Solution to Failed Insurance Claim Payments

A number of cases concerning the failure of insurers to pay life insurance claims have occurred since the late 1990s.

KOMPAS/LUCKY PRANSISKA

Hotbonar Sinaga

The cases have become a major concern for the regulator because they involved millions of claims worth trillions of rupiah. One of these cases involves the 1912 Bumiputera Life Insurance (AJBB). The main difficulty for mutual insurance companies in fulfilling their obligation to policyholders is the absence of shareholders, even though the company had survived at least six crises since 1912.

A quick, short-term solution to the financial difficulties of insolvent insurance companies is to involve the shareholders. One way to do this is through subordinated loans, by inviting a strategic investor to inject fresh capital to restore the company’s health in the short term (instant solution). The point is that an inflow of funds is necessary to sustain the company through its liquidity problems.

This option cannot be implemented for mutual insurance companies because they have limited access to funding sources. In the Bumiputera case, a former AJBB senior official put forth the idea that AJBB policyholders, who were also "shareholders" of the company, convert their claims into a kind of "equity". The problem was that the conversion would not improve the company’s cash flow.

One quick solution was to take exploit the property assets scattered throughout the archipelago. The assets would not be sold but securitized in collaboration with investors or financial institutions, such as banks. But asset securitization was not recommended because it would not generate fresh funds, and it would entail the company paying income tax on any capital gains.

Jiwasraya case

Jiwasraya (JS) has a relatively better position in terms of settling claims payments than AJBB because as a state insurance company, it has access to funding sources.

Mukhtarudin, a House of Representatives (DPR) Commission VI member from the Golkar faction who is in charge on stated-owned companies (SOEs), revealed during a talk show on Kompas TV that that the government must address three key priorities in the JS case: claims payments to its customers, a sustainable recovery program and law enforcement efforts.

He also said that an investigative audit had been proposed and it was possible that the DPR would form a special committee to “dissect” the case to determine the appropriate, alternative solutions. In fact, the prosecutor\'s office, as part of the judicial system, has begun interrogating dozens of witnesses.

This is necessary to ensure that no third parties are involved in JS’s investment activities, as well as to prevent rumors or false information (hoaxes) that could worsen the situation even further. President Joko “Jokowi” Wiodo\'s statement alleging the existence of a criminal element needs to form the basis of law enforcement efforts in the JS case.

The problematic product, the JS Savings Plan, initially attracted many bank customers (depositors) because it promised greater returns than deposit interest rates. The investment product was marketed in cooperation with banks under a bancassurance scheme. Banks would receive a commission (fee-based income) from selling the investment-linked insurance policy (ICL) and improve their loan-to-deposit ratio (LDR).

Read more : Industry 4.0 and Health Services

ANTARA FOTO/GALIH PRADIPTA

A woman walks in front of the Jiwasraya Insurance office on Jl. Juanda in Jakarta on Dec. 11 (11/12/2019).

Most policyholders did not use cash to purchase the ICL, and instead converted their savings deposits at their banks. The transaction involved no direct interaction between the depositors (policyholders) and JS officials or its marketing staff.

The ICL performed well initially. However, JS decided to reduce the investment yield in the first quarter of 2018, and then stopped selling the product altogether in the second half of 2018.

The new board of directors (management) at JS realized that the company would experience difficulties paying out the promised returns to its customers. The previous management had used this very reason as a kind a justification to deliberately invest in underperforming stocks and high-risk securities to ensure high returns and so they could fulfill their obligation (guaranteed return) to policyholders. The investment instead worsened the company\'s effort to balance its assets against its liabilities (asset liability management/ALM).

A possibility then emerged that if the product were continued, JS would unavoidably be digging a hole only to refill, which would basically be the same as a Ponzi scheme.

On the other hand, the JS management ordered that its 2017 financial statements be re-audited, which significantly revised the company’s profits down from Rp 2.4 trillion to only Rp 428 billion. This also caused its risk-based capital (RBC) to fall below the minimum limit as regulated by the Financial Services Authority (OJK).

The new president director, who was appointed in November 2018, estimated that JS would need fresh funds of at least Rp 32 trillion to meet the minimum RBC. The company’s RBC had dropped to minus 800 percent that year. The new JS management also asked its shareholders – in this case the government – for Rp 32 trillion to bail out the insurance company.

The author is of the opinion that this request is not feasible, given the government\'s heavy financial burden to meet the state budget’s routine and development spending and other obligations. It is also feared that this could set a bad precedent for other SOEs.

The option to providing capital injection (PMN) is also discouraged because of the attending complicated procedures, and because it would be insignificant.

On the other hand, the shareholders must prevent JS from liquidation because the company has been established for more than a century and is a legacy from the nation’s founding fathers. Liquidation could also tarnish the reputation of not only the country’s SOEs and insurance industry, but also its good name, since Indonesia has been making active efforts to lure foreign investors to the country.

This matter is indeed a dilemma for the government, but the solution is clear: leave JS to find its own cure, provided that it receives government/ SOEs Ministry assistance, just not in the form of funding.

Discussions on establishing a subsidiary and an insurance holding company can continue, but these should be established within a time frame of not more than a year. Other proposals like subsidiaries

Leave JS to find its own cure

issuing securities will be ineffective. At the current credit rating, which is likely below the market standard, the securities may not attract buyers.

