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Viewing cable 07JAKARTA978, INDONESIA'S INSURANCE SECTOR STILL STRUGGLING
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| Reference ID | Created | Released | Classification | Origin |
|---|---|---|---|---|
| 07JAKARTA978 | 2007-04-05 01:13 | 2011-08-24 01:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Jakarta |
VZCZCXRO5339
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #0978/01 0950113
ZNR UUUUU ZZH
R 050113Z APR 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 4200
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHKO/AMEMBASSY TOKYO 0452
RUEHBJ/AMEMBASSY BEIJING 4028
RUEHBY/AMEMBASSY CANBERRA 0622
RUEHUL/AMEMBASSY SEOUL 4037
RUEAIIA/CIA WASHDC
UNCLAS SECTION 01 OF 07 JAKARTA 000978
SIPDIS
SIPDIS
SENSITIVE
AIDAC
DEPT FOR EAP/MTS AND EB/IFD/OMA
TREASURY FOR IA-SEARLS
SINGAPORE FOR TREASURY-BAKER
COMMERCE FOR 4430 - BERLINGUETTE
USTR FOR KATZ
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR FINEMAN
DEPARTMENT PASS EXIM BANK
DEPARTMENT PASS USTR
E.O. 12598: N/A
TAGS: EFIN EINV ECON PGOV KCOR ID
SUBJECT: INDONESIA'S INSURANCE SECTOR STILL STRUGGLING
¶1. (SBU) Summary. A decade after the financial crisis, Indonesia's
small insurance sector continues to suffer from weak regulation and
poor enforcement, inadequate training, low professional standards,
and insufficient capital. A few players dominate the sector, and
some small, non-transparent firms are insolvent. Industry insiders
say one of the largest life companies, Bumiputera 1912, with 9.7
million policyholders and $1 billion in assets, is currently
operating as a Ponzi scheme with an estimated $500 million in
liabilities above its equity. Though in poor financial shape, the
domestic industry has been resistant to reform and professional
training and certification for insurance underwriters has only
recently begun. Weak regulation and fallout from the bogus
bankruptcy cases against Manulife and Prudential have made for a
treacherous operating environment for foreign firms, and 14
international insurance companies in Indonesia closed their doors
from 2000-04. In July 2006, the Government of Indonesia (GOI) and
Bank Indonesia launched a policy package aimed at strengthening the
banking industry, non-bank institutions and capital markets by
resolving insolvent insurance firms, improving the quality and
effectiveness of insurance industry regulation, and subjecting
insurance company management to fit and proper tests. The World
Bank has recommended the GOI resolve weak and bankrupt firms,
improve the Ministry of Finance's (MOF) enforcement and regulatory
capacity, and launch a sustained education campaign to develop the
industry. Finance Minister Sri Mulyani Indrawati and foreign
industry representatives support these recommendations and are
searching for ways to implement them. This cable uses the exchange
rate of Rp 9090 per dollar. End Summary.
¶2. (U) Indonesia's insurance sector pre-dates independence in 1945
when most insurance companies were foreign-owned including some
founded by the Dutch. Asuransi Jiwa Bersama Bumiputera (or
Bumiputera 1912 for short), one of the largest, was created as a
mutual insurance company by a group of teachers in 1912 and remains
Indonesia's only mutual insurance company. As of December 2005,
there were 152 insurance companies in Indonesia, comprising 51 life
insurers and 97 non-life insurers.
----------------------------------
Table 1: Insurance Companies, 2005
----------------------------------
Life, State-Owned 1
Life, Private 34
Life, Joint-Venture 16
Non-Life, State-Owned 3
Non-Life, Private 75
Non-Life, Joint-Venture 19
Re-insurance 4
Total: 152
¶3. (U) Despite the considerable number of firms, the sector is small
and concentrated. In 2005, insurance sector assets were equivalent
to 2.8% of GDP and 4.1% of total financial sector assets.
