Industry Structure Less Balanced

KOMPAS/PRIYOMBODO

A security guard looks out of a window displaying the PT Asuransi Jiwasraya logo at the office of the state-owned insurance company on Thursday (9/1/2020) in Jakarta. A State Audit Agency (BPK) investigation in 2018 discovered indications that corporate mismanagement at the insurer had cause losses to both the company and the state. The case is being investigated by the Attorney General’s Office.

JAKARTA, KOMPAS — Problems that surround life insurance companies, such as PT Asuransi Jiwasraya, PT Asabri, and Life Insurance with Bumiputera, are not only triggered by poor governance and weak supervision, but also because of the unbalanced structure of the insurance industry. In the future, the insurance industry must focus more on the protection business than on investment.

Jiwasraya, Bumiputera and Asabri allegedly suffered large investment losses. As a result, Jiwasraya failed to pay customer claims of Rp 12.4 trillion, while Bumiputera’s unpaid claims reached Rp 9.6 trillion by the end of 2019. Life insurance companies tend to invest their customers\' premium funds in high-risk instruments in order to pursue large returns. Insurance companies are looking for high investment returns in order to be able to return customers\' investment funds with large returns in order to be attractive. This makes insurance companies more dominant in the investment business rather than protection.

"Investment is not actually the nature of the insurance industry business. However, many insurance companies are more interested in playing investments rather than focusing on working on the protection business line," said insurance observer Irvan Rahardjo earlier this week in Jakarta.

Indications that insurance companies are more focused on investment than on protection are reflected in the comparison of unit-link premiums and traditional insurance premiums. Based on data from the Financial Services Authority (OJK), the total premium incomes collected by the life insurance industry until the third quarter of 2019 were recorded at Rp 171.83 trillion. Of that amount, unit link premiums dominated with portions reaching 63 percent

KOMPAS/Lasti Kurnia

A security guard looks out of a window displaying the PT Asuransi Jiwasraya logo at the office of the state-owned insurance company on Thursday (9/1/2020) in Jakarta. A State Audit Agency (BPK) investigation in 2018 discovered indications that corporate mismanagement at the insurer had cause losses to both the company and the state. The case is being investigated by the Attorney General’s Office.

Unit link is an insurance product that is linked to investment. Customers pay a premium that is intended for protection as well as investment, with the investment portion usually being greater. When due, customers can withdraw investment funds along with the promised yields. Meanwhile, traditional products are purely for protection. This means that if there are no claims, customers cannot withdraw their funds.

According to Irvan, this situation indicates that the insurance industry relies heavily on the investment business as a source of profits. This makes the structure of the insurance industry less balanced considering that the expertise of insurance companies actually lies in the protection business, not investment.

The JS Saving Plan product that Jiwasraya sells is a type of unit link with yields promised to customers ranging from 9 to 13 percent per year, far higher than the interest on deposits and government securities.

The unit link product was originally intended to attract people to the life insurance industry. That was because people were considered less interested in buying just traditional insurance products.

Even now, life insurance penetration is only 6.5 percent of the total population of Indonesia, very small compared to neighboring countries. The executive director of the Indonesian Life Insurance Association, Togar Pasaribu, said the future challenge related to unit-link products was caution in managing investment.

KOMPAS/Lasti Kurnia

A security guard looks out of a window displaying the PT Asuransi Jiwasraya logo at the office of the state-owned insurance company on Thursday (9/1/2020) in Jakarta. A State Audit Agency (BPK) investigation in 2018 discovered indications that corporate mismanagement at the insurer had cause losses to both the company and the state. The case is being investigated by the Attorney General’s Office.

Chairman of the Board of Commissioners of the OJK Wimboh Santoso said his party would reform the nonbank financial industry (IKNB), including insurance.

The three main focuses of the OJK in implementing IKNB reform are strengthening risk-based supervision, which includes the prudential and governance aspects of risk management; institutional reform, which includes the determination of supervision status; and infrastructure reform, which includes information and reporting systems to the OJK.

In addition to reforming supervision and industrial governance, Wimboh added, the IKNB ecosystem also needed to be addressed so that harmonization of the way of working with other institutions could run well. (DIM/KRN/ERK/NTA)