The insurance sector must modernize to engage Indonesia’s growing Gen Z and millennial markets.
Indonesia’s insurance industry is grappling with outdated practices that hinder its ability to adopt digital technologies, despite governmental initiatives aimed at accelerating the use of advanced tools like cloud computing, artificial intelligence (AI), and blockchain. Analysts have pointed out that a lack of adequate digital infrastructure is a significant barrier.
Jessica Pratiwi, an associate director, and Femmy Novaryani, a senior analyst at Fitch Ratings’ Asia Pacific insurance team, highlighted that unreliable internet connectivity in Indonesia compounds the challenges. They noted that the financial investment required to implement sophisticated IT systems can be burdensome for smaller insurers, particularly as the sector adapts to more stringent global accounting standards.
The rise in cyberattacks has intensified concerns about data security and customer trust, further discouraging many insurance firms from embracing digital solutions. “Challenges related to data encryption and the integration of advanced technologies complicate the adoption process,” the Fitch analysts stated in a recent communication.
Indonesia’s insurance penetration rate stood at a mere 1.39% at the end of 2022, according to the ASEAN Insurance Council. This figure is significantly lower than its regional neighbors—Singapore at 10.49%, Thailand at 5.02%, Vietnam at 2.51%, and the Philippines at 1.98%—and is attributed largely to the low financial literacy of its population.
To capitalize on its expanding middle class and the growing cohort of Millennial and Gen Z consumers, the country must enhance financial inclusion, as noted in a Deloitte report released in October 2023. A survey conducted by the Otoritas Jasa Keuangan (OJK), Indonesia’s Financial Services Authority, revealed that only 56% of local insurance companies have adopted IT, while 38% have yet to fully embrace digital marketing channels.
Pratiwi and Novaryani emphasized that advanced technologies like AI could play a critical role in identifying and responding to unusual patterns and risks more efficiently. “Automation can also mitigate the risks associated with cyberattacks,” they added.
The analysts called for the financial regulator to establish clear guidelines to support the adoption of IT and data security measures in the insurance sector. Collaboration between insurance companies and technology providers, including shared infrastructure and resources, could reduce costs and facilitate IT integration.
“Cloud computing offers scalable and secure infrastructure, while AI enhances data protection through real-time threat detection,” stated Edy Widjaja and Rafael Lam, partners at Bain & Company.
Lukas Bower, EY’s Asia-Pacific financial services generative AI leader, noted that Indonesia could learn valuable lessons from neighboring countries, which have seen rapid AI adoption in areas like customer service. “In the wake of COVID-19, there has been a surge in call volumes, prompting many insurers to leverage AI for handling customer inquiries more efficiently,” he said.
Despite the increasing reliance on AI, businesses typically maintain human oversight during customer interactions, using AI primarily for initial engagement before routing inquiries to live agents.
Bower also pointed out that while blockchain technology is often praised for its potential, its practical application within the insurance sector remains limited due to high operational costs. “Insurers must weigh the costs against the benefits when considering blockchain,” he said.
The global blockchain market in insurance was valued at approximately $766 million in 2022 and is projected to expand to $33.5 billion by 2030, reflecting a compound annual growth rate of 61.2%, according to Fortune Business Insights.
Competition and Regulatory Landscape
Analysts stress that Indonesia should look to more developed markets for insights. In Singapore and Australia, insurers have successfully integrated IT and AI to enhance operations and customer service. “Singaporean insurers have leveraged AI to personalize interactions and streamline processes,” Widjaja and Lam noted.
In December 2020, China established regulations for its burgeoning Internet insurance sector, prompting rapid digital expansion among its insurers through technologies like big data and AI.
In June, Malaysia’s central bank finalized regulations for digital insurers and takaful operators—Islamic insurance systems aimed at filling protection gaps and enhancing service quality. These new rules aim to increase insurance penetration to 5% of the economy by 2026, up from 3% in 2022.
Bower highlighted the intense competition in the region, particularly from fintech startups that are quick to adopt modern technologies. “Insurers in Indonesia, alongside regulators, face the challenge of keeping pace with the global technological evolution in the insurance market,” he said.
As regulations evolve, insurers will be required to monitor compliance in real time, rather than retroactively addressing breaches. “As customer interactions become more digital, the emphasis will shift toward proactive prevention of breaches,” he added.
While these regulatory changes may take time to materialize in Indonesia, Bower believes that companies that prepare in advance will gain a competitive edge by minimizing compliance-related expenditures.
Widjaja and Lam anticipate that Indonesia’s regulatory framework will adapt, particularly focusing on data privacy and cybersecurity. “We expect regulations surrounding AI in insurance across the Asia-Pacific region, including Indonesia, to become more structured and ethically oriented,” they concluded.
As the insurance sector grapples with these challenges, proactive adaptation to technological advancements will be essential for future growth and competitiveness.
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