Approximately 60% of these assets are concentrated in the ten
largest companies, while the ten smallest ones account for less than
1% of the market.
-------------------------------------------
Table 2: Assets and Liabilities - Overview
-------------------------------------------
Assets Liabilities
(in Rp trillion)
-------------------------------------------
Life 53.9 46.4
Non-life & 22.4 5.0
Reinsurance
-------------------------------------------
TOTAL 76.3 51.4
TOTAL
$billion $8.4 $5.7
JAKARTA 00000978 002 OF 007
Source: Ministry of Finance, 2005 data.
¶4. (U) A few players dominate both the life and the non-life
sectors. In the life sector, the top five companies have 53% of
market assets (see Table 3). In the non-life sector the top five
companies have 43% of the market by assets (See Table 4).
----------------------------------------
Table 3: Assets and Liabilities (Life)
----------------------------------------
Assets as of 2005 Liabilities
(in Rp trillion)
----------------------------------------
State-owned:
Jiwasraya 3.7 3.3
Private:
Bumiputera 1912 9.7 9.6
Sequis Life 2.8 2.4
Panin Life 2.6 0.8
Indolife
Pensiontama 2.2 1.8
Remaining 30 6.7 5.4
----------------------------------------
Subtotal 23.9 20.0
Joint Venture:
AIG Life 6.7 5.6
Manulife 4.7 4.3
Prudential 4.1 3.5
AIA Indonesia 3.6 3.2
Remaining 14 7.3 6.5
---------------------------------------
Subtotal 26.3 23.1
TOTAL 53.9 46.4
TOTAL $ billion $5.9 $5.1
------------------------------------------
Table 4: Assets and Liabilities (Non-Life)
------------------------------------------
Assets Liabilities
(in Rp trillion)
------------------------------------------
State-owned:
Jasindo 1.5 1.0
Kredit Indonesia 0.9 0.1
Ekspor Indonesia 0.6 0.1
--------------------------------------
Subtotal 2.9 1.2
Private:
Panin 2.2 0.1
Tugu Pratama 2.1 0.6
Astra Buana 2.0 1.4
ACA 1.3 0.5
Remaining 71 7.4 4.1
--------------------------------------
Subtotal 15.0 6.7
Subtotal
Joint Venture 3.3 1.6
TOTAL 21.2 9.5
TOTAL $ billion $2.3 $1.0
Source: Ministry of Finance, 2005.
JAKARTA 00000978 003 OF 007
Low Level of Insurance Penetration
----------------------------------
¶5. (U) In addition to a very low level of social security, insurance
penetration in Indonesia is small. Reasons for this include
Indonesia's low per capita income, a lack of public understanding of
insurance products, and a traditional cultural reliance on the
extended family for financial support. Finance Minister Mulyani
commented at a seminar in 2006, "My mother would say, 'Why do I need
a pension or insurance? I have six children.'" Mulyani doubted the
current generation of young people would relay on family in the same
way, however. Hasbullah Thabrany, Chairman of the National
Association of Health Insurance and Guarantee Management Experts
(PAMJAKI) said that the low penetration rate is due to the lack of
both education and interest. Despite several massive natural and
manmade disasters in Indonesia from 2004-2006, few insurance
companies were affected since so few people carry disaster or
property insurance.
----------------------------------------
Table 5: Insurance Penetration 2005
----------------------------------------
Country Insurance Premiums %GDP
(In $ Billions)
----------------------------------------
Indonesia 3.8 1.4
Malaysia 5.6 5.4
Thailand 4.9 3.5
ASEAN 24.3 3.4
Australia 40.4 8.0
Canada 59.2 6.8
Japan 479.1 10.8
OECD 2,709.8 9.0
Source: Indonesian Capital Markets and Non-Bank Financial
Institutions Supervisory Agency; Swiss RE; OECD.
Competition Growing Domestically
--------------------------------
¶6. (U) Despite weak enforcement and regulation, competition in the
insurance sector is getting stiffer. The World Bank estimates that
from 2000-05, assets and premiums in the life sector almost tripled.
