The Insurance Market in Indonesia

Tell us about yourself.

My name is Paul Setio Kartono, and I’m currently the CFO of Prudential Syariah in Indonesia. I’m also chairperson of the Society of Actuaries (SOA) Greater Asia Committee and vice president of the Society of Actuaries of Indonesia. Recently, I was appointed head of Sharia life insurance market development for the Life Insurance Association of Indonesia.

Describe your journey to becoming CFO of Prudential Syariah. How have your actuarial skills helped you along the way?

Like most life actuaries, I started my career as an actuarial analyst, then climbed the ladder and became chief actuary and chief financial officer. Throughout my career working at insurance companies, I have held many roles aside from finance and actuarial jobs, including risk, marketing, sales and operations. Of course, my actuarial skills helped me in my current and previous roles. Every time I got a new position, I tried to strategize it by mapping the requirements of the role and my weaknesses and strengths, making sure to cover my weaknesses with my strengths.

Can you give an example of this?

Certainly. One example is when I was appointed to lead a group employee benefits business that included sales. I was quite nervous, as my only sales experience had been selling pencils in elementary school. However, when I thought about it, I realized I had experience and strengths in knowing the product and pricing. I understood the product details to the maximum extent, so when I needed to pitch it to a client, I emphasized the benefits and various applications of the product with details that others without my background may have missed. In other words, pitch it for various propositions. That approach worked well, and I gained trust from the clients, respect from my sales team and confidence in myself.

How has the insurance market in Indonesia developed?

The insurance market in Indonesia has grown rapidly since the global economic crisis of 1998 when Indonesia rebuilt its economy, politics and infrastructure. It can be seen in the growth of the financial sector since then, which includes banks, insurance, the stock market and other sectors. However, the rapid growth has declined over the last couple of years, mainly due to the economic slowdown during the COVID-19 pandemic. Moreover, lack of financial literacy and the geographic span of Indonesia always have been challenging in terms of the speed and reach of economic development in the country.

With growth stagnant the past few years, how would you assess the opportunities going forward?

Regardless of the small contraction in growth in the last couple of years, Indonesia still possesses a huge opportunity. I’ll say it again—there is a huge opportunity for growth. Parameters that I can use to describe the opportunity are the following:

• The Indonesian market is still underpenetrated.
• The insurance penetration ratio—life insurance premium to gross domestic product (GDP)— is only slightly above 1%.
• Indonesia’s GDP per capita just passed 4,000 USD and is growing to 5,000 USD, which is believed to be the next tipping point of insurance growth.

Islamic insurance is a special type of insurance in Indonesia. Can you explain what it is and its growth opportunity?

Islamic insurance is an insurance system based on the Sharia (Islamic) principle. By participating in the economy, Muslims are forbidden to get involved in a transaction that contains riba (interest), gharar (uncertainty) and maysir (speculative risk). Sharia-compliant insurance resembles mutual insurance on the risk side and has a stock company as the operator.

There are differences between conventional and Islamic insurance. The main differences are the following:

• Islamic insurance involves a tabarru fund, which is an insurance risk fund whereby the participants contribute money to the tabarru fund in the form of donations. So, whenever insurance risk occurs, the tabarru fund gives support to the beneficiaries. This concept is a risk-sharing principle among the participants instead of a risk transfer to the insurance company.
• The operator or the insurance company only manages the tabarru fund. They have no (or limited) interest in profits, so the objective of underwriting and claims is about managing fairness among participants and the sustainability of the fund.
• The funds—both tabarru and assets of the operator—and investment assets of participants can be invested only in a noninterest-bearing investment or Sharia-compliant equity and investment vehicle.
• The company needs to abide by not only the insurance regulations but also Sharia rules. Therefore, it has a Sharia board to ensure all decisions comply with Sharia rules.

Having the largest share of the Muslim population in the world (87% of Indonesia’s 273 million citizens are Muslims), there are great growth opportunities for Islamic insurance in Indonesia. Although it has grown by double-digit percentages over the last few years, the premium size still hovers around 10% of total life insurance in Indonesia. There is an opportunity for it to become bigger than conventional insurance.  

