Challenges of the Actuarial Profession in Indonesia

IAA SeminarKuala Lumpur

Kim YeohPT Prudential Life Assurance Indonesia10 October 2011

22

Agenda

1. Life Insurance in Indonesia

2. Personal Experience

3. Insights

4. Challenges

33

Agenda

1. Life Insurance in Indonesia

2. Personal Experience

3. Insights

4. Challenges

44

Indonesia Life Insurance Landscape – Competitive position

Developed markets are generally more fragmented than emerging ones, with more insurance companies relative to population of market

Despite being a developing market, Indonesia is less concentrated than many other developed and emerging markets in Asia, representing healthy competition from customers’ perspective

27 out of 46 life insurance companies have market share of less than 1%, highlighting need for market consolidation

Indonesia Life market is relatively fragmented, representing a healthy competitive landscape and potential for consolidation

Comments

Top 5 insurers

6th to 10th insurers

Rest of market

Emerging market

More Developed Market

Penetration (%)

10 7 3 1 4 <1

Population (mn)

7 5 29 237 1,232 89

No. of insurers

56 18 16 46 22 10

Population / insurer (mn)

0.1 0.3 1.8 5.2 56.0 8.9

Indonesia Life Insurance Landscape – Recent Trend

Robust economic outlook with low insurance penetration make Indonesia a very attractive life insurance market

Life Market APE* Observation

Strong GDP growth over the 5-year period (5%+) mainly driven by commodity exports and domestic demand

Economy showed high resilience to recover quickly after 2009 economic crisis, posting 6.1% growth in 2010

Steadily growing insurance penetration, but well below other large emerging markets (China: 3%, India: 4%)

One of the best performing stock markets from developing countries leading to high investor confidence

Top 5 players dominate market share in a highly fragmented market

ILP continues to drive industry growth as all JV players have entered the segment

1. As a % of GDP; 2. As a % of population with life insurance coverage; 3. Based on nominal GDP; 4. Local corporate bond rate (S&P rating A and above)Source: BMI , Indonesia Bond Pricing Agency, Indonesia Stock Exchange, AAJI Report Q2 2011* Weighted new premiums is used as proxy for APE, as per available reported data from AAJI, the Life Insurance Association of Indonesia

0.0

4.0

8.0

12.0

16.0

20.0

24.0

2006A 2007A 2008A 2009A 2010A

Life m

ark

et

AP

E,

LC

b

Rest

Top 5

Mkt growth

Penetration(GDP)1

Penetration(Popul.)2

GDP growth3

10-year bond rate4

Inflation

Stock mkt ind

19%

0.8%

N/A

5.5%

9.8%

6.6%

1,806

40%

1.1%

N/A

6.3%

10.0%

6.6%

2,746

10%

1.0%

N/A

6.0%

11.9%

11.1%

1,355

8%

1.1%

N/A

4.6%

10.9%

2.8%

2,534

53%

1.2%

N/A

6.1%

7.8%

7.0%

3,704

Life Market APE Observation

GDP growth expected to remain strong at about 6% for 2011-2014

Strong potential for industry grow with insurance penetration expected to remain fairly low at 1.2%

Stock market expected to continue steady growth from growing foreign inflows and high investor confidence

Top 5 players expected to further consolidate dominance of market share

ILP expected to continue driving industry growth

Increasing interest from Chinese and Japanese insurance players (e.g. Mitsui Sumitomo – Sinarmas JV)

Indonesia Life Insurance Landscape – Forecast

Robust economic outlook with low insurance penetration make Indonesia a very attractive life insurance market

0.0

4.0

8.0

12.0

16.0

20.0

24.0

28.0

32.0

2011YTD 2011F 2012F 2013F 2014F

Life

mar

ket

AP

E,

LCb

Rest

Top 5

1. As a % of GDP; 2. As a % of population with life insurance coverage; 3. Based on nominal GDP; 4. Local corporate bond rate (S&P rating A and above)Source: BMI , Indonesia Bond Pricing Agency, Indonesia Stock Exchange, AAJI Report Q2 2011, PLA internal projections

Mkt growth

Penetration(GDP)1

Penetration(Popul.)2

GDP growth3

10-year bond rate4

Inflation

Stock mkt ind

21%

N/A

N/A

5.9%

7.6%

5.5%

3,889

12%

1.2%

N/A

5.9%

7%

5.0%

4,260

12%

1.2%

N/A

5.8%

7%

5.0%

4,899

12%

1.2%

N/A

6.2%

7%

5.0%

5,633

12%

1.2%

N/A

6.3%

7%

5.0%

6,478

77

Macroeconomic indicators

Positive and robust economic outlook is favorable for the industry

GDP continues to show resilience with growth forecast at 6%+ for 2011-2013, largely driven by domestic demand (infrastructure, automotive, oil & gas, mining)

4th most populous country in the world (237 million) with increasing urbanization and growing household income levels

Largest Muslim population in the world – significant Syariah opportunity

Low insurance penetration of 1.1% (vs. 3% in Malaysia and 7% in Singapore) represents significant growth opportunity

Peer comparison Comments

Insurance penetrationPopulation (mn)

2011 GDP Growth Forecast 6.2% 5.3% 4.5% 1.5%

2011 Real GDP Forecast, USD bn 777 237 233 5,683

Sources: Swiss Re, BMI, IMF

88

Demographics

Population by Sex and Age Group (current & future) Comments

Low insurance penetration and a growing young segment provide significant opportunities

2008

2028

Customer Demographics:

4th most populous country in the world - 240 million

Young population with an increasing 45 - 65yr age bracket

Approximately 25-30 million people within the AB market segment

Significant Growth Opportunities Moving Forward:

Individual insurance penetration is still very low at 2.9% (6.6 million)

Most Indonesians are in need of financial planning for education, health, retirement, and protection

IL products remain in demand

Tremendous Syariah opportunity leveraging largest Muslim population in the world

Total population: 227 million

Total population:284 million

Source: US Census Bureau

9

Product Trend

ILP continues to dominate customer & distributor demand

Market Product Mix Commentary

Investment linked products continue to dominate demand (2010 growth 48%)

All JV players have now entered ILP market

Growth in low-margin group health and group life products

Regular premium remains preferred mode for large segment of customers

Increasing demand for SP endowment/ILP products from bank partners

Syariah continues to grow by mirroring conventional products

Increasing interest in micro-insurance (credit life) but lacking in distribution infrastructure

2012-14 CAGR

2012-14 CAGR

16.9%

8.7%

12.7%

(5.3%)

1.3%

4.3%

10

Distribution Channel Trend

Market Distribution Mix Commentary

Agency remains leading channel with over 50% share

Recently introduced licensing and professional development requirements support the development of a professional agency force

Significant recent growth in Bancassurance, largely driven by Single Premium sales – 89% of all Bancassurance sales are SP

Steady growth in DM/TM channel as banks maximize revenue potential from customer database

Agency remains leading channel, though Bancassurance has shown rapid recent growth

2012-14 CAGR

4.1%

13.9%

14.3%

1111

Life Insurance Premiums

Strong economic fundamentals have fuelled industry growth

Source : BMI, Swiss Re; AAJI; internal projections

Premiums per capita, USD

21.5 22.0 25.3 35.5 45.0 54.6 70.0

Premiums (IDR trn)

Economic Growth

GDP (IDR trn) Real GDP Growth Rate

GDP per capita, USD

1,916 2,238 2.329 2,963 3,270 3,532 3,822

Industry outlook

1212

Key Industry Insights

Positive outlook for industry with premiums

expected to grow at CAGR 22% for 2008-2013

Fragmented market with 45 life insurance

companies

Market share :

Top 5 companies – 54.1%

Domestic companies – 45.2%

Foreign JV companies – 54.8%

High demand for ILP continues, contributing 51% of

industry APE (Q4 2010)

Agency remains dominant distribution channel

contributing 43% of industry APE, while

Bancassurance channel emerging with 24% of

industry APE

Life Insurance Companies Key Insights

Sources : BMI; Swiss Re; AAJI

Industry Growth %

66% 19% 5% 53%

No. of companies

46 45 46 45

1313

Market Characteristics & Evolution

Indonesia is still at its ‘early growth’ stage but crucial to prepare

for the next phase

Infancy Early Growth Maturing Matured

Product Simple traditional life products

Simple investment linked, traditional life products

Sophisticated investment linked products (e.g. life cycle)

Unbundled investment and protection, variable annuities, equity release

Distribution Proprietary sales force Proprietary sales force, emergence of brokers

Multi-channel distribution, penetration by brokers and IFAs

Alternate channels (e.g. internet), high advice ingredient, increased compliance

Compensation High up front commission

High up front, with some renewal

Reduction of up front, more emphasis on renewal

Fee for service, renewal, AUM fees

Source of Profit Scale of sales force and underwriting drives profits

Competitive pressure erodes underwriting profits

Investment performance and brand drives profits

Ownership of customer relationship drives profits

CountriesChina India

Indonesia

Malaysia Singapore

Hong Kong

US UK

Australia

Germany

Source : McKinsey

Japan

1414

Industry SWOT – Strengths & Weaknesses

Strengths

Indonesia’s large population, growing

economy and insurance sector growing

strongly of small base

Industry is relatively fragmented, and

while majority of market is held by well-

established firms, none has a dominant

position

Economic conditions are, and are likely

to remain, favorable

Weaknesses

Very small market with low product

density per capita of USD 32

Unemployment, terrorist threats and lack

of institutional transparency remain

concerns for businesses considering

operations in Indonesia

1515

Industry SWOT – Opportunities & Threats

Opportunities

Several local players are owned by

shareholders who are not naturally in the

business of providing life insurance or long-

term savings solutions

If government is perceived to strengthen the

legal system and reform bankruptcy laws,

there could be significant influx of cross-

border life insurers

Cross-border life insurers are better placed

than local players to weather any future

storms in Indonesia’s underdeveloped capital

markets

Large uninsured or under-insured population

Potential for growth in Takaful and Micro-

insurance segments

Threats

Foreign investment inflows have been

volatile, and country depends on foreign

capital markets to fund industrial and

infrastructure developments

Volatile politics, challenging macroeconomics

and structural problems mean Indonesia is

usually rated as one of the more difficult

countries in the region in which to do

business

Terrorism threat needs to be taken into

account when underwriting risks

1616

Agenda

1. Life Insurance in Indonesia

2. Personal Experience

3. Insights

4. Challenges

1717

Personal Experience

Experience in Indonesia:

Since Jan 2009

Worked for 2 large multinational life insurance companies

Led teams of actuarial students and qualified actuaries

Participated in industry events

1818

Agenda

1. Life Insurance in Indonesia

2. Personal Experience

3. Insights

4. Challenges

1919

Insights

A dynamic, growing market

Developing regulatory environment

Intensifying competition

New entrants and more to come

Actuaries– A scarce resource– A small-ish pool of talent– Mainly technical in focus

2020

Agenda

1. Life Insurance in Indonesia

2. Personal Experience

3. Insights

4. Challenges

2121

Challenges

Actuaries– Recruiting and retaining– Training and developing– Professionalism

Product innovation

Regulatory uncertainty