In the non-life sector, assets increased about 75% and premiums by
about 90% over the same period. The World Bank projects premiums
could grow another 15-20% if GDP growth meets the GOI's projections
of around 6% in 2007. As in the banking business, with relatively
few new industrial customers, many insurance companies are targeting
property-owning wage earners with consumer products, competing by
offering low premium rates. An executive at a general insurance
company told us vehicle insurance premiums are sometimes discounted
by as much as 50%. However, the tight competition for a limited
customer base has translated into low premium growth over the last
couple of years. One international consultant told us "the last
thing you want is rapid growth in a sector which is in weak
financial condition and weakly regulated."
Weak Regulation and Enforcement
-------------------------------
¶7. (U) The Capital Markets and Financial Institutions Supervisory
Agency (BAPEPAM-LK), an agency under the Ministry of Finance, is
responsible for regulating and supervising the insurance sector.
However, the agency operates under a weak legal framework, the
Insurance Law of 1992, which established prudential regulations
while at the same time muddying responsibility for resolving
insolvent companies. The GOI took a major step in 1999 by launching
Regulation No. 63/1999 which significantly increased the minimum
paid-up capital requirements from Rp 3 billion ($330,000) to Rp 100
billion ($11 million) (Rp 200 billion or $22 million for
re-insurance). However, existing ones were "grandfathered" under
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the previous, lower capital requirement.
¶8. (SBU) According to many insurance industry insiders, years of
weak regulation and indifferent supervision have left Indonesia with
a number of insolvent domestic companies that may present a serious
risk to the sector. Numerous small insurers are under-capitalized
and unlikely to withstand stiffer market competition in the future.
While stricter capital requirements have been in place since 1999,
and the MOF has withdrawn the licenses of some small companies, none
have been closed. Insolvent insurers with licenses revoked,
continue to issue policies without penalty. An industry contact
told us that a bank certificate of deposit was sometimes used to
show the regulator that the insurer had the required minimum
capital, then cashed after the business approval was received. A
lengthy, 7.5 year audit cycle has allowed some insurers to operate
with very little scrutiny. "There is a lot of fiction in the
reported numbers," an industry contact noted. "It is pretty common
knowledge that most companies keep two sets of books." There is no
requirement for insurance companies to be rated, and ratings agency
Pefindo rates less than ten domestic insurers.
Resistance to Reform Among Domestic Insurers
--------------------------------------------
¶9. (SBU) Not surprisingly, Indonesia's domestic insurance companies
have proven resistant to reform. Lack of transparency about the
ownership of many small insurers has left it difficult to gauge the
true state of the sector. Some companies are owned or controlled by
influential Indonesians, including members of Parliament, who may
not be keen for regulatory reform. As the World Bank notes,
"international experience indicates that costs of resolution
increase consistently as a resolution decision is delayed."
¶10. (SBU) Another factor that has propped up an unreformed, domestic
industry is excessive international reinsurance capacity. Industry
sources told us that international reinsurers often offer local
companies very attractive terms that reduce the need for them to
follow best practices. The downside comes when there is a large
event which small domestic insurers cannot afford to cover, forcing
them to their international re-insurers. After the riots of 1998,
for example, international re-insurers took many months to decide
whether the riots were an "excluded event" or not. Although they
eventually paid, international joint venture companies paid claims
quickly and without difficulty.
Bumiputera 1912: Ticking Time Bomb?
-----------------------------------
¶11. (SBU) There is a consensus among expatriate insurance
professionals that the financial condition of Bumiputera 1912 is one
of the biggest risks facing Indonesia's insurance sector.
