The Urgency of Removing Habitual Distrust in the Insurance Industry
Professor of STIE Perbanas Surabaya
The successive failures of several insurance companies have raised public concern over the reliability of the insurance industry in Indonesia. The case of failure to pay Life Insurance with Bumiputra (AJB Bumiputra 1912), Bakrie Life, PT Asuransi Jiwasraya (Persero) has caused trauma to policyholders.
Moreover, the issue of PT Asabri (Persero) 's failure adds to public trauma to insurance companies, especially in relation to the adequacy aspect of insurance consumer protection.
The most dramatic in the community is actually the case of AJB Bumiputra 1912 because this is the only mutual plan insurance company, which is a company owned by members and has been established since Indonesia was not yet independent. His name is also very representative of the natives. The customer base is also very Indonesian, namely from rural and urban areas. What is fantastic is the estimated number of policyholders to reach nearly 7 million customers.
Currently, millions of customers are anxiously waiting for their overdue claims to be disbursed. Likewise, Jiwasraya faced solvency problems because the amount of liabilities exceeded its assets so that