Social Security Policy Rejuvenation through Accelerated Growth in the Micro-Insurance Industry

The Indonesian workforce is dominated by workers in the informal sector, complicating the task of providing social security to workers nation-wide. The vast majority of these people have neither a plan to fund their retirement, nor income, health or life insurance coverage to protect them. From the year 2030, the Indonesian population will, collectively, be an aging one. This policy paper addresses the urgent need to begin post-retirement planning for the informal workforce. The Indonesian government has passed a law(No.40/2004) on social security, but fulfilling the aim of universal pension scheme coverage remains a distant goal. The International Labour Organisation (ILO) has identified microinsurance schemes as a viable solution for workers not covered by state social security. A number of pilot microinsurance projects have been undertaken by private insurance companies in Indonesia already. Although promising, challenges to expanding these projects remain. On the supply side, the highly dispersed distribution of informal workers creates economy of scale barriers for insurance companies in marketing products and providing services. Meanwhile, informal workers are often wary of insurance, put off by issues of trust, affordability or non comprehension. The authors argue that mobilising social networks can overcome the supply side issues, while improving financial literacy of the informal sector can help reduce perceptions of product complexity. Overcoming these barriers will require a coordinated approach involving insurance companies, central and local governments, industry associations, and the local social organisations.