Bumiputera had 13.4% of the life insurance market's gross premiums
in 2005 (down from 38% in 1985), and remains the biggest life
company in terms of customer base. It has approximately 9.7 million
policyholders. The Ministry of Finance showed its assets of Rp 9.7
trillion ($1 billion) and liabilities of Rp 9.6 trillion ($1
billion) in 2005. However, a financial sector consultant and an
industry contact we spoke with estimate it currently has $500
million more in contractual liabilities than it has in assets, and
is, in reality, insolvent by both domestic and international
standards. The MOF was aware of Bumiputera's financial woes as far
back in 1999 when it enacted new capital requirements, and made an
exception for "mutual life insurance companies." Bumiputera is
Indonesia's only mutual life company. Then and now, Bumiputera's
millions of middle class policyholders represent an important
political force.
¶12. (SBU) "The GOI is losing sleep at night over Bumiputera," our
industry contact told us, "it is a ticking time bomb." Another
industry contact said "insurance companies should not be
pay-as-you-go," noting that Bumiputera is simply paying claims from
the premiums of new customers. The GOI is aware of Bumiputera's
problems, and has quietly approached several international insurance
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companies to purchase it. However, international insurers are
reluctant to do so unless they are held harmless for Bumiputera's
liabilities. Raden Pardede, the newly appointed chair of the
Executive Forum of the Financial Sector Stability Forum,
acknowledged that Bumiputera, "is absolutely a Ponzi scheme, but
hopefully will survive for now. It urgently needs restructuring, a
buyer or a rescue program." Despite the its weak condition, IMF
Senior Resident Representative Steven Schwarz told us he did not
think a collapse of Bumiputera would create contagion to the banking
sector. "There are not close linkages to the banks," he concluded.
Uneven Playing Field and Professional Gaps
------------------------------------------
¶13. (SBU) Regulations that protect weak companies at the expense of
good ones represent another challenge for the sector. An example is
a 2004 Ministry of Finance "Local Priority Treaty" that endorses
domestic retention of premiums. The decree restricts the flow of
premiums overseas to international reinsurers, and requires that 10%
of the reinsurance business stay with domestically incorporated
companies. International companies call this policy an example of
the "good propping up the bad" and say it disregards the basic
fiduciary responsibility of an insurance company.
¶14. (SBU) A lack of professional training of many insurance company
employees also hampers the sector. While Indonesia has regulations
mandating training and certification of insurance employees, the
industry does not comply. Companies are also mandated to spend 5%
of personnel budgets on training and education, but unlike in the
banking industry, the MOF has not enforced this policy in the
insurance sector. One organization is addressing the professional
gap. The Institute of Risk Management and Insurance (STIMRA) in a
joint initiative with the Ministries of Finance and Education along
with donors, is now providing the first professional training for
the insurance sector. STIMRA began a one-year accelerated program
for individuals employed in the sector, and will graduate its first
class of 32 in March 2007 with a Bachelor's in Insurance and Risk
Management. Three and four-year diploma programs will see their
first graduates in 2009 and 2010, and graduates are likely to
receive multiple offers from an industry with a dearth of skilled
employees. STIMRA will offer a certification program in
underwriting personal auto, personal home-owners' and commercial
property policies will, also a first for Indonesia.
Slow Steps to Reform
--------------------
¶15. (SBU) The Ministry of Finance is aware of problems in the
insurance industry and is moving slowly to reform the sector.
Responding to criticism of weak regulation and supervision, it is
working on an "insurance industry blueprint". In May 2006, MOF
appointed a dynamic, hard-working, new Director for Insurance, Isa
Rachmarwata, an experienced actuary who trained in Canada. The
Coordinating Ministry for the Economy tasked Rachmarwata with a
report on the financial condition of domestic insurance companies by
the end of 2006. Our MOF contacts tell us the report is complete,
and awaiting review by the Finance Minister. However, a Ministry of
Finance consultant cautioned us that the new Director's job is
"massive." "He is starting to do what hasn't been done in twenty
years."
