Authors: Ibrahim Kholilul Rohman[1] and Nada Serpina[2]
As we approach the end of 2023, the Indonesian government has presented a noteworthy gift – a comprehensive roadmap for the digital economy strategy. This marks a historic moment as it unveils the Vision of Digital Indonesia 2045 (VID2045) on December 14, 2023. Collaborating with the Ministry of National Development Planning, the Coordinating Ministry for Economic Affairs, and over 50 institutions, the Ministry of Communication and Information Technology spearheads this initiative.
The conceptualization of VID2045 involves policy scenarios with a holistic focus on ecosystem, sectoral, and regional perspectives, addressing critical aspects such as digital infrastructure, security and data, research and innovation, human resources, and regulation and policy. From a sectoral standpoint, VID2045 advocates leveraging technology to fortify the national economy.
While the white paper is commendable as a crucial step towards enhanced digital adoption, further details are imperative to meet our ultimate goals. Specifically, the digitalization policy should extend beyond narratives. As an example, among the area is by providing intricate strategies to mitigate risks, considering Indonesia’s vulnerability to natural disasters.
Indonesia’s history of natural disasters reveals frequent and severe impacts that threaten lives and economic development. The 2004 Aceh earthquake and tsunami alone resulted in economic losses of IDR 51.4 trillion (USD 3.5 billion), far surpassing the 3-10 trillion IDR available in the disaster reserve fund (APBN). In response, the Indonesian Ministry of Finance devised a disaster management risk financing strategy, Pembiayaan dan Asuransi Risiko Bencana (PARB), featuring a Disaster Pooling Fund (PFB). This strategy aims to protect state finances, government assets, and the community. Furthermore, in the long run projections estimate that economic losses due to natural disasters could range from 0.66% to 3.45% of our GDP by 2030 if not taken seriously.
Data from the 2018 Village Potential Census conducted by the Central Statistics Agency (BPS) illustrates the alarming frequency of natural disasters nationwide. With 3,597 flooding events and 2,651 droughts, the impact of natural disasters is significant. Landslides alone caused 12,044 fatalities, while fires claimed almost 900 lives throughout the country in the same period.
Despite these escalating risks, the level of risk mitigation as shown in the insurance coverage remains minimal. Until the end of 2020, IFG Progress found that the density of life insurance in Indonesia, measured by the ratio of premium income to the population, stands at a meager 1.4%, significantly lagging behind Singapore (7.6%) and Malaysia (4%). Similarly, general insurance premiums that might cover risks such as accidental damage and loss, health and property casualty in Indonesia average USD 17 per person, a stark contrast to Singapore (USD 1,110/person) and Malaysia (USD 153/person).
In essence, the level of protection against risk mitigation stemming from natural disasters in Indonesia is unacceptably low, considering our susceptibility to various causes of fatalities.
A major contributing factor is the exorbitant acquisition fee associated with insurance in Indonesia. On average, IFG Progress study found that for unit-link cases as an example, premium allocation structures in the initial five years predominantly cover acquisition costs, monthly fees, insurance, and administrative costs. With acquisition costs averaging around 35% annually in the first five years, the remaining portion allocated to the investment fund is below 15% of the total premiums paid. The same phenomenon happens in general insurance where the share of brokerage fee is seen to be expensive.
Therefore, digitalization strategy should alsp be targeted to address real challenges faced by the populace, and one clear use case is the introduction of technology in financial sector especially in the insurance industry which is called as insurtech. The term “insurtech” arises from the implementation of digital innovations by insurance companies, aiming to catch up with global economic developments increasingly influenced by digital technology.
The evolution of insurtech in health and life insurance has been remarkable, undergoing a paradigm shift from protection to prevention. Over the past three years, significant progress in the health and life insurance sectors has been driven by increased public awareness of the benefits of these products in the aftermath of the Covid-19 pandemic.
The advent of digitization, particularly insurtech, has the potential to reduce unnecessary costs in the insurance industry. By utilizing technology such as Artificial Intelligence (AI), insurtech might shorten the value chain process, enabling insurance companies to efficiently analyze and manage, providing accurate product guidance. This aims to simplify data acquisition and processing, aligning products with public needs.
Insurtech might offer a solution for insurance providers seeking to deliver better services at reduced costs. Research indicates that automation can reduce the costs of insurance claims by as much as 30%. Thus, insurtech helps insurance providers cut costs, increase profits, improve customer satisfaction, and retain customers by enhancing service standards, reducing processing times, and saving costs across the value chain.
In Indonesia, insurtech could play a crucial role in attracting new consumers, particularly through innovative pricing models facilitated by digital technology combatting the problem of excess searching costs. Research shows that it costs seven to nine times more for insurers to attract new customers than to retain existing ones. Insurtech offers a unique solution by helping insurers blend product and pricing innovation to attract and retain those who have high income and price elasticity sensitive towards pricing. Innovations like vanishing deductibles, accident forgiveness, and rebates for safe driving become possible through digital technology, creating perceived value that makes fairer pricing.
In summary, the role of digitalization should extend beyond narratives to address real-use cases. Risk mitigation, especially in a country surrounded by natural catastrophes like Indonesia, should be among focal points. Stakeholders need to build upon the current digital strategy whitepaper, offering detailed stages that emphasize the importance of technology adoption and the use case in the areas such as financial sector. Successful implementation requires closer collaboration between relevant ministries, the Financial Service Authority, and insurance companies in the future.
This article was published in thejakartapost.com with the title “Digital Transformation: Safeguarding the Future through Risk Mitigation”. Click to read: Digital transformation: Safeguarding the future through risk mitigation – Academia – The Jakarta Post
[1] Senior Research Associate at IFG Progress and Lecturer at SKSG Universitas Indonesia
[2] Research Associate at IFG Progress
