is calculated based on the ratio between
gross premium income of commercial insurance industry and economic growth (PDB).
Even so, penetration of insurance in Indonesia is still considered low. At the end of last
2012, penetration of insurance in Indonesia was recorded at 1,31% of total population.
This is deemed as low if it is compared to other countries in Southeast Asia.
As for societys purchasing power in buying insurance product along 2012 has recorded a
decrement of 21% compared to previous years achievement. The density is calculated
based on the total of gross premium income of commercial insurance industry towards
total population.

Mellani Puspitasari / 1306420056

3. Too many insurance companies in Indonesia
According to Investor Magazine July 2013 edition page 48, there are still 9 life insurance
companies and 38 general insurance companies (48% of total) whose capital are still
below 100 billion. This practically shows the number of insurance companies in
Indonesia is excessive, shown in a fact that there are 83 general insurance companies and
43 life insurance companies recorded in Indonesia. Therefore, OJK hopes that license for
life insurance companies will be combined to those of general insurance companies in the
future which is commonly known as composite license. As a result, the increment of
number of insurance companies in Indonesia will be suppresed and insurance
companiess activities will be well-monitored and eventually puts OJK at ease in
conducting supervision. (http://prasetya.ub.ac.id/berita/Dinamika-Persaingan-IndustriAsuransi-Jiwa-di-Indonesia-7497-id.html)
4. Competition with global and ASEAN Economic Community
Few parties are in doubt with local insurance companies to compete in regional market.
The same thought still exist in current situation where competition in 2015 due to Asean
Economic Community is tough and inevitable. The Indonesian market is huge and
untapped optimally, and it becomes the target of global market participants. However,
looking at the development itself, insurance companies in Indonesia have been exposed
for quite a time and accustomed to competition considering how giant global insurance
companies have penetrated Indonesia. Currently, there have been plenty of global
insurance companies in Indonesia with huge valued assets who lead in accumulating
premium in Indonesia. The existence of those global insurance companies simply shows
that Indonesian companies have got used to competition.
5. Political conditions and government regulations
Political circumstances will also be a challenge for the development of insurance in
Indonesia, especially for the year 2014 which the election will be held. But, as a
challenge in this political event, people's fears and the possible risks that will probably
arise will be an opportunity for insurance companies. Under conditions of uncertainty,
people need insurance for protection. Because of that, in facing an election year in 2014,
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insurance industry is optimistic that this is not a scourge, even insurance provides
protection from risks that may occur. If risk increases, then the society will need
insurance for protection.
In addition, there are also challenges for insurers when converting GAAP to IFRS was
already implemented in 2012 and these changes will affect the income derived by the
insurance company where there will be a potential loss for the insurance company
because the company must increase its obligations and the possible claims of premiums
or if there are future claims. The application of this rule will result the liability or
obligation of the company increased and will weaken equity or capital structure. That
certainly

would

make

the

insurance

industry

must

raise

their

capital.

(http://akuntanonline.com/showdetail.php?mod=art&id=622&t=IFRS%20Pengaruhi%2
0Rugi-Laba%20Perusahaan%20%20Asuransi%20&kat=Akuntansi)
Besides, BPJS (Badan Pelaksana Jaminan Sosial/ Executive Agency for Social Security)
will be implemented in 2014. The main mission of the implementation of BPJS is there
are no more poor people that could not receive health care because they have no money.
Although it is still in pros and cons and may be slightly damaging the private insurance
market, but it is expected that BPJS can collaborate with private insurance companies
without damaging the market which can lead to the declining of economic conditions in
Indonesia. It is also expected that BPJS can provide socialization about insurance and
great benefits that people of Indonesia can achieve by having insurance, so they will be
more educated and will increase the selling of insurance policy.
6. Lack of experts
In line with the changing business environment, the future of insurance industry will be
faced with several constraints such as the increasing of sophisticated insurance products
and excellent service in all sectors ranging from sales to claims settlement process.
Serious challenge in this matter is the lack of professionals in insurance fields in
Indonesia such as insurance actuaries, underwriters and investment experts. But, the
insurance industry and education world keep growing with the opening of various
departments in universities in Indonesia related to the profession in insurance business.

Mellani Puspitasari / 1306420056

7. Tariff Competition
Tariff competition is going on in some products in insurance especially in the general
insurance business such as property and marine cargo and they have entered the alarming
levels. If it is continuously left without solution will lead to the destruction of the
insurance industry. There are several companies which the premiums are too low and
theres no clear calculation basic and this will cause they could not afford to pay in the
event of a claim in the future. This situation encourages the regulator to publish a
reference tariff through the Capital Market Supervisory Agency and Financial Institution
(BAPEPAM LK now OJK) No. PER-07/BL/2012 where this rule applies pure premium
reference elements and elements of administrative costs and other general expenses on
car insurance motor line in 2013. (Investor Magazine, July 2013, edition XV/241 page 82)
8. The low awareness of Indonesian citizens about the importance of insurance.
This is contrast with the various phenomena that exist in many developing countries
where each citizen has a high awareness to insure themselves begin to tip to toe and all
the assets and properties. Low awareness is due to lack of socialization to the public.
However, insurance industry performances are increasing and they have started to
socialize through media and personal approach. Besides, the government will start to
socialize the importance of insurance industry. So in the future, it is expected that people
will be more educated and more aware of the importance of insurance, so it will increase
the purchasing power and insurance industry will keep growing day by day.

C. Future
1. Insurance industry will continue to grow
Although the future of the insurance industry will face challenges, however, insurance
industry will continue to grow. In the midst of the world macroeconomic crisis in
European countries and US zone, the insurance industry in Indonesia is optimist would
continue to develop. Moreover, the insurance industry is relatively immune to the crisis,
continued to grow well. Seeing the recent performance of insurance companies, both life
insurance and general insurance, has shown an increase, ranging from premium growth,

Mellani Puspitasari / 1306420056

asset growth, earnings growth, the amount of investment to investment returns. From the
statistics below it can be seen that in terms of net premium and profit, the figure shows
the increasing from year to year.
Year

Net Premium

+/-

Profit

+/-

2008

IDR 48,38 trillion

IDR 1,14 trillion

2009

IDR 59,75 trillion

+23,49%

IDR 4,75 trillion

+316%

2010

IDR 72,53 trillion

+20,87%

IDR 5,46 trillion

+14,28%

2011

IDR 90,79 trillion

+23,6%

IDR 7,93 trillion

+29,57%

2012

IDR 107 trillion

+14%

IDR 8,9 trillion

+12,00%

Source : Investor magazine July 2013 edition page 50-51

2. The increasing of national income
Industry still remains optimistic that the business will continue to grow. Global rating
agencies, Fitch Ratings, considers that the prospects for the insurance sector both life and
losses insurance in Indonesia will be stable with sustained growth in premium income,
was driven by the increasing of national income and the increasing of number of rich
people in Indonesia. When the global crisis hit in 2008, insurance industry in Indonesia
has still experienced double-digit growth. Although after it was down, but growth
remains. This fact and history increases the optimism among industry players.
3. Improvement of socialization to the public
To maintain the pace of growth of insurance companies, the government would increase
the socalization of insurance to the public primarily through BPJS. Drivers of the high
growth are economic conditions are keep improving and the rising purchasing power.
People nowadays are also already high educated and open minded.

4. More business opportunity

Insurance growth in the future will be greatly supported by the insurance business
opportunities. The opportunities such as Takaful market opportunities, micro insurance
and middle economic class will continually grow. Indeed the awareness of the

Mellani Puspitasari / 1306420056

importance of insurance is still weak, but the number of middle class in Indonesia will
grow and this will increase the potential growth of the life insurance market.
5. The population and economic conditions
Indicators that drive the growth of insurance are large number of people and more
attractive and easy system of insurance that are offered to the public, as well as economic
conditions are quite well. Moreover, the population of Indonesia includes the world's top
five and becomes a potential market for the insurance world. With the increasing of
population, it becomes one of the opportunities for life insurance, especially where it is
supported by the economic conditions of Indonesian society that is relatively stable, and
the growth of the national economy continues to evolve into a world of opportunities for
insurers. The increasing of diversification of life insurance products become a trigger of
the increasing of insurance world, followed by ease of system and types of products that
are offered become the factors that are expected to lead the growth of life insurance.
(http://piter05.blogspot.com/2012/11/prospek-asuransi-di-indonesia.html)
6. Role of Otoritas Jasa Keuangan (FSA/Finance Service Authority)
National insurance industry entered a new phase. Optimism is getting stronger with the
presence of FSA and it is expected to bring changes in the regulation and supervision of
the industry. Improvement ideas from the FSA is increasingly bringing optimism of
national insurance. Setting the reference rate of property insurance, formation of strong
reinsurance company or execution of insurance company drop RBC are partly the
determination of the FSA. By considering the existance of FSA, the insurance industry's
growth

in

the

following

year

should

be

more

optimistic.

(http://munawarkasan.wordpress.com/2013/12/17/optimisme-industri-asuransi-danfaktor-ojk/, also published in Bisnis Indonesia newspaper, 17 December 2012).

D. Conclusion
The development of insurance industry in Indonesia will increase although they will face
some obstacles such as lack of capital, market penetration is still low, competition with
global and ASEAN Economic Community, Politic and government regulation, Lack of
experts, tariff competition, etc. But, the insurance industry in Indonesia remains optimistic to
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Mellani Puspitasari / 1306420056

look into the future with the increasing of national income and the increasing number of
middle to upper class people in Indonesia, there will also be an increasing of socialization of
insurance to the public, more business opportunity for insurance, the increasing number of
people in Indonesia, the economic conditions of the community, and supported by FSA 's
role, so it is expected that the insurance industry in Indonesia will continue to grow.

E. Suggestion
The insurance company should be able to see the market and can create a variety of products
according to customers' requirements.
Efforts to raise public awareness of insurance must involve all parties, the government and
the insurance company itself. The government could help to strengthen education in the field
to the public, while the insurance companies also do not ever get tired of strengthening the
performance of the agent.
F. Bibliography
Investor Magazine, July 2013, edition XV/241
http://www.bi.go.id/id/moneter/inflasi/data/Default.aspx
http://prasetya.ub.ac.id/berita/Dinamika-Persaingan-Industri-Asuransi-Jiwa-di-Indonesia7497-id.html
http://akuntanonline.com/showdetail.php?mod=art&id=622&t=IFRS%20Pengaruhi%20Ru
gi-Laba%20Perusahaan%20%20Asuransi%20&kat=Akuntansi
http://ipungonomics.blogspot.com/2013/04/asuransi-di-tengah-beragam-tantangan.html
http://piter05.blogspot.com/2012/11/prospek-asuransi-di-indonesia.html
http://munawarkasan.wordpress.com/2013/12/17/optimisme-industri-asuransi-dan-faktorojk/