Business in life insurance is facing heavy challenges in Indonesia with financial problem and difficulty in attracting investors. The root of the problem is decline in interest rate and business uncertainty amid low purchasing power of the people and the fact that insurance is not quite popular in the country.
The rupiah fall lately against the U.S. dollar worsened the condition. The amount of premium and income from investment decline. Total amount of premium was only around 1.25%-166% of the country' Gross Domestic Product (GDP) in the 1997-2001 period. In 2002, premium was Rp 11.3 trillion or an increase of 9.7% from the previous year. In 2003, insurance industry grew by an average of 30% as against 70% in 1997.
The collapse of property business and liquidation of many banks contributed to the difficulties faced by insurance companies as the impact was bad for investment in certain sectors. Fortunately income in interest on deposits helped maintain growth.
The rupiah fall against the dollar caused an increase in costs burdening the business sector including insurance. Meanwhile, limited capital makes it difficult for insurance companies to cover large insurance forcing them to seek reinsurance with foreign partners.
Low economic growth and an increase in unemployment rate further weakened the purchasing power of the people in general. Based on official data, only 16% of the country's population of 215 million hold life insurance polish.
Life insurance companies compete not only among themselves but also against banks and mutual funds because of the absence of clear limits of business areas among the financial companies.
For example, the products of link unit and mutual fund are almost the same with market. The different lies in the regulators. Mutual fund is under the Capital Market Supervisory Body (Bapepam) and link unit is under the Insurance Directorate of the Finance Ministry. In other countries the regulators of the two products is one.
Slow growth
The law No. 2 in 1992 said life insurance companies offer service in meeting risk of death. Therefore, life insurance companies could operate in life insurance, health insurance, accident insurance and found and manage pension fund.
Life insurance offers an alternative for the people to invest. Life insurance generally has a longer term than loss insurance. With longer protection of 5 to 30 years its investment has longer term such as in property, direct participation. Bonds and mortgage loan.
Despite the fact that most life insurance companies are facing liquidity problem, there has been no life insurance company declared bankrupt
or liquidated as the case with many banks. In addition, despite incentive offered by the government for merger no life insurance companies have comply with the call for merger.
Based on data at the Indonesian Insurance Council (DAI), by the end of 2003, the country had 55 life insurance companies including a state-owned company, 33 Indonesian private companies and 21 foreign joint ventures. The companies had around 80,000 agents altogether. Business in life insurance in the country grew sluggishly. The number of companies did not change much from 53 in 1999 including a state-owned company, 40 Indonesian private companies and 12 joint ventures.
In the past five years, the number of joint venture life insurance companies grew to from 12 to 21 units. On the contrary the number of Indonesian private companies declined from 40 to 33. The decline was likely caused by financial difficulty to resume business. Some of them were taken over by foreign investors.
Performance declines:--Business restriction imposed on some companies
The vulnerability of life insurance industry is indicated by the growing number of companies included in the list of Business Activity Restriction from year to year. The restriction was imposed on companies having a Risk Based Capital (RBC) of less than 100% as set by the finance ministry in 2003. The minimum RBC was raised to 120 in 2004.
Sufficient amount of capital is needed to cover risks of losses as a result of deviation in the management of assets and obligations. Therefore, financially powerful, companies will survive amid the situation such as prevailing at present in the country, but small companies will most likely collapse without additional capital.
Legal uncertainty is also a factor slowing the growth of life insurance companies in the country. For example, the finance ministry allows...
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