Microinsurance in Indonesia: Current Challenges and Innovations
By Laurie Young, KF16, Indonesia
I was fortunate enough to be invited to accompany the Director of VisionFund Indonesia to attend the ‘First Microinsurance Marketplace in Indonesia’ coined ‘MIMPI.’ The event was a joint effort by the Indonesian Insurance Council, World Bank and the IFC with the three main goals being:
- “To provide an opportunity to showcase innovations in microinsurance across various aspects (including. new products, innovations in distribution and service delivery, use of technology incl. cell phones) and emerge as a platform for bringing together the innovators and the agencies interested in innovations. Thus the event will lead to the creation of Partnerships.
- To identify & recognize grassroots level innovations.
- Overall to create an enabling environment for new approaches to be tried out in the area of microinsurance particularly in the challenging socio economic contexts.”
There were speakers, panels, and exhibitions over the course of the two days aiming to create a marketplace environment rather than that of a traditional conference. Below, I hope to provide you with the current challenges facing the industry based on presentations and discussions during the two-day event. Additionally, I will present some of the product innovations and ideas that have been recently, or are going to be, introduced in Indonesia in an attempt to increase access to insurance for the poor.
Indonesia is an archipelago spreading across 17,000 islands with greater than 50% of residents living in rural areas. Creating products that can grow to scale is challenging from a distribution standpoint. At MIMPI, there was an underlying theme that in order for products to be not only successful but also sustainable in Indonesia, they have to go beyond just being part of ‘corporate social responsibility.’ Turning microinsurance into a lucrative business isn’t the goal, but, rather, responsibly developing products and finding effective distribution strategies that a business can sustainably incorporate into its product line. Organizations interested in developing insurance products for the poor should start thinking long-term even if the upfront costs of development and implementation seem daunting. Of the estimated 77 million people being targeted for ‘microinsurance’, fewer than 5 million are active MFI borrowers. This proves the limitation of using microfinance organizations as a prominent distribution method.
Developing appropriate products:
Regularly when companies enter a new market, they try to leverage off of products or ideas that worked well in other locations in which they operate. As I mentioned previously, Indonesia is a diverse country spread across 17,000 islands and a “one size fits all” strategy could prove to be problematic. It’s especially important to listen to the consumers and ask what they want in addition to providing what insurance companies think they need. Because Indonesia is a wide-open market, more research and development needs to be done to ensure suitable products are being designed for the poor. Many speakers reiterated the importance of pilots before rolling out any product.
Easy to understand:
In order for insurance to be successful in a developing world where financial literacy is limited, developing simple, transparent and easy to understand products is critical. It’s also crucial to ensure consumers have a solid understanding of the product while not burying them in paperwork. Policy information and the amount of required paperwork to be completed the consumer shouldn’t be more than one page. Some companies are trying to consolidate information onto the size of a business card and small booklet. In general, ensuring clients have a clear understanding of their responsibility in terms of premiums, filing claims, and benefits are extremely important.
Government & Regulation:
Currently, microinsurance in Indonesia is governed by the same laws and rules as traditional insurance because there are no current provisions to distinguish ‘micro’ from traditional. The trend for Indonesia, similar to many emerging economies, is that they wait for the demand first before developing and establishing regulations. As more companies have begun to enter the microinsurance stage, regulators have started to work with organizations to develop an effective framework for regulation. Protecting consumers and developing trust are the first priorities. The challenge associated with this is striking a balance between promoting access to insurance products while protecting the client. In order for microinsurance to grow, regulators need to help promote rather than hinder progress with too many constraints, all the while ensuring companies are being responsible with their practices.
Developing an efficient and effective way to settle claims, especially in a rural environment with an already low profit margin product, is challenging. Ongoing due diligence or claims verification audits can also be both extremely expensive and inefficient in this environment. The claims processing and settlement is the end service provided to the customer; more often than not, the client needs the payment to be settled quickly in order to reduce the impact in their lives of whatever the event may be. Additionally, one of the best ways to market a product will be through word of mouth by customers who have had a positive experience during the settlement process. Speakers from both the Philippines and India, representing their organizations that have been providing microinsurance for some time, have different claims settlement strategies with the same end goal. One organization has an initial payment within a few hours after the claim has been filed, with final settlement within 30 days. The other has a 5-day commitment to settle all claims with an exception if documentation is missing from the client. Use of mobile phones and the internet have helped facilitate these rapid transaction settlements.
