Insurance Must be More Professional
Who would have expected that PT Jiwasraya, Indonesia’s oldest state-owned insurance firm established in 1859, would on Oct. 10 announce Rp 820 billion (US$52.36 million) in late payment for maturity claims on its JS Proteksi Plan products?
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Who would have expected that PT Jiwasraya, Indonesia’s oldest state-owned insurance firm established in 1859, would on Oct. 10 announce Rp 820 billion (US$52.36 million) in late payment for maturity claims on its JS Proteksi Plan products?
What must we do to push insurance firms to be more professional? This is not the first such case in the insurance industry. There have been several similar cases. On Oct. 18, 2013, the Financial Services Authority (OJK) revoked the operational license of insurance firm PT Bumi Asih Jaya for its failure to fulfill the risk-based capital (RBC) requirement of a minimum 120 percent. The firm later filed for bankruptcy on Aug. 28, 2015. On June 18, 2013, the OJK revoked the business license of insurance firm PT Asuransi Jiwa Nusantara because of its unhealthy financial condition.
Then, on Sept. 15, 2016, the OJK similarly revoked the business license of PT Asuransi Jiwa Bakrie because of its unhealthy finances. In the same month, the OJK declared PT Asuransi Syariah Mubarakah (ASM) bankrupt due to its inability to maintain a healthy financial condition. On July 5, 2017, the OJK revoked the business license of PT Asuransi Raya for its inability to fulfill the RBC requirement (Koran Kontan, 15/10/2018).
What is the JS Proteksi Plan? It is a bancassurance product (insurance products marketed through banks) that pays life insurance upon the demise or the total permanent disability (TTD) of the policyholder, whether as the result of accident or otherwise. Jiwasraya insures repayments of insurance principals and investment.
The product is highly popular among investors aged 18 to 65 years, and it carries a five-year policy period and a premium of Rp 50 million to Rp 5 billion. Seven banks are involved in marketing and selling the products: state-owned PT Bank Tabungan Negara (BTN) and PT Bank Rakyat Indonesia (BRI), along with QNB Bank, ANZ Bank, KEB Hana Bank, Victoria Bank and Standard Chartered Bank.
Strategic moves
So, what should we do to push insurance firms to be more professional? First, according to the board of directors that was newly appointed at a shareholders meeting (RUPS) on May 18, 2018, and which officially began its duties on Aug. 27, Jiwasraya’s unaudited and non-consolidated 2017 financial statement showed that the firm booked an annual net revenue of Rp 2.4 trillion. The new board directors then requested an audit from PricewaterhouseCoopers (PwC). This audit determined a decline in net revenue from Rp 2.4 trillion to Rp 360 billion. The public accounting firm provided a “With Modifications” opinion.
The new management is on the right track here. If necessary, as a shareholder, the Financial Ministry can audit the earlier results from the public accounting firm through its Financial Profession Development Center (PPPK). Why? Because illicit procedures might have been involved in the drastic reduction of the net revenue from Rp 2.4 trillion to Rp 360 billion.
There are implications. Earlier in September, Infobank magazine ranked state-owned enterprises on the basis of nine criteria, including financial health (RBC), liquidity, total assets, investment adequacy ratio and growth (gross premium revenue and own capital).
The other criteria comprised the gross premium, the investment-net premium revenue balance, advertising expenses, operational expenses and commission divided by net premium revenue and net profit (loss before taxes divided by average own capital) and profit (comprehensive loss divided by average own capital). Under such criteria, Jiwasraya obtained a “very good” ranking in 2016 and 2017. However, with this latest case, its ranking raises many questions.
Secondly, surely this late payment of insurance claims will affect other similar products in the insurance industry. Potential investors will now think twice before purchasing similar products, the sales of which may decline.
Third, Asuransi Jiwasraya may have been hit by a reputation risk. Reputation risk is caused by, among others, negative publicity from negative perception or the company’s activities.
At first, reputation risk may not lead to financial loss. However, as time goes by, the company may have to shell out a lot more money to repair its reputation, including for the costs of organizational restructuring to address disruptive technology, improve human resource competence and improve services.
Fourth, Jiwasraya must also improve its corporate governance by implementing the principles of openness, accountability, responsibility, independence and fairness. Old business practices that do not adhere to these principles must be discarded.
Only in this way can Jiwasraya become a professional and advanced state-owned insurance firm to hopefully contribute its dividends to the government.
Fifth, to mitigate risks, an insurance company must be able to protect its products through a reinsurance company. Such products, called a protection plan, do not only provide the benefits of protection but also investment security in line with insured principals and investment returns. However, in general, insurance firms only reinsure products that cover death or personal accident risks with TPD. Investment risks and maturity risks are not reinsured and, therefore, come at the insurance firm’s own risk.
Why is this? It is most likely that this practice provides fertile business opportunities for an insurance company’s investment department or for asset management companies. In Jiwasraya’s case, it appears that the firm did not reinsure its JS Proteksi Plan. Consequently, when the firm is in an unhealthy financial condition, it must bear its own investment risk.
Fortunately, Jiwasraya paid on Oct. 15 the maturity interest on 1,286 policies, which reached Rp 96.58 billion. For policyholders that want to roll over, the company prepared prepayment at 7 percent per annum net interest, or equivalent to a net effective interest of 7.49 percent per annum. Policyholders not wanting to roll over would receive an effective net interest of 5.75 percent per annum. This serves as a stern warning and a valuable lesson for life insurance companies that do not reinsure its investment risks under a reinsurance company’s protection plans. The current economic condition, filled with uncertainties as it is, demands that all companies readily mitigate their risks.
Challenges for OJK
Sixth, such cases should urge the OJK to increase its monitoring of insurance companies. Thus far, the OJK has regulated its monitoring of non-bank institutions through OJK Regulation No. 11/POJK.05/2014 on Direct Monitoring of Non-bank Financial Services Institutions, dated Aug. 27, 2014. These non-bank institutions include insurance and reinsurance companies, financing firms, pension funds and non-bank support services in the financial industry.
Unfortunately, Article 4 of the regulation only requires the OJK to check on these non-bank institutions once every three years at the minimum. This is the right time for the OJK to revise this requirement to once a year, as in the case with the OJK’s monitoring of banks. Article 4 of OJK Regulation No. 41/POJK.03/2017 on Procedures for Monitoring Banks, dated July 12, 2017, stipulates that banks are monitored at least once a year and at anytime deemed necessary.
It is critical and urgent for the OJK to revise this regulation, considering that many insurance products are now linked with banking products as bancassurance, such as protection plans and unit linked insurance plans (ULIPs – insurance products offering both protection and investment). In short, insurance products will become more varied and more risky in the future.
Paul Sutaryono
The logical consequence is that the OJK must increase its manpower for monitoring non-bank financial institutions, as more highly qualified human resources will be needed. Furthermore, OJK employees must be visionary and possess high integrity to prevent any illicit transactions between the monitor and the monitored institution.
Seventh, consumer protection should be the OJK’s top priority. The OJK should also educate the public on investment products to improve the nation’s financial literacy and inclusion rate. Indonesia’s financial literacy rate was 21.84 percent in 2013 and 29.66 percent in 2016. This means that out of 100 Indonesians, only 30 are financially literate. Financial inclusion has also increased from 59.74 percent in 2013 to 67.82 percent in 2016.
In taking these various strategic measures, the country will have life insurance firms that are professional, prominent and profitable, and consumer interests will be better protected.
Paul Sutaryono, Expert Staffer, State-Owned Enterprises Research Center; Banking Observer; Former Assistant to the Bank Negara Indonesia (BNI) Vice President
