Statement follows Dai-ichi Life’s decision to buy 40% stake in Indonesia’s Panin Life

indonesia

More foreign and domestic insurers are likely to participate in merger and acquisition activity in Indonesia, Fitch Ratings says.

Japan’s Dai-ichi Life’s announcement on Monday that it was buying a 40% stake in Indonesia’s Panin Life highlights the attractiveness of the Indonesian market. The rating agency thinks local insurers may merge to gain scale to exploit the same opportunities.

Indonesia is an attractive insurance market because it is large and relatively underpenetrated, and has a growing middle class. A resilient economy means there should be significant potential to raise insurance penetration, which, at a low 1.7% of GDP in 2011, lags behind other fast-growing markets such as India and China.

There is also a vast untapped takaful (Islamic insurance) and sharia (Islamic banking) market in the country, which has the largest Muslim population in the world. Increasing catastrophe awareness should also help drive steady premium growth.

The attraction for overseas investors also lies in a more generous foreign ownership cap for insurers, at 80%, than in other Asian countries, such as India and Thailand (26% and 49% limits, respectively).

Fitch expects the Indonesian insurance sector to consolidate and the number of participants to fall, thanks to domestic and cross-border M&A. Higher minimum capital requirements of IDR70bn ($7.1m) by end-2012 and IDR100bn by end-2014 should encourage smaller and weaker insurers to exit the market or merge with others.

A foreign buyer from a more mature market, such as Dai-ichi Life, could help the development of the Indonesian insurance sector through the sharing of expertise and knowledge. It may also lead to increased competitiveness among local companies.