Insurance Business DevelopmentOver Regulation Anxiety

28 Oct 2016

22nd Indonesia Insurance RendezvousBali, 26 – 29 October 2016

HighlightIndonesiaInsuranceIndustry

Hot topics inaccounting

Risk andregulations

Contents

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Market Risk

RegulationAccounting

What is going on…..

Challenges inthe Indonesian

InsuranceIndustry

Regulations, laws and accountingstandards

• Government increased effort to prepare aframework for Indonesian insuranceindustry development

• Compliance with stringent tax regulations• Limitation of foreign ownerships• Implementation of insurance standards

(SFAS 62, SFAS 28/36) and insuranceregulations which have vary interpretationsdue to unclear implementation guidance.

Competitive landscape

• Insurance industry in Indonesia shows alarge opportunity for growth in thefuture (low market penetration, largenumbers of people who areunderinsured/uninsured)

• The insurance industry in Indonesia isfragmented considering the largenumber of players

• Limited underwriting capacity ofdomestic insurers (shifting premiums tooverseas)

Trend towards auto insurance andunit-link products

• Auto insurance cover and unit-linkproducts has become more popular andis preferred by consumers in Indonesia.

• Companies not offering auto insurancethrough multi finance/bancassuranceand unit-link products appears to growat a slower pace.

Distribution network and talent

• Traditional ways versus bancassurance.• Distribution channel competition.• Bancassurance becomes more common

and popular in the recent trend.Strategic initiatives is one of the key ingrowing customers base.

• Scarcity of talents for insuranceexpertise

Financial market

• Interest rate – volatile interest rates will create challenges tofinancial performance

• Volatility of exchange rates• Limited availability of investment portfolios

Insurance Penetration and Density in Indonesia

• In general, life insurance segment is affected by the growth of population and life density.Whereas non-life insurance segment is affected by the nominal GDP and non-life density.

• As shown in the graphs below, the primary factors affecting the life and non-life insuranceindustry in Indonesia show an increasing trend in the next five years period.

Projected Growth of Primary Factors in the Indonesian LifeInsurance Industry

Projected Growth of Primary Factors in the IndonesianNon-Life Insurance Industry

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10

20

30

40

50

60

70

80

90

100

248

250

252

254

256

258

260

262

264

2014 2015F 2016F 2017F 2018F

inU

SD

pe

rc

ap

ita

inm

illi

on

Population Life premium per capita

0

5

10

15

20

25

30

35

-

200

400

600

800

1,000

1,200

1,400

1,600

2014 2015F 2016F 2017F 2018F

inU

SD

pe

rca

pit

a

inU

SD

bil

lio

n

GDP Non-life premium per capita

Source: BMI, EIU Source: BMI, EIU

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Market Risk

RegulationAccounting

What are the risks facing the industry for the next2-3 years?

\ Weighted average response

How well prepared to address top risks?

the Company

the industry

Risk – comparison to global industry views

1 Regulation

2 Market conditions

3 Macro-economy

4 Human talent

5 Distribution channels

6 Investment performance

7 Interest rates

8 Product innovation

9 Change management

10 Natural catastrophes

1 Regulation

2 Macro-economy

3 Interest rates

4 Cyber risk

5 Investment performance

6 Change management

7 Guaranteed products

8 Distribution channels

9 Natural catastrophes

10 Quality of risk management

Indonesia Global

What regulation needs more clarity?

\ Weighted average response

Accounting & TaxPolitical & Legal

Regulations in Indonesian Insurance Industry

There is development of limiting singleshareholders ownership, similar to thebanking industry.

Increasing Minimum CapitalRequirement

Need to strengthen the enforcement,especially bankruptcy law

Need to continuous improvement foragency regulations and relations

Minority interest (local families andassociated business culture)

Differences in GAAP (valuation of assets,goodwill, others) and its impact on thedeal value from a buyer’s perspective

Alignment between regulations andaccounting standards including taxregulations

Related party transactions

Compliance with stringent taxregulations

Tax audits and associated exposures

Extensive tax withholding requirements

Increasing attention to transfer pricingissues

Regulation: Data on-shoring actions

\ Weighted average response

0%

10%

20%

30%

40%

50%

60%

70%

Take concrete steps now andwill finish in year

Already taking some stepsnow and will continue

Not yet but plan to do No

Life P&C/Non-Life

Increasing legal and compliance risk in 2016?

Effective function to assess and mitigaterisk?

Risk management strategy in place?

Risk management focus areas

\ Weighted average response

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4

Market Risk

RegulationAccounting

Hot topics in InsuranceAccounting matters

• Volatility of interest rate. Interest rate used in theinsurance technical reserves calculation. High interestrate/discount rate will be resulted lower interest rate,vice versa. Significant impact to long-term insurancecontract and/or traditional life products.

• Long-term versus Short-term insurancecontract. Classification of insurance contract willimpact to revenue recognition and technical reserves.Diverse interpretation among insurance industryplayers.

• Availability of investment portfolios. Gapping onthe duration ratio for block of assets to the specificinsurance products.

• Accounting treatment for bancassurance feesand deferred acquisition costs. Some insurers payupfront to banks or distribution channel provider inexchange of exclusive rights for its distribution channel.Variable commission should follow revenuerecognition-stream.

• Discount premium and acquisition costs:Treatment and presentation to the financial statements.

Thank you