BI Rate Rises, Insurance Companies Focus on Long Term Investments

Insurance industry premium income as of March 2024 reached IDR 87.53 trillion or grew 11.49 percent annually.

KOMPAS/AGUSTINUS YOGA PRIMANTORO

President Director of PT Avrist Assurance Simon Imanto explained the company's performance at the Media Gathering in Jakarta, Monday (6/5/2024).

JAKARTA, KOMPAS — Even though the increase in reference interest rates has no direct effect, insurance companies are trying to maintain their liabilities. This is done by focusing on placing a long-term investment portfolio.

President Director of PT Avrist Assurance, Simon Imanto, said that the increase in interest rates has caused the capital market to be depressed, leading to an impact on investment performance. However, this impact does not directly affect the insurance industry.

"We manage our asset investments, particularly to maintain liabilities. Therefore, our investments are focused on the long-term, especially in bonds. Although there may be an influence on prices due to rising interest rates, we maintain the coupon and long-term aspects," he said at a Media Gathering event in Jakarta on Monday (5/6/2024).

In managing investments, Simon continued, it needs to be done prudently and with a long-term orientation. This management is not only to maintain the long-term obligations of policyholders, but also as an effort to anticipate various potential impacts of macroeconomic changes.

According to Simon, macroeconomic conditions will determine the company's targeting of its market share. This is because economic growth, inflation rates and economic sentiment affect people's purchasing power or ability.

"The GDP of Indonesia is still reasonably good at 5 percent during 2023, supported by economic activity, particularly during the campaign preparations. These processes are making the economy more active, especially in the first quarter of 2024. There is also a factor of controlled inflation," said Simon.

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During 2023, Avrist recorded a consolidated net profit, including conventional and sharia, of Rp 144.5 billion or an annual growth of 18.3 percent. This achievement was supported by operational efficiency efforts related to life and health insurance products, education insurance, and pension insurance.

To get around this, insurance companies must be more active and selective in managing asset portfolios and investment placement.

Likewise, Acting Director Main BNI Life Eben Eser Nainggolan said that uncertain economic conditions do not have a direct impact on the insurance industry. The increase in the benchmark interest rate to 6.25 percent caused investment conditions to fluctuate, thus impacting investment placement projections.

"To cope with this, insurance companies need to be more active and selective in managing asset portfolios and investment placements," he said when contacted from Jakarta.

Eben is optimistic that the performance of life insurance will improve and continue to grow in the future, considering the wide opportunities for insurance inclusion and penetration. This is also supported by regulators and the government through the Insurance Roadmap and the establishment of the Insurance Guarantee Institution as an effort to increase public trust.

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Throughout 2023, BNI Life recorded a premium income of Rp 5.4 trillion, or a 7.7 percent annual growth. In 2024, BNI Life targets a premium income of Rp 6.4 trillion.

Based on data from the Financial Services Authority (OJK), the insurance industry's accumulated premium income as of March 2024 reached IDR 87.53 trillion or grew 11.49 percent on an annual basis. In general, the life insurance industry's capital ratio (risk based capital/RBC) is 448.76 percent or above the 120 percent threshold.

IFG Progress senior researcher, Ibrahim Kholilul Rohman, suggests that the impact of macroeconomics is somewhat difficult to translate to the insurance industry compared to banking. However, there are two sides of the insurance industry that are affected.

First, an increase in interest rates will increase risks and create a need for risk mitigation. This will increase the demand for premiums or insurance.

On the other hand, an increase in the benchmark interest rate will increase the cost of funds and interest costs, especially for companies that have debt obligations. Thus, the need for insurance is not a top priority.

"The direct impact on the insurance industry is generally related to bond yields. It is an inverse relationship. When bond yields rise, bond valuations will fall. This is because the company (bond insurance) will need higher yields to attract people to buy bonds," he said.

According to Ibrahim, this has an impact on the value of assets or investments of insurance companies because the asset valuation decreases. Furthermore, the decrease in asset valuation will automatically reduce RBC.

If viewed from the impact, the increase in interest rates will potentially have a greater effect on the life insurance industry considering its high bond composition. Meanwhile, the general insurance industry is not too affected because the portion of bonds it holds tends to be in the short term.