Countries within the Association of South East Asian Nations (ASEAN) are continuing

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1 BEST S SPECIAL REPORT Our Insight, Your Advantage. Market Review May 2, 13 The number of non-life insurers continues to drop amid higher capital requirements. Indonesia s Growth Attracts Insurers, While Capital Requirements Deter Them Countries within the Association of South East Asian Nations (ASEAN) are continuing to grow economically and are increasing interest in the region. The non-life insurance market has benefitted from this favorable trend, as further economic development could create greater demand for insurance risk products. As a result, regulations and regulatory supervision are still evolving. A.M. Best classifies most members of the ASEAN economic community including Malaysia, Thailand, Indonesia and the Philippines as Country Risk Tiers (CRT) 3 and 4, which denotes a moderate amount of economic, political and financial-sytsem risk. Indonesia, Thailand and the Philippines have similar non-life insurance markets, which are characterized by fragmentation, with a large number of players possessing little capital. Building a Larger Capital Size Amid Regulatory Change At year-end 11, 85 non-life insurers operated in Indonesia, with the top 1 capturing more than half of the market premium (see Exhibit 1). The remaining 75 players hold an average share of less than 1%, which continues to reflect a fragmented market (see Exhibit 2). The number of non-life insurers has decreased over the past five years to 85 in 11, from 94 in 7, primarily driven by a higher capital requirement (see Exhibit 3). While the minimum paid-up capital is IDR billion (USD 12 million), the required capital, defined as the total capital and surplus, will increase to IDR billion (USD 12 million) in 14, from IDR 7 billion (USD 8 million) in 12 which was increased from IDR billion (USD 5 million) in 1. The higher requirement has driven the raising of new funds, acquisition activities and cancellation of licenses. Analytical Contact Arina Tek Arina.Tek@ambest.com Editorial Management Carol Demyanovich Based on their capital at year-end 11, about one third of the local insurers do not meet the current requirement of IDR 7 billion. Some insurers although fewer than expected still did not meet the requirement at year-end 12, which will lead to additional license suspensions in 13. In March 13, the Indonesian General Insurance Association (AAUI) announced that the regulator, Otoritas Jasa Keuangan (OJK) had ordered the association to conduct a study to detect those insurers that fail to meet the capital requirement and need to improve their profitability. This action indicates the importance OJK places on Exhibit 1 Indonesia Number of Non-Life Insurers (7-12*) * * A.M. Best estimate. Source: Otoritas Jasa Keuangan for 7 to Copyright 13 by A.M. Best Company, Inc. ALL RIGHTS RESERVED. No part of this report or document may be distributed in any electronic form or by any means, or stored in a database or retrieval system, without the prior written permission of the A.M. Best Company. For additional details, refer to our Terms of Use available at the A.M. Best Company website:

2 Exhibit 2 Top 1 Insurers (11) Bina Dana Arta 2% Bangun Askrida 2% Others 45% MSIG Indonesia 3% Sinar Mas 11% Wahana Tata 4% Note: market share based on gross premium written (IDR 34 trillion). Source: Otoritas Jasa Keuangan (OJK) Jasindo 1% Astra Buana 8% Central Asia 5% Tugu Pratama Indonesia 5% Adira Dinamika 5% profitability and capital adequacy, in addition to absolute capital size. Because of the differences in capital requirements, the average capital of the Indonesian non-life industry is smaller than that of its Malaysian peer, comparable to its Thai counterpart and larger than its Filipino peer. Lower entry costs generally result in larger numbers of insurance companies in the market. Improving Operating Performance In an operating environment predominantly filled with small players, the insurers lack of economies of scale translates into higher operating costs and lower underwriting buffers. In 11, the expense ratio of the Indonesian non-life market stood at 37%, which is comparable to that of the Thai industry and higher than that of Malaysian insurers (see Exhibit 4) The cost structure of the Indonesian non-life insurers showed, however, a decreasing trend between Exhibit 3 Southeast Asia Capital Requirements (11) USD Thousands Capital requirements (Current and Planned) (USD s) Malaysia Thailand Indonesia* Philippines** Current Requirement Planned Requirement Industry Average Capital * Indonesia s capital requirement is defined as the total capital and surplus. ** As of February 13, the new capital requirement will be increased steadily to USD 32 million in 22, from USD 6 million in 13. The capital requirement in the Philippines is defined as the net worth (paid-up capital added with retained earnings, unimpaired surplus and revaluation of assets). Sources: Bank Negara Malaysia, Thailand Office of Insurance Commission, Otoritas Jasa Keuangan, Senate of the Philippines Industry average capital (USD s) 6 and 11, in line with a reduced number of players and increasing company size. The expense ratio decreased to 37% in 11, compared with % in 8, and 46% in 6. This decrease is the primary reason for the combined ratio s improvement in 8 compared with 7. However, since 8, the underwriting performance of the industry has remained relatively stable, keeping within a 2% range from 89% to 91% over a four-year period (see Exhibit 5). In 11, Indonesian non-life

