April 11, 2012 5:35 pm

Rivals play catch-up with the Pru in Indonesia

Prudential revealed some startling figures about Indonesia in its results last month. The world’s fourth most populous nation now produces more revenues for the UK-based insurer than its entire Asian business did only four years ago.

Indeed, the Pru’s Indonesian earnings in 2010 even eclipsed all of the Asian earnings generated by its European rivals combined, according to analysts.

The group has long hailed Indonesia as the most promising life assurance market in the world, and rivals including the pan-Asian powerhouse AIA have been rushing to catch up with the Pru’s early lead and roughly 20 per cent market share.

Rising incomes, falling unemployment, low levels of existing insurance cover and the absence of state welfare all make for a heady mix as an emergent middle class looks to protect its improving standards of living. While it is still small, Moody’s reckons Indonesia is the fastest-growing Asian insurance market. According to Swiss Re, the country’s life assurance market grew 23 per cent in 2010.

There are downsides, however. There is the potential for a regulatory crackdown as has happened in India, where sales collapsed last year after insurers were forced to redesign all their products to reduce the fees. As markets mature, consumers can become much more aware of the costs and benefits of their insurance, which in places such as the UK has led to regulatory overhauls and mis-selling scandals in the past.

Joachim Wessing, country manager for Allianz in Indonesia, says, for example, that local regulations are not as stringent as in many markets in Europe, where the disclosure of commissions and fees is required. “Regulators can turn around and in no time implement a rule or a change in the way you sell, and it could wipe out 50 per cent of sales,” he says.

Another regional finance executive notes that Indonesia has historically seen periodic turbulence on both the economic and political fronts. “This period of growth looks to be very strong [and] we’re very excited by the prospects for the market, but don’t presume it will be plain sailing,” the executive says.

Life assurers with ambitions in Asia are fighting to get a better foothold in Indonesia. Although AIA is the leader in Asia as a whole by some margin, it is light on its exposure to Indonesia, where it ranks sixth among about 10 foreign participants. That is partly because in the past its former parent, AIG, held its own licence there alongside AIA.

Now Indonesia is one of the big three markets, along with Taiwan and Malaysia, where the group hopes to build a bigger presence.

Mark Tucker, chief executive of AIA, was instrumental in building the Pru’s agency network in Indonesia in his years running the UK group’s Asian business in the 1990s and early 2000s. He believes he can do the same again for AIA, according to analysts.

AIA also recently renewed its bancassurance agreement with Bank Central Asia, the country’s third-largest bank by assets. AIA’s revenues in the country, which it does not report publicly, rose almost 50 per cent last year, according to a person familiar with the group.

Other big Asian insurers are also eyeing the market. Mitsui Sumitomo bought a 50 per cent stake in Sinarmas Life for Y67.2bn last year, the largest acquisition in Indonesia by a Japanese buyer in 2011, according to Mergermarket. Mayban Ageas, the insurance arm of Maybank, Malaysia’s largest bank, says it is also looking to enter the sector.

One of the big battle grounds for a quick gain is bancassurance distribution deals. When Jakarta-based Bank Danamon opened for tender its distribution deal with Allianz in October, it sparked a fierce battle between the incumbent, AIA and Manulife, according to analysts.

Manulife won the deal and while neither side revealed what it paid, Danamon said it expected “significant growth” in its fee income from insurance sales.

In spite of the promising demographics and solid economic progress, there are hurdles to continuing rapid growth and to new entrants.

Finding and training salespeople is costly in an industry where competition for employees means turnover last year was about 20 per cent for the sector as a whole, while pay rises were 12 per cent on average, according to Mr Wessing of Allianz.

Companies must also convince the public that buying insurance is worthwhile – often difficult in a developing economy, according to Randy Lianggara, country chief executive for AXA Indonesia, which last year launched a general insurance joint venture with Indonesia’s Bank Mandiri.

“Selling insurance in an emerging market where consumers are not fully aware of the benefits of insurance is not easy,” he says. “People do not wake up in the morning and decide they want to buy insurance.”

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