OJK’s Monitoring of Insurance Firms

HERYUNANTO

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All 535 members of the United States Congress were enraged upon finding out that the executives of insurance firm American International Group Inc (AIG) were having a lavish vacation just one day after the firm received a Congress-approved US$85 billion bailout.

The bailout was approved to salvage AIG from mismanagement by its leaders. It was reported that AIG bosses spent $440,000 on a gathering at St. Regis, a luxurious hotel in Los Angeles, California. As they partied, golfed and enjoyed spa treatments, AIG was experiencing a liquidity crisis following the bankruptcy of prominent investment firm Lehman Brothers.

To prevent a financial crisis in the US, the US government bailed out the company with $85 billion sourced from taxpayers’ money (Kompas, 10/10/2009).

On Oct. 10, 2018, Indonesian state-owned insurance firm PT Jiwasraya sent letters to its bancassurance partners, announcing Rp 802 billion (US$52.79 million) in late payments for maturity claims on its JS Proteksi Plan products. A significant decline of the firm’s risk-based capital (RBC) from 200.15 percent in 2016 to a meager 123.16 percent in late 2017 indicates a solvency problem.

Jiwasraya’s unaudited and non-consolidated 2017 financial statement showed that the firm booked net revenue of Rp 2.4 trillion. The firm’s new management then requested an audit by local partner PricewaterhouseCoopers (PwC), which significantly revised the net revenue figure to a mere Rp 360 billion. The PwC audit found that Jiwasraya’s actuaries had miscalculated the firm’s financial reserves by Rp 7.6 trillion.

The Financial Services Authority (OJK) said Jiwasraya’s liquidity difficulties had been caused by its inability to cut losses in a number of its share investment portfolios to pay matured insurance policies. The firm also had difficulties in obtaining additional capital because it was a state-owned company. Law No. 9/2016 on the prevention and management of financial system crises prohibits the government from bailing out financial institutions. Instead, the government must push for internal improvements in the institutions (bail-in).

Cases of failing banks or insurance firms that have the potential to cause a systemic risk should be resolved through the Financial Sector Stability Coordination Forum (FKSSK). This is in line with Article 45, Point 2 of the OJK Law.

Under conditions that indicate either potential or an ongoing crisis within the financial system, the finance minister, Bank Indonesia governor, the OJK chief commissioner and/or the Deposit Insurance Corporation (LPS) chief commissioner can submit a proposal to the FKSSK for a meeting to decide on the necessary steps to take to tackle the crisis and prevent further impacts.

It needs to be acknowledged that bancassurance products are not banking products and should not be seen as bank savings. They should not be insured by banks or be part of LPS’s insurance scheme of a maximum of Rp 2 billion per bank customer, as stipulated in Law No. 24/2004 on the LPS.

OJK monitoring and regulation

Jiwasraya’s late payment brings about many questions about OJK’s monitoring ability, especially as it has also failed in the unfinished restructuring of insurance company Asuransi Jiwa Bersama (AJB) Bumiputera.

OJK is overregulated and often cannot uphold its own rules. Just look at some of OJK’s rules, such as OJK Regulation (POJK) No. 1/POJK.07/2013 on consumer protection in financial services; POJK No. 23/POJK.05/2015 on insurance products and their marketing; POJK No. 73/POJK.05/2016 on good corporate governance for insurance firms; POJK No. 71/POJK.05/2016 on financial health of insurance and reinsurance firms; POJK No. 1/POJK.05/2016 on state bond investment for non-bank financial service institutions; and POJK No. 55/POJK.05/2017 on insurance firms’ periodical reports. With OJK’s wide-ranging authority and various early detection instruments, such as the RBC, mismatches in insurance firms should have been avoidable.

OJK’s poor monitoring of insurance firms can be seen in the poor governance among these firms and the legal certainty for them. This includes the declaration of insurance firms’ bankruptcy without considering the interests of policyholders, the limitation on insurance firms’ business activities that negatively affect their reputation, poor governance, legal compliance and the lack of legal certainty (policy insurance regulations and  the lack of adherence to Law No. 40/2004 for insurance companies).

Furthermore, there have been violations of the deadline for monthly reports and the June 2018 deadline on achieving minimum brokerage equity, violations on RBC inadequacy below 120 percent and lawsuits against insurance firms filed by clients.