The Global Index Insurance Facility made a presentation promoting the potential use of Index Insurance as an innovative solution in Indonesia. Index insurance requires a great deal of upfront research before an appropriate program can be designed. Unlike traditional insurance, it works this way: once a defined threshold or trigger point is met, the policy holder receives a payout from the insurance company without the need for assessment of individual claims or trying to estimate actual damage from an event on a per person basis. In Indonesia, certain weather or rainfall statistics could be linked to crop production. To try to simplify it in terms of weather index insurance, an insurance policy could be developed in which a farmer could buy protection if there isn’t ‘X’ amount of rainfall over a certain period of time, therefore resulting in a drought that would probably kill most of his crops. The insurance company would then be responsible to pay the defined compensation to the farmer as established in the upfront agreement based on the data of their feasibility study. Because the insurance company can easily determine through weather statistics that the rainfall has only been ‘X’ amount of centimeters over the time period specified, they do not need to go out and assess the damage to each farmer’s crops in order to determine a payout. The farmer receives the defined amount for the claim as soon as that trigger point has been reached and they file a claim. As you can see, the insurance company’s policy can only be as good as the upfront research and trending data used to define the policy. (note: there is an informative article here if I’ve thoroughly confused you in my attempts to give an over-simplified breakdown of how it could be used.)
Dengue fever insurance:
In many areas of Indonesia, especially once the rainy season begins, millions of people are at risk for contracting dengue fever. In a country where health insurance is rare, ACA has created an innovative product that is affordable to practically everyone. It was launched last year to help Indonesians receive benefits to pay for medical bills if diagnosed with dengue fever. There are a couple of options ranging from premiums of 10,000Rp to 50,000Rp (around $1.10-$5.60USD) with benefits of 1,000,000Rp to 2,000,000Rp (around $110-$220USD). It can be purchased at an ACA branch or through agents including at the Post Office, supermarket chains and convenience stores. The consumer purchases a credit-card sized policy and small information booklet, and then can activate it through their mobile phone. ACA has designed the claims process to be as simple as possible; the client can call the ACA 24-hour Hotline or send SMS. All they then need to do is send three documents: certificate from doctor stating the insurance participant was diagnosed with dengue fever, the lab results of blood test, and evidence of identity such as copy of ID card.
Mobile Phone Technology:
Mobile phone subscription has rapidly increased over the past five years and estimates indicate that there are around 120 million mobile phone customers (and rising) in Indonesia. Leveraging the usage of mobile phones will be extremely useful in increasing efficiency of microinsurance processes. There were two ways highlighted at MIMPI regarding its use.
1) Use of Mobile Phones for subscription & claims:
Similar with ACA’s Dengue Fever Insurance, Allianz is selling accidental death and dismemberment policies in Alfamart (Indonesian supermarket chain). For 25,000Rp (around $2.80 USD), the buyer receives a one-year insurance policy that pays 25,000,000Rp (around $2,800 USD) in the event of death or a certain percentage for a body part dismemberment. Allianz was providing examples at the event so I snagged one to test out. I gave it to one of my coworkers at VisionFund Indonesia to try (see photo below). All he had to do was send a text message including his name, Indonesian ID #, birthdate, and number on the Insurance card (scratch off). Within 3 minutes, Allianz texted him confirming that his policy would be activated within 24 hours. If he, or a family member, need to file a claim they call a 24-hour support number for assistance.
2) Use of Mobile Phones for distribution of insurance:
Allianz worked with mStars in the development of the ‘Vox Hati’, due to begin sales in the upcoming months. The Vox Hati is targeted at pulsa (prepaid mobile phone minutes) sellers in rural areas. With the purchase of the kit, the pulsa seller receives a smartphone, mobile banking service application, Allianz Tamadera Insurance application, tools for pulsa sales through the phone, and other features. The mobile phone technology will help distribute the product and facilitate premium payments for the customers who want to sign up for Tamadera.
Leveraging already established RT-RW groups for distribution:
Anna Agus, a lecturer and researcher at University of Indonesia, suggested the potential use of the already established ‘RT-RW’ networks as distribution channels in Indonesia. RTs are neighborhood group structures that are made up of half-a-dozen to forty or fifty houses. Then an RW is comprised of multiple RTs. As these groups are already established, often with monthly meetings, the leader could be trained then paid some incentive to distribute and sell microinsurance policies to the community. At present the RT system is sometimes used for neighborhoods to pay for trash collection, security, and Indonesian Identification card registration at birth. This would reduce the mistrust of the members in the insurance companies because they’d be working through an intermediary.
Hopefully I’ve been able to provide some insights into both the present and future of microinsurance in Indonesia. Financial services such as microloans, insurance, or savings options are an important part of helping poor families rise above the poverty line or to help keep those hovering above it from dipping below. Though I probably won’t be around to attend next year’s microinsurance marketplace, I hope that there is evidence that progress has been made through innovative products and increased access to financial services to those who need them most.
Laurie Young is a Kiva Fellow (KF16) working with VisionFund Indonesia in Jakarta. If you would like to learn more about VisionFund Indonesia, please visit their partner page. You can also support them by joining the lending team for VisionFund Indonesia. Former posts written by Laurie about her experiences in Jakarta and with VisionFund Indonesia can be found at:
New City, New Field Partner: Settling into the “Big Durian” (Part 1 of 2)
New City, New Field Partner: Getting to know VisionFund Indonesia (Part 2 of 2)
Meeting Karsinah: Maximizing my Social Return on Investment
Remembering Rizky: VisionFund Indonesia Loses One of Their Own
Microinsurance in Indonesia: What are the Options for Kiva Borrowers?