Jiwasraya’s Systemic Risks

State-owned insurer PT Asuransi Jiwasraya is in the public spotlight after its failure to pay a savings plan product. One of the questions raised as a result concerned its potential systemic risks.

Supreme Audit Agency (BPK) chairman Agung Firman Sampurna said Jiwasraya\'s financial management problems were massive and had the potential to cause systemic risks (8/1/2020). The BPK chairman did not explain the basis of his statement. It is estimated that the complexity of the problem and the amount of funds being audited by the BPK will be the main consideration.

The word “systemic” is mentioned in Law No. 9/2016 concerning the prevention and management of financial system crises (PPKSK Law). Therefore, the Financial System Stability Committee (KSSK) in a press conference on Jan. 22 cited the PPKSK Law in defining the systemic risks that could trigger a financial system crisis.

This law defines a financial system crisis as one that has failed to carry out its functions and roles effectively and efficiently, as indicated by the deterioration of various economic and financial indicators. The definition is in line with that of the Financial Stability Board (FSB), which defines systemic risks as a disruption to financial services caused by a partial or total malfunction of the financial system and a significant impact on the economy.

KOMPAS/FRANSISKUS WISNU WARDHANA DANY

Customers of PT Asuransi Jiwasraya (Persero) are waiting in the lobby of Wisma Mulia, South Jakarta, to meet representatives of the Financial Services Authority, Thursday (6/2/2020). The customer asks for certainty in the payment of the policy claim.

Only banking

The FSB introduced the systematically important financial institutions (SIFIs) concept to assess how vital or crucial the systemic risk potential of a financial service institution (LJK) in a financial system is.

The criteria being used include: (i) the size of assets, capital and liabilities; (ii) network area or transaction complexity of the financial services; (iii) availability of substitute services (substitutability); and (iv) linkages with other financial sectors. Given these criteria, level not only banks are included in the SIFI\'s category at the global but also insurance companies such as AIG, Allianz, Axa and Prudential.

During the drafting of the PPKSK Law, the House of Representatives and the government agreed that in the Indonesian financial system, only banks could pose systemic risks. Referring to the criteria made by the FSB, the Financial Services Authority (OJK), which took part in drafting the bill, predicted that in the next 10 to 20 years, there will be no domestic insurance companies in the SIFI category. Therefore, what is regulated in the PPKSK Law is only systemically important banks (SIBs).

For example, for insurance companies, the problem resolution refers to Law No. 40/2014 concerning Insurance.

In addition, mechanisms for regulating, supervising and resolving problems for non-bank financial institutions (LJKs) are adequately regulated in specific laws in their respective sectors. For example, for insurance companies, the problem resolution refers to Law No. 40/2014 concerning Insurance.

Records show cases of insurance company bailout for reasons of systemic impact are somewhat rare.

This is because the insurance company business model in general does not have a contagion effect on other financial institutions.

In the banking sector, it is a common practice to place interbank funds through the interbank money market. If one bank fails, the failure can spread to another bank. In the insurance sector, what is commonly done is a reinsurance treaty, which is a risk sharing agreement between insurance companies. The obligations to pay damages to other insurers only arise if there is a claim from the policyholder so that the contagion effect is relatively limited.

Not necessarily systemic

The difference in the structure of the insurance balance with the bank also influences its systemic impact. The liabilities of life insurance companies are dominated by long-term obligations to policyholders. Meanwhile, on the asset side, premiums from customers are invested in short-term securities instruments.

If customers withdraw large-scale funds (bank run), the bank can immediately collapse because it cannot immediately disburse the funds that have been channeled as credit.

Conversely in banking, liabilities are dominated by short-term deposits. On the asset side, these customer deposits are channeled for long-term credit. This condition causes maturity mismatch. If customers withdraw large-scale funds (bank run), the bank can immediately collapse because it cannot immediately disburse the funds that have been channeled as credit.

These different characteristics explain why Jiwasraya may not have a systemic impact, like Century Bank, although the handling costs are estimated to be greater.

In 2008, when various macroeconomic indicators worsened to a scale that it was too risky to close a bank, Deposit Insurance Corporation (LPS) data at that time showed that of the banking sector’s total third-party funds (DPK) of Rp 1.600 quadrillion, only Rp 1 quadrillion was guaranteed by LPS.

At the same time, several countries, including Singapore and Australia, had implemented full guarantees for deposits in their respective countries. What if the owners of the Rp 600 trillion fund that is not guaranteed by LPS withdraw large funds or moves the funds abroad (flight to quality)? If this happens, a banking crisis like 1997-1998 could happen.

President Joko “Jokowi” Widodo\'s priority program related to infrastructure development, was ideally supported by long-term funding sources from within the country.

Although the Jiwasraya issue is not expected to trigger a financial system crisis, that does not mean it can be considered trivial. Insurance companies and pension funds have a strategic role in developing the financial markets and achieving long-term development targets. President Joko “Jokowi” Widodo\'s priority program related to infrastructure development, was ideally supported by long-term funding sources from within the country.

In addition, the capital market and bond market are difficult to develop without the support of strong domestic institutional investors. Dependence on foreign investors has made our financial markets vulnerable to global shocks and volatility. Therefore, the resolution of the Jiwasraya problem and a number of other financial institutions must be carried out quickly and comprehensively. It is hoped that people\'s trust in the financial services sector will soon recover.

Deni Ridwan, Finance Ministry director of risk management and law