The Indonesian Financial Services Authority (OJK) is understood to be drafting regulations to make third-party liability insurance mandatory for motor vehicles, a move which will create opportunities for insurers but poses underwriting and capacity challenges, due to the potential need for millions of new policies.
As a line of business, motor currently accounts for 13% of total gross written premiums (GWP) in the country in 2023.
“The growth potential in compulsory motor insurance is immense,” Abhishek Bhatia, Founder and Group CEO of Oona Insurance, a digital insurer in the country, tells (Re)in Asia, estimating the impact on growth could “potentially be more than fivefold.”
At present, Indonesia requires vehicle owners to pay into a state-owned Road Traffic Accident Fund, which covers bodily injury, disability and death benefits of up to IDR 50 million (US$3,200). Commercial third party liability remains optional.
Abhishek Bhatia
Founder and Group CEO of Oona InsuranceIn an omnibus law for the financial sector passed in 2023, the government gave itself the ability to require Indonesians to participate in and pay premiums in mandatory insurance programs.
Aligned with this, industry experts believe the OJK could roll out details of a mandatory TPL program. While no clear timeline has been set, speculation has intensified in recent months that details could happen sooner rather than later and likely by the end of the year.
Statista estimates the motor line of business will exceed US$1.94bn by 2028. Wayan Pariama, Chief Risk Officer at Zurich Asuransi Indonesia, says that Mandatory TPL will almost certainly provide a boost to that number.
“We also expect to see that this may trigger an increase in insurance penetration across the board, as public awareness around (insurance) is more recognised and established,” says Pariama.
Despite the growth potential, the change will not come without challenges. For one, even if the change is mandatory, the general population will need to be persuaded of its benefits.
Bhatia says that in a crowded market, financial literacy remains a key challenge and educating millions of vehicle owners on the benefits of mandatory insurance will require a collective effort.
“There are macro limitations such as limited access to insurance, educational disparities, and geographical challenges, which further complicate the effort to drive literacy. Insurers must therefore support their distribution and agency networks to take on the crucial role of consumer education.”
Wayan Pariama
Chief Risk Officer at Zurich Asuransi IndonesiaGrowing pains
Even without the introduction of mandatory TPL, Indonesia’s motor market has the potential for strong growth due to rapid urbanisation and increasing new vehicle sales.
More than 153 million vehicles were registered in Indonesia in February last year, with around one million new cars and five million new two-wheeled vehicles registered every year.
Accidents already cost Indonesia 2.9-3.1% of its GDP, said Oona’s Bhatia, quoting Asian Development Bank figures. While the introduction of mandatory TPL provides GWP growth opportunities, it will also lead to an increase in underwriting challenges and claims costs.
Jessica Pratiwi
Senior Analyst at Fitch Ratings“(Insurers) will have better premium growth, but it will also need to be hand in hand with proper pricing from the insurance company,” Jessica Pratiwi, Senior Analyst at Fitch Ratings, tells (Re)in Asia.
“Insurers will need to manage the pricing and their reserves, as they will have larger risks coming from such products,” she adds.
To help bridge the gap, insurers can leverage technology, says Bhatia, especially in Indonesia, where the claims process can be lengthy due to high fraud rates. For a start, Oona now offers instant AI-driven risk inspection to transform the way the insurer conducts car insurance claims.
However, even with the adoption of technology and improved underwriting, the surge in demand will nonetheless strain existing capacity.
“Historically, there has been limited take up of this (TPL) insurance,” Pariama says. “For insurers, the readiness of the additional TPL coverage will be subject to various factors, including the limit required, the level of premium and whether a consortium approach will be taken.”
Wayan Pariama
Chief Risk Officer at Zurich Asuransi IndonesiaConsortiums and consolidation
The country’s insurers have been preparing for this potential capacity surge, with the Indonesia General Insurance Association (AAJI) saying in late May that it is looking into the possibility of creating “two to three” consortiums of insurers to handle the additional business.
The consortium approach would see a group of insurers join together to share risks; by pooling their resources, the member companies can spread the risk and manage it more effectively.
Using this approach, insurers would not need the same level of strong, individual capacity, Pratiwi says. “I believe (consortiums) will give (insurance companies) more opportunity, and they could also absorb some of the risks that are suitable with their risk appetite. So, I think this consortium could be an alternative for insurance companies with lower capacity.”
Jessica Pratiwi
Senior Analyst at Fitch RatingsConsidering the likely surge in demand for capacity, the forming of consortiums appears to be a pragmatic move for the industry, but it is not without challenges.
An example is claims mechanisms, which are likely to become complicated with several players involved. “Insurance companies in one consortium will need to acquire the same data and manage the data and claim mechanisms,” points out Pratiwi.
To complicate things further, in a separate regulatory move that applies to the entire Indonesian insurance industry, the OJK is also set to raise minimum capital requirements.
The change is being introduced to create a healthier, more competitive landscape. However, the regulatory milestones will take effect in 2026 and 2028. This is likely to coincide at or around the same time as the introduction of mandatory TPL motor insurance.
Based on current numbers, Fitch estimates around 62% of rated non-life and reinsurance companies will need to increase equity capital by 2028 to meet the regulator’s new requirements. The rating agency expects that the new requirements will lead to industry consolidation.
“On one side, it will strengthen the capacity and the capitalisation of insurance companies and on the other, we also see that it will likely reduce the number of companies operating in the sector,” Pratiwi explains.
The introduction of mandatory TPL insurance concurrent with new capital requirements marks a potentially transformative period for Indonesia’s insurance market. This will likely reshape the Indonesian insurance landscape through consortiums, consolidations, or both.
Nonetheless, it’s clear that the potential TPL change has created a degree of anticipation in the industry. “With the OJK actively promoting mandatory insurance policies, we welcome the implementation of mandatory TPL and are optimistic that it will happen in the near term,” Bhatia says.