¶16. (U) In July 2006, the GOI and Bank Indonesia launched a policy
package aimed at strengthening the banking industry, non-bank
institutions and capital markets to boost the economy. The package
includes steps aimed at strengthening the capital structures of
non-bank financial institutions, managing insolvent institutions and
introducing good governance principles. However, international
insurers remain concerned that there have been inadequate industry
consultations in developing needed reforms. The five main policy
actions in the plan are:
A) Resolution of insolvent insurance firms by creation of a clear
exit strategy.
JAKARTA 00000978 006 OF 007
B) Improving the quality and effectiveness of insurance industry
regulation and supervision through amendments and new guidelines.
C) Protection of policy holders via a mediation agency.
D) Improvement of the quality of director's and commissioners in the
insurance industry through fit-and-proper test of directors and
commissioners of insurance companies (10% completed by the end of
2006).
E) Improving tax treatment of the insurance industry by recognition
that claims paid by life insurers are tax deductible.
¶17. (U) The GOI's reform priorities largely track with World Bank
recommendations for reforming the sector. The Bank has put forward
three major reform priorities to the Ministry of Finance:
- Rationalize the industry including resolving weak and bankrupt
firms.
- Improve the enforcement and regulatory capacity of the Ministry of
Finance as supervisory authority.
- A sustained education campaign to develop and promote the
industry.
Legacy of Manulife and Prudential Cases
---------------------------------------
¶18. (SBU) The 2002 Manulife case and 2004 Prudential case continue
to cast a shadow over foreign participation in the insurance sector.
In the former case, the Commercial Court granted a bankruptcy
petition against a local subsidiary of Canadian insurance firm
Manulife Financial Corporation, even though the MOF declared the
subsidiary fully solvent. The judges ruled Manulife Indonesia
bankrupt for not paying a 1999 dividend, forcing the company to shut
down operations for six days. The Supreme Court later overturned
the ruling after facing strong protests from the international
business community and the Canadian government. In a similar case
two years later, a commercial court in Jakarta declared Prudential's
local unit bankrupt after a former consultant to the company accused
the insurer of not paying his fees. A court-appointed receiver
ordered the London-based insurer to suspend its local operations.
The foreign business community heavily criticized this case as
severely damaging to the investment climate.
¶19. (SBU) Industry and business representatives, working with the
Ministry of Finance and Parliament, submitted an amendment to close
the loophole in the bankruptcy law. In September 2004, Parliament
passed Bankruptcy Law No. 37/2004, replacing Law No. 4/1998. The
amended law requires prior approval by the Ministry of Finance
before a court can declare an insurance firm bankrupt. It also
specifies that only the Finance Minister can file a bankruptcy
petition against insurance companies in commercial courts. (The
attorney general and the central bank are the only bodies permitted
to file petitions against banks.) Nevertheless, the judicial
uncertainty revealed in these cases damaged the investment climate
and spooked foreign companies. From 2000-2004, 14 international
insurance companies in Indonesia closed their doors.
¶20. (SBU) Comment. The MOF appears to be beginning to address some
of the insurance sector's problems with help from STIMRA, donors and
the insurance associations. The World Bank told us that after
delivering its recommendations for non-bank financial institutions
publicly in January, it met for over five hours with Finance
Minister Mulyani to discuss them in detail. International industry
players are pushing for an independent "Blue Ribbon Commission" to
look at the condition of the insurance industry, and believe the
sector needs the same level of scrutiny that the banking sector
received after the 1997-98 financial crisis. However, the
challenges facing the sector are daunting, and resolving them may
take years. Despite Bumiputera's troubled state, our contacts agree
JAKARTA 00000978 007 OF 007
this politically sensitive case must be managed carefully so as not
to create a crisis of confidence. The MOF will also need to proceed
carefully given powerful interests in domestic insurance companies.
The good news is that Mulyani has shown, by her appointment of a new
insurance director, her careful attention to World Bank and industry
recommendations, and the inclusion of an insurance reform component
in the financial sector reform package, that she is committed to
improving the sector.
HEFFERN