3 insurers underwriting performance was comparable to that of their Malaysian peers, and better than their Thai counterparts, due to a lower loss ratio. Also, they reported a more favorable combined ratio than their Filipino counterparts due to a lower cost structure (see Exhibit 6). However, the Indonesian nonlife insurers should attribute their favorable operating performance compared with that of their regional peers more to their country s resilient economy during the global recession. Unlike most of its peers, Indonesia s economy greatly depends on domestic consumption rather than on exports. According to the World Bank, the amount of goods and services exported from the four countries, shown as a percentage of gross domestic product (GDP), is: Malaysia 92% Thailand 77% Philippines 31% Indonesia 26% Exhibit 4 Southeast Asia Non-Life Number of Insurers & Expense Ratios by Country (11) No. of Insurers Malaysia Thailand Indonesia Philippines Indonesia s non-life insurance penetration in 11 was.7 relatively low compared with Malaysia s and Thailand s, 1.7 and 1.8, respectively. Its gross domestic product (GDP) per capita was USD 3, in 12 (see Exhibit 7). When the GDP per capita reached around the same level for China in 8 and 9, the non-life Source: Otoritas Jasa Keuangan insurance penetrations were 1. and 1.1, respectively. In 11, China s GDP per capita stood at USD 5,445 with a penetration of 1.2 (see Exhibit 8). Indeed, A.M. Best would expect greater non-life insurance penetration to be driven by higher GDP per capita and by the young and rising middleclass, which will translate into greater demand for both personal and commercial insurance. Growth in personal lines should be driven primarily by property, motor, and accident and health, while business growth in commercial lines will be attributed to the expanding economy and subsequent infrastructure projects. 3 No. of Non-Life Insurers Expense Ratio (%) Sources: Bank Negara Malaysia, Thailand Office of Insurance Commission, Otoritas Jasa Keuangan, Philippines Insurance Commission Exhibit 5 Aggregated Ratios (6-11) (%) Net Loss Ratio Expense Ratio Combined Ratio Operating Ratio Expsense Ratio (%)

4 Exhibit 6 Slow Acquisition Southeast Asia Non-Life Aggregated Ratios (11) Activities Amid the business (%) opportunity and profitability, acquisition activities also are driven by regulatory changes such as higher capital requirements and opening the Malaysia Net Loss Ratio Thailand* Expense Ratio Indonesia Combined Ratio Philippines Operating Ratio market to greater foreign ownership. Foreign investors can acquire up to * Thailand's data is of fiscal year 1, due to the 11 Thailand flooding. Sources: Bank Negara Malaysia, Thailand Office of Insurance Commission, Otoritas Jasa Keuangan, Philippines % of a company s Insurance Commission shares, enabling them to have control of the board. Acquisition activities have been slower than anticipated because of Indonesian insurers ability to meet the capital and/or solvency requirements in the past few years. Currently, the majority of the insurers are owned by domestic conglomerates, domestic or regional banking groups, individuals or the government. Over the past two years, major acquisition activities include that of PT Asuransi Dharma Bangsa by Bank Mandiri (% of shareholding) and AXA (France) (%). The insurer was renamed PT Mandiri AXA General Insurance on Oct. 27, 11. In 12, Zuellig Group (Hong Kong) and ACE Ltd. (Bermuda) respectively acquired % of the equity shares of PT Asuransi Indrapura and PT Asuransi Jaya Proteksi. SHC Insurance Pte. Ltd. (Singapore) has invested in PT Asuransi Parolamas in the form of a call option agreement. If the call option were to be exercised in full, SHC Insurance would hold 55% of Parolamas shares. Toward a Changing Operating Environment Acquisition activities and capital infusions are expected to continue in 13 and 14 to meet the capital requirement. In March, Sanlam Ltd. (South Africa) announced its intention to invest in a non-life insurer, and PT Asuransi Staco Mandiri has announced a potential investor from the banking sector to resolve its capital shortage. Exhibit 7 Southeast Asia Key Economic Highlights (12) Country Country Risk Tier GDP (USD Billions) GDP per Capita Non-Life Insurance Penetration (11) Malaysia CRT-3 USD 33.3 USD 1, Thailand CRT , Indonesia CRT ,.7 Philippines CRT ,593.5 Sources: A.M. Best and Swiss Re Indonesian non-life insurers will have to maintain or improve their current underwriting results and seek new capital to meet the capital requirement. Fresh capital will come primarily from insurance and regional banking groups and through initial public offerings. Market consolidations will be driven mainly by difficulties 4

5 in meeting the capital requirement, and mergers and acquisitions. With fewer players in the market, the expense ratio is expected to continue to decrease as a result of the supportive premium growth. However, this will be offset by more competition, which would deteriorate the loss ratio in the near term, maintaining the combined ratio at around 9% (see Exhibit 5). The operating ratio is expected to remain fairly stable with some signs of improvement as investment income should increase due to economic growth. Exhibit 8 Indonesia & China GDP per Capita & Non- Life Insurance Penetration (8-11) GDP per Capita Insurance Penetration Indonesia China Indonesia China 8 USD 2,172 USD 3, ,273 3, ,952 4, ,495 5, Sources: World Bank and Swiss Re Overall, Indonesian non-life insurers are expected to post better operating performance than their Thai peers due to a lower loss ratio, and their Filipino peers because of a lower cost structure. However, capital size will remain small, which will limit opportunities to expand to other markets. 5

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