The OJK issued POJK No. 17/POJK.05/2017 on procedures of imposing administrative sanctions on insurance firms and the blocking of wealth management insurance, sharia insurance, reinsurance and sharia reinsurance firms. The regulation stipulates that the OJK can impose administrative sanctions on any entity that violates Law No. 40/2014 on insurance.

Administrative sanctions can be in the form of a written warning; partial or full limitation of business activities; insurance product marketing ban; revocation of business license; revocation of registration statements of insurance and reinsurance brokers or agents; revocation of approval for association or mediation institutions; administrative fines; and/or bans on serving as shareholder, controlling shareholder, commissioner or executive on a board of directors. Administrative sanctions are issued by the OJK and delivered in writing (Article 2).

Administrative sanctions are imposed on insurance firms in stages, starting with a written warning. Written warnings are given three times – one for each violation.

The first and second written warnings can also be deemed as the final written warning if (1) the insurance firm has made the same violation within the past year prior to the issuance of the latest written warning; (2) is under administrative sanction of business activity limitation due to a separate violation; or (3) based on the OJK’s consideration, no further written warnings are necessary.

Periods of administrative sanctions can be more than 30 days up to six months, in line with the OJK’s considerations of how much time is needed to truly address the violation. Administrative sanctions may also be imposed on insurance companies that do not fulfill the requirement of minimum solvability and/or equity; also, in the case of insurance firms’ inability to resolve violations that led to a previous issuance of a written warning until the end of administrative sanction’s period.

The OJK may partially or fully limit insurance firms’ business activities without any written warning in the case of an insurance firms experiencing worsening financial health and/or harming policyholders. Insurance firms that have had their business activities limited may still be issued a separate written warning upon any new violation.

Partial business activity limitations can be imposed for up to one year, while full business activity limitations can be imposed for up to three months (Article 4). Insurance firms on which a partial business activity limitation has been imposed may face full business activity limitation if they cannot resolve the problem that led to the partial limitation in the first place.

License revocation

An insurance firm may face business license revocation if it cannot resolve the problem that led to full business activity limitation. The OJK may also revoke insurance firms’ business licenses when their financial condition worsens drastically; their shareholders are uncooperative; their boards of commissioners and directors cannot find solutions to problems that harm policyholders’ interests and/or for any other condition that the OJK deems is harmful to policyholders’ interests.

Insurance firms may also be banned from marketing their insurance products for up to one year. The OJK will make a public announcement on its official channels and/or national print media when it revokes an insurance firm’s business license or bans one from marketing its products.

Reports say that a number of insurance companies are currently facing such problems. Thus far, we only find news of insurance firms’ license revocation and none about the OJK’s ban on any insurance firm on marketing its products. Insurance firms that have had their licenses revoked include Jiwa Nusantara (in 2013), Bumi Asih Jaya (2013), Indo Surya (2013), MAA (2015), Asuransi Raya (2017) and PT Gelora Karya Jasatama, through Board of Commissioners Decree No. KEP-58/NB.1/2018 dated Sept. 28, 2018.

We can compared what the insurance regulator did with AJB Bumiputera during the era of the Capital Market and Financial Institutions Supervisory Agency (Bapepam-LK). In 2009 and 2010, AJB Bumiputera was sent 11 warning letters by Bapepam-LK: two warnings on investment management, two warnings on fund management contracts, two warning on balance of wealth and obligation, one warning on the delivery of solvability and operational calculation report, one warning on the delivery of its 2009 independent audit report, one warning on fines, one warning on opening a branch without expert staffers and one warning on investment placement and balance of wealth and obligation.

With such a picture, then, first, we need to improve the monitoring of the OJK. Currently, there is no independent audit agency for the OJK, similar to the Bank Indonesia Supervisory Body that answers to the House of Representatives. The only monitoring of the OJK is done incidentally by the House.

Second, insurance firms must separate their records of premium income that is purely for protection from those linked to investment. Stipulations in International Financial Reporting Standards (IFRS) set during the G-20 Forum in Washington DC in 2008 require insurance firms to separate protection premium transactions from investment premium ones. Third, we should urge insurance firms to be open and more accountable. Their information must be accessible by all stakeholders, without exception.

Irvan Rahardjo, Insurance and Social Security Policy Observer