Why do you think that Islamic insurance growth in Indonesia will be big?

There are various reasons why Islamic Insurance is a success in the making, including the following:

• Indonesia has the highest giving index in the world, which means that Indonesians participate in philanthropic behavior. This resonates with the concept of giving donations to a person in need, as introduced by Islamic insurance.
• Indonesians have a culture of working together to achieve things. Therefore, the sharing principle of Islamic insurance fits the behavior of Indonesians. There are concepts of “friend assurance” or “peer-to-peer” insurance. Islamic insurance, although not the same, resembles these concepts.
• Islamic insurance requires fairness and transparency in all aspects of the product, underwriting, claims and pricing. The trust from the participants can reduce negative sentiment toward insurance in Indonesia.
• I’ll also mention again that Indonesia has the largest Muslim population in the world.

What are the challenges faced by Islamic insurance in Indonesia?

Although the opportunity is big for Islamic insurance in Indonesia, there also are challenges, including the following:

• Tax and regulation on Islamic insurance is not complete yet. Many regulations still refer to it as conventional insurance. For example, tabarru surpluses are treated as profit and, therefore, taxable, although the nature of it is a donation fund. Similarly, the surplus refund to participants is still taxed as a dividend.
• There is low awareness of the market. Many Indonesians still are not aware of the need for insurance and how to manage their wealth.
• There is a lack of human resources and experts who understand the Islamic insurance business and can develop the business.

Do actuaries in Islamic insurance have the same job as in conventional insurance?

I would say that the actuarial proficiencies required in Islamic insurance are very advanced. There are aspects to the work that actuaries don’t usually deal with in conventional insurance. There also can be conflicts of interest that actuaries need to manage, including the following:

• Actuaries need to maintain two solvencies: Tabarru and operator funds.
• In the product design, for a non-YRT product, the tabarru and operator funds may act differently on sensitivity toward lapse, whereby if tabarru and operator sensitivity move in different directions, it may trigger a conflict of interest from the operator point of view.
• The principle of Islamic insurance states that the risk should be shared among similar risk profiles; however, the separation between risk categories and cohorts is not very clear. Therefore, it’s possible to cross-subsidy between the risk categories, which requires actuaries to be more prudent in declaring a surplus for the tabarru fund and the use of that surplus.

Are there challenges faced by Indonesian insurers with respect to International Financial Reporting Standard (IFRS) 17 implementation and Islamic insurance?

Yes, there are challenges faced by Indonesian insurers, especially among smaller local companies that don’t have a large enough expense budget to fund IFRS 17—so they don’t feel the need to move to IFRS 17. However, the implementation date for Indonesia has been postponed to 2025. For bigger joint-venture companies, most were ready as of Jan. 1, 2023, and the main challenge is to find actuarial resources—there has been high attrition of actuarial talent due to workload and high demand from competitors.

For Islamic insurance, the challenge is different. The companies currently are in a state of debate among actuaries, accountants, the accounting board and regulators whether Islamic insurance, with the concept of risk-sharing, is considered an insurance contract. The discussions and development are very interesting for actuaries.

Do you have any general advice for aspiring actuaries who are currently in Indonesia or planning to move there?

There are ample opportunities for actuaries in Indonesia, and the business of insurance is growing rapidly. Although consolidation is happening currently, the companies and principals are investing a lot of capital and resources in Indonesia for the next phase of growth. Areas that still require the work of a lot of actuaries in Indonesia include the following:

• Management of insurance companies—for actuaries who want to work as business consultants
• IFRS 17 implementation, which will require technical expertise
• Islamic insurance, which, as mentioned, requires the next level of actuarial wisdom and can exercise fairness to all stakeholders
• General insurance because very few actuaries are currently working in this area
• Medical insurance, both in social security as well as private insurance
• Retirement benefits, as the fluctuating interest rate environment requires actuaries to support a pension benefit move from defined benefit to defined contribution
• Data analytics on claims, underwriting and so on

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.

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