Challenges of the Actuarial Profession in Indonesia IAA

Challenges of the Actuarial Profession in Indonesia IAA Seminar Kuala Lumpur Kim Yeoh PT Prudential Life Assurance Indonesia 10 October 2011

Agenda 1. Life Insurance in Indonesia 2. Personal Experience 3. Insights 4. Challenges 2 2

Agenda 1. Life Insurance in Indonesia 2. Personal Experience 3. Insights 4. Challenges 3 3

Indonesia Life Insurance Landscape – Competitive position Indonesia Life market is relatively fragmented, representing a healthy competitive landscape and potential for consolidation Rest of market 6 th More Developed Market Penetration (%) Population (mn) No. of insurers Population / insurer (mn) to insurers · Developed markets are generally more fragmented than emerging ones, with more insurance companies relative to population of market Top 5 insurers · 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 Emerging market 10 7 3 1 4 <1 7 5 29 237 1, 232 89 56 18 16 46 22 10 0. 1 0. 3 1. 8 5. 2 56. 0 8. 9 Comments 10 th 4

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%) Mkt growth 19% 40% 10% 8% 53% Penetration(GDP)1 0. 8% 1. 1% 1. 0% 1. 1% 1. 2% N/A N/A N/A GDP growth 3 5. 5% 6. 3% 6. 0% 4. 6% 6. 1% 10 -year bond rate 4 9. 8% 10. 0% 11. 9% 10. 9% 7. 8% Inflation 6. 6% 11. 1% 2. 8% 7. 0% Stock mkt ind 1, 806 2, 746 1, 355 2, 534 3, 704 Penetration(Popul. )2 § 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 Q 2 2011 * Weighted new premiums is used as proxy for APE, as per available reported data from AAJI, the Life Insurance Association of Indonesia

Indonesia Life Insurance Landscape – Forecast Robust economic outlook with low insurance penetration make Indonesia a very attractive life insurance market 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 Mkt growth 21% 12% 12% Penetration(GDP)1 N/A 1. 2% Penetration(Popul. )2 N/A N/A N/A GDP growth 3 5. 9% 5. 8% 6. 2% 6. 3% 10 -year bond rate 4 7. 6% 7% 7% Inflation 5. 5% 5. 0% Stock mkt ind 3, 889 4, 260 4, 899 5, 633 6, 478 § 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) 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 Q 2 2011, PLA internal projections

Macroeconomic indicators Positive and robust economic outlook is favorable for the industry Peer comparison Population (mn) Comments Insurance penetration · GDP continues to show resilience with growth forecast at 6%+ for 2011 -2013, largely driven by domestic demand (infrastructure, automotive, oil & gas, mining) · 4 th 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 2011 GDP Growth Forecast 6. 2% 5. 3% 4. 5% 1. 5% 2011 Real GDP Forecast, USD bn 777 233 5, 683 Sources: Swiss Re, BMI, IMF 7

Demographics Low insurance penetration and a growing young segment provide significant opportunities Population by Sex and Age Group (current & future) Comments Customer Demographics: 2008 Total population: 227 million · 4 th most populous country in the world - 240 million · Young population with an increasing 45 - 65 yr age bracket · Approximately 25 -30 million people within the AB market segment Significant Growth Opportunities Moving Forward: 2028 Total population: 284 million · 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 Source: US Census Bureau 8

Product Trend ILP continues to dominate customer & distributor demand Market Product Mix Commentary 2012 -14 CAGR 16. 9% (5. 3%) 1. 3% 4. 3% § 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 2012 -14 CAGR 8. 7% 12. 7% § 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 9

Distribution Channel Trend Agency remains leading channel, though Bancassurance has shown rapid recent growth Market Distribution Mix Commentary § Agency remains leading channel with over 50% share 2012 -14 CAGR § Recently introduced licensing and professional development requirements support the development of a professional agency force 4. 1% 13. 9% § Significant recent growth in Bancassurance, largely driven by Single Premium sales – 89% of all Bancassurance sales are SP 14. 3% § Steady growth in DM/TM channel as banks maximize revenue potential from customer database 10

Industry outlook Strong economic fundamentals have fuelled industry growth Life Insurance Premiums Economic Growth GDP (IDR trn) Premiums per capita, USD 21. 5 22. 0 25. 3 35. 5 45. 0 54. 6 70. 0 GDP per capita, USD Real GDP Growth Rate 1, 916 2, 238 2. 329 2, 963 3, 270 3, 532 3, 822 Source : BMI, Swiss Re; AAJI; internal projections 11

Key Industry Insights Life Insurance Companies Key Insights No. of companies 46 45 · Positive outlook for industry with premiums expected to grow at CAGR 22% for 2008 -2013 · Fragmented market with 45 life insurance companies · Market share : Ø Top 5 companies – 54. 1% Ø Domestic companies – 45. 2% Ø Foreign JV companies – 54. 8% · High demand for ILP continues, contributing 51% of industry APE (Q 4 2010) Industry Growth % 66% 19% 5% 53% · Agency remains dominant distribution channel contributing 43% of industry APE, while Bancassurance channel emerging with 24% of industry APE Sources : BMI; Swiss Re; AAJI 12

Market Characteristics & Evolution Indonesia is still at its ‘early growth’ stage but crucial to prepare for the next phase Infancy Product Distribution Compensation Source of Profit Countries Early Growth Maturing Matured Simple traditional life products Simple investment linked, traditional life products Sophisticated Unbundled investment linked and protection, variable products (e. g. life cycle) annuities, equity release Proprietary sales force, emergence of brokers Multi-channel Alternate channels (e. g. distribution, penetration internet), high advice by brokers and IFAs ingredient, increased compliance High up front commission High up front, with some Reduction of up front, renewal more emphasis on renewal Scale of sales force and Competitive pressure underwriting drives erodes underwriting profits China India Malaysia Indonesia Fee for service, renewal, AUM fees Investment performance Ownership of customer and brand drives profits relationship drives profits Singapore Germany Hong Kong US Australia UK Japan Source : Mc. Kinsey 13

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 wellestablished 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 14

Industry SWOT – Opportunities & Threats Opportunities Threats · Several local players are owned by shareholders who are not naturally in the business of providing life insurance or longterm savings solutions · Foreign investment inflows have been volatile, and country depends on foreign capital markets to fund industrial and infrastructure developments · If government is perceived to strengthen the legal system and reform bankruptcy laws, there could be significant influx of crossborder life insurers · · Cross-border life insurers are better placed than local players to weather any future storms in Indonesia’s underdeveloped capital markets 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 · Large uninsured or under-insured population · Potential for growth in Takaful and Microinsurance segments 15

Agenda 1. Life Insurance in Indonesia 2. Personal Experience 3. Insights 4. Challenges 16 16

Personal Experience in Indonesia: 17 · Since Jan 2009 · Worked for 2 large multinational life insurance companies · Led teams of actuarial students and qualified actuaries · Participated in industry events 17

Agenda 1. Life Insurance in Indonesia 2. Personal Experience 3. Insights 4. Challenges 18 18

Insights 19 · 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 19

Agenda 1. Life Insurance in Indonesia 2. Personal Experience 3. Insights 4. Challenges 20 20

Challenges 21 · Actuaries – Recruiting and retaining – Training and developing – Professionalism · Product innovation · Regulatory uncertainty 21