Another option is to invite strategic investors: They are likely motivated by the potential for profits, but this would reduce the government’s share in ownership.

In mid-December 2019, the JS president director publicly announced that the insurer was unable to make the payouts for policies that had matured.

Exploring the possibility of appointing a temporary caretaker (statute manager) to take over management of the company in accordance with Article 62 of the Insurance Law could be worth the OJK’s consideration. It is known that the OJK appointed a caretaker to take over management of the AJBB in 2016.

KOMPAS/ERIKA KURNIA

Victims of PT Asuransi Jiwasraya insurance products hold a meeting with members of Commission VI of the House of Representatives (DPR) in Jakarta on Wednesday (4/12/2019).

Short-term health

Corporate restructuring should be the government’s second priority, including paying out the 17,000 ICLs (bancassurance) that have reached maturity and around 5.5 million group life insurance policies outside the JSF Pension Fund (DPLK).

Based on this author’s knowledge and experience, the financial condition of JS can be restored through several quick solutions, such those that use its position as the only life insurance SOE.

The initial step is to carry out due diligence and to aggressively sell old products that still have potential, such as life insurance as part of a severance package (Law No. 13/2003 on Employment), for companies that are making efforts to meet the Accounting Standards Statement (PSAK) 24, with a focus on fellow SOEs (Indonesia has 142 SOEs with about 1 million employees) or oil and gas companies (67 companies with 22,000 personnel) that operate under a cost recovery program.

An inventory on companies that have transferred funding originally allocated for severance pay is needed, including oil and gas companies, life insurance companies and DPLKs. This would certainly require the facilitation of the SOEs Ministry, as the shareholder of all SOEs and their subsidiaries, as well as the government, in this case the Finance Ministry. The potential premium for this product over a minimum of three years can reach trillions of rupiah.

Meanwhile, JS should continue to develop products that are suitable for the millennial generation by creating app-based basic life insurance products, both with and without the investment element.

Leave it to the experts

Collaboration with Workers Social Security Agency (BPJS TK) can be initiated by offering accident insurance that the BPJS does not cover, such as outside the workplace/working hours for the informal sector.

The BPJS-TK, in accordance with statutory provisions, only covers work-related accidents (occupational risk). JS can use the BPJS database for cost efficiency in underwriting. The potential annual premium generated from this partnership product is estimated to be in the billions of rupiah.

JS can also offer an additional death benefit (top-up premium), the amount of which is determined according to statutory provisions. Realizing this plan requires staff or teams that meet several requirements, such as experience in managing an insurance company (not a non-insurance company), possessing competence or reputation, integrity, an extensive network and willingness to “endow” themselves, and last but not least, former employment at JS as a supplementary condition.

ANTARA FOTO/APRILLIO AKBAR

Attorney General ST Burhanuddin (right), accompanied by the head of the Legal Information Center, Mukri, gives a press statement related to the handling and development of the investigation into alleged criminal acts involving financial management and investment fund management at PT Asuransi Jiwasraya at the Attorney General\'s Office in Jakarta on Wednesday (18/12/2019).

The SOEs Ministry can hold an immediate “beauty pageant” so it can appoint an appropriate management team or the aforementioned caretaker as designated by the OJK. Thousands of policyholders need certainty as to when their claims will be paid.

The eventual team that manages JS must be fully committed to implementing governance, risk management and compliance (GRC) to prevent similar cases from happening again. In the case of defaulting on payouts, JS must conduct governance and management risk management in addition to ALM.

In 2013-2018, companies as big as JS did not have a dedicated technical director so the president director filled the role, a duality that caused a proven conflict of interest. The company also did not have director that specifically handled compliance and risk management. Unusually, the general director and the human resource director saw to these tasks. Thus, the second line in the “three lines of defense” concept clearly did not work as it should.

This was due to the absence of a technical director that should take charge of compliance and risk management. Since the president director cannot fulfill this function, a director was appointed. For some reason, the authorities allowed this omission to drag on until early 2018, when the company finally failed to fulfill its claims payment obligations. As a result, third parties were suspected of being involved in the company’s investment activities.

The eventual team that manages JS must be fully committed to implementing governance.

This is really worrying. Corruption or fraud in the company that involved trillions of rupiah was done as easily as turning a hand.

There is no need to sign an integrity pact or any pact, just swear upon the holy book that, "If you commit corruption, cheating, or enrich yourself or others, you are prepared to be cursed by God Almighty". Well, who would dare?

Long-term solution for protecting policyholders

The last paragraph of the section above can be used as a model so that integrity in full commitment to GRC is ingrained at all levels of the company. However, beyond this "manmade disaster" is still the risk that life insurance companies and the public could experience default as a result of external factors.

Long-term solutions like those already well established in the banking sector can be applied to the insurance sector by expanding the scope of the existing deposit guarantee schemes (LPS) to form a deposit insurance institution. To realize this, the LPS Law needs to be amended so that the guarantee also covers insurance products, as well as mutual fund products if necessary. This long-term solution will increase confidence in the insurance industry, like in the banking sector.

Guarantees for policyholders should have been established in October 2017 as mandated by the Insurance Law.

Hotbonar Sinaga, Former Jamsostek president director (2007-2012); member of the National Governance Policy Committee since 2004