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Can insurance guarantee schemes illuminate the industry’s future?
Between 2010 and 2016, the insurance industry's contribution to the banking sector increased by 4.2 times, while the banking industry's contribution to the insurance sector rose by 2.7 times.
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Rise and fall: The PT Bumiputera office building (center) stands on Dec. 18, 2016, amid Jakarta skyscrapers. Poor governance has beset several state insurance companies, including Bumiputera, over the past decade. (JP/Wendra Ajistyatama)
The Financial System Stability Committee (KSSK) recently released a report on the financial sector's performance in the first half of 2023. While some areas experienced modest to lower growth, the banking sector in general continued to show a promising trend.
Bank credit saw a year-on-year (yoy) increase of 7.76 percent, slightly lower than the 9.39 percent recorded in May 2023. Similarly, investment credit still grew at 9.60 percent yoy, compared with 12.69 percent the previous month. Third-Party Funds (DPK) witnessed 5.79 percent yoy growth, just slightly below the previous month's 6.55 percent, largely driven by deposits.
While the banking industry showed a relatively stable performance, the insurance sector faced significant challenges in 2023. It stood as the only financial sector experiencing negative growth, at 0.7 percent yoy, despite the country's overall gross domestic product (GDP) growth reaching 5.03 percent yoy.
From an industry perspective, notable disparities emerged between the life insurance and general insurance sectors. The life insurance industry experienced negative growth in gross premiums and claims, by 11 and 7 percent yoy, respectively. On the other hand, the general insurance sector demonstrated relatively positive growth in gross premiums at 7 percent yoy, but faced a larger increase in gross claims of 14 percent yoy.
We have identified two primary structural issues that are impeding the growth of Indonesia's insurance industry and contributing to a penetration rate of below 4 percent over the last five years. The first issue pertains to financial literacy. A survey conducted by the Financial Services Authority (OJK) in 2022 revealed a low level of financial literacy (31.7 percent) and inclusion (16.6 percent) within the industry.
A recent study conducted by the Indonesia Financial Group (IFG), which surveyed over 500 students, shed light on the understanding and ownership of financial instruments among young individuals and revealed striking findings. The survey corroborated those of the OJK’s figures. The majority of respondents were familiar with conventional products such as savings (97 percent), gold (61 percent) and investment options like stocks (67 percent), bonds (41 percent) and mutual funds (47 percent).
However, only 37 percent of those surveyed were familiar with insurance policies. Moreover, the ownership pattern remained consistent, with most respondents possessing conventional products like savings (97 percent) and gold (19 percent), while only a mere 9 percent had insurance policies.
