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  • Foto del escritorThe Corporate Reviews

Ibrahim Kholilul Rohman

Senior Research Associate, Indonesia Financial Group, Indonesia


Insure to Endure: Conquering Indonesia's Insurance Industry Challenges

As among the cornerstones of the financial sector, the insurance industry's significance intertwines with the broader economy. Serving as a vital risk mitigator for life, general insurance, and reinsurance, its role cannot be overstated. However, Indonesia's geographical disposition and the persistent specter of climate change render it particularly vulnerable to an array of natural disasters, encompassing landslides, floods, earthquakes, tsunamis, and more. These calamities pose a grave threat to the nation's economic stability, with projected losses estimated to range from 0.66% to 3.45% of GDP by 2030 if left unaddressed. Analyzing Indonesia's Natural Disaster Index reveals provinces such as Aceh, West Java, and North Maluku as hotspots for such events. People still vividly remember that the 2004 Aceh tsunami resulted in staggering economic losses, with building damages alone totaling USD 0.88 billion. This might lead to the realization of the importance of insurance as a risk mitigator.

Yet, despite facing heightened risks, the insurance and pension fund sectors confront substantial challenges, trailing behind other industries in terms of both market size and the adoption rate.  Utilizing both yearly and quarterly data from Bank Indonesia, the insurance and pension fund industries continue to fall behind in comparison to other sectors until the fourth quarter of 2023. With a year-over-year (YoY) growth rate of -2.30%, the insurance and pension fund industry ranks 47th out of 53 observed sectors. Similarly, on a quarterly basis, the industry experienced a growth rate of -2.03%, positioning it 46th out of 53 observed economic sectors. 

Concurrently, Susenas surveys conducted by Indonesia's central statistics bureau—designed specifically to collect data on household welfare in Indonesia and conducted semi-annually—reveal a low rate of private insurance adoption. Out of 33 million surveyed households in 2023, only 121,000 have access to private health insurance, amounting to a mere 0.378% of Indonesia’s vast population.

On the size of the industry, the combined assets of Indonesia's insurance and pension funds, standing at less than 12% of GDP as of 2020, lag significantly behind neighboring countries such as India, the Philippines, Thailand, and Malaysia. External factors, including volatility in global markets and geopolitical tensions, further exacerbate the industry's challenges. Fluctuations in macroeconomic variables like inflation and interest rates critically impact key industry metrics such as underwriting and asset management.

On the supply side, market conduct improvements, particularly in pricing strategies, are imperative. Current practices often fail to reflect risks adequately, leading to a disproportionate emphasis on premium collection while neglecting reserves and future claim payment capabilities. Moreover, investment fund management tends to prioritize short-term high-return asset allocation, resulting in significant fluctuation levels. Improper management of Asset Liability Management is among the drivers of a long list of failing insurance companies, including but not limited to Bakrie Life, Bumi Asih Jaya, Jiwasraya, AJB Bumiputera 1912, and Kresna Life.

Addressing these challenges hinges on enhancing financial literacy, a critical factor contributing to the sector's underperformance. Triennial surveys conducted by Indonesia's Financial Services Authority (OJK) indicate a positive trend in literacy rates for the insurance sector. However, a substantial gap persists between literacy and inclusion indices, attributed to limited public knowledge of insurance products and low confidence in insurance companies.

Enhancing literacy stands as the pivotal issue. A significant contributor to the underperformance of these sectors is financial literacy. In Indonesia, the Financial Services Authority (OJK) administers a triennial National Survey of Financial Literacy and Inclusion (SNLIK), revealing that the literacy index for the insurance sector ascended to 31.7% in 2022, compared to 19.4% in 2019. However, the financial inclusion index for the insurance sector only rose to 16.6% in 2022, signifying a substantial 15% gap between literacy and inclusion indices.

Technological advancements, particularly in artificial intelligence (AI), offer promising avenues for industry transformation. While banking has rapidly embraced digitalization, the insurance sector lags in adoption. AI applications hold potential for enhancing underwriting performance, risk monitoring, and real-time risk mitigation—a crucial development given the prevalence of traditional distribution channels in Indonesia.

Furthermore, Indonesia's status as the world's most populous Muslim nation presents an opportunity to integrate the halal industry, potentially adding USD 5.1 billion to GDP. However, the absence of a robust Sharia Takaful insurance segment hampers synergies between the halal industry, Islamic banking, and insurance, hindering market expansion.

The implementation of the P2SK Law heralds a new era of development opportunities for the insurance industry. Mandatory insurance provisions, particularly for health, accompanied by schemes for low-income individuals, are pivotal. Government-initiated micro-insurance programs aim to enhance sector penetration, aligning with the law's emphasis on supporting micro and small businesses. Strengthening consumer confidence through insurance sector guarantee schemes is paramount, underpinning efforts to bolster trust in the industry.

In conclusion, Indonesia's insurance sector faces multifaceted challenges requiring a holistic approach. Prioritizing financial literacy, leveraging technological innovation, and aligning with regulatory frameworks are critical steps toward overcoming barriers and fostering sustainable growth, safeguarding the nation's economic resilience in the face of adversity.


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