Last November I visited Indonesia to speak at a conference on microinsurance. This large and exciting country itself presents many of the opportunities and challenges for insurers that we see across emerging markets. To seize these opportunities, insurers will need to be flexible as regards their business models and thinking as well as their supporting infrastructure.
In fact, becoming a true digital insurer will be an absolute necessity in these markets, and Indonesia is no exception.
The first thing to appreciate is that this country of 247 million people (or even more, according to some) has been growing at a rate of 6.2 percent since 2009, building a strong lower middle class. Some 8 million people moved out of poverty in the last four years alone—and there is now a substantial group with something to lose, and thus with something to insure.
At present, the level of insurance penetration in Indonesia, at about 0.5 percent of gross domestic product, is on a par with that of India but substantially lower than China and Brazil (approximately 1 percent) and also its neighbor Malaysia (1.5 percent). There is every reason to believe that more and more consumers will start to invest in insurance.
That’s the potential, but what are the challenges? To me they seem to be substantial, and any insurer that wants to make headway must confront them:
- The diversity of a country with some 300 ethnic groups and more than 700 languages. Income and education levels also span a wide range. Most insurers do not have experience in marketing to such a diverse population.
- Half the nation still lives in inaccessible rural areas. The other half is urbanized with high levels of literacy, but there is a lack of infrastructure and knowledge about insurance. These factors make it hard (and expensive) to acquire customers and distribute product.
- In the absence of comprehensive customer data, and faced with issues such as adverse selection, moral hazard and covariant risk, insurers in Indonesia—as in other emerging markets—cannot underwrite microinsurance with their customary rigor. And even though most microinsurance policies have a higher premium:cover ratio than is the case with conventional policies, these premiums seldom meet the full cost of the cover. To break even, high and geographically concentrated volumes are required.
The key to success in such a market will be the ability of an insurer to adopt a totally new business paradigm—and have the flexible, digital infrastructure in place to enable it. The extent of the mind shift required is summed up in the words of one experienced senior insurer confronted with the challenge of launching a microinsurance offering in an emerging market: “Forty years in insurance doesn’t teach you anything about microinsurance!”
In Indonesia specifically, insurers will find there are several key success factors:
- An effective operating model that includes product development, marketing and distribution, and claims and administration functions that are specifically tailored to meet local requirements.
- Local partners who can provide deep knowledge of customers, and capabilities or assets which would take the global carrier a long time to develop.
- Differentiated products which have been specially customized to meet the needs and expectations of Indonesia’s customers, who have modest means and scant experience (if not mistrust) of insurance.
- Innovative distribution, financing and partnering mechanisms, and the ability to scale as the offering proves itself.
- Compliance and collaboration with local regulations and incentives. It seems to me that Indonesia’s Financial Services Regulation Authority (OJK) is very interested in increasing insurance coverage and is thus very active. They were a very friendly and supportive host to the microinsurance conference.
As I said, the prize is well worth the trouble.
For more on microinsurance in general, please read Big opportunities in small-ticket insurance.