The Indonesian insurance industry is expected to remain stable next year, with most insurers maintaining their financial fundamentals, Fitch Ratings says.

Premium growth should be steady, while economic development, the “vast, unpenetrated market” and “increasing catastrophe awareness” mean the long-term growth outlook is strong, the agency says.

Insurance premium income rose 15.5% annualised in the first half of this year to IDR68.9 trillion ($6.88 billion). Of that, life insurance accounted for $4.78 billion, up 16.4%, and general insurance was at $2.08 billion, up 13.6%.

Total claims grew 18.2% to $3.97 billion in the year to June and average premium spend per head was up 8.9% to $56.29.

Fitch notes the growth potential for Indonesia, saying premiums account for only 1.7% of GDP compared with 8.1% in the US and 11.8% in the UK.

Catastrophe awareness is rising in a country infamous for natural disasters, driven by rising affluence and the resulting growth in insurable assets.

Less than 1.5% of the estimated $4.33 billion damage from the 2004 Boxing Day tsunami in Sumatra was insured; the proportion for the 2007 Bengkulu earthquake was 6%.

Increased consolidation is expected, with the Indonesian Government raising capital reserve requirements this year and again in 2014. Already nine life offices and 22 general insurers are failing to meet the requirements, leaving them vulnerable to takeovers by competitors.

Overseas groups are likely to be part of this consolidation. Indonesia allows insurers to be 80% foreign owned and groups such Mitsui Sumitomo and Axa have already bought in.

With Indonesia having the world’s largest Muslim population, Fitch identifies sharia-compliant insurance as a vast, almost untapped, market. It totals only 5% of gross premium now but grew almost 10-fold between 2006 and last year.

Fitch says the main risk for the market is an economic slowdown but adds this is unlikely, with economic growth at 6.2% and only China performing better among G20 countries.

Dangers also lie in the lack of industry transparency, public disclosure and adequate risk management. However, these should gradually abate with improved regulation and the rising influence of foreign players.

The predominance of single-premium unit-linked products in the life market poses the threat of market fragility but Fitch says this is unlikely to change soon.

Bancassurance is now the dominant role distribution channel, accounting for 40.6% of the life market by June. Motor vehicle insurance dominates the general market, with 30.1%, while property accounts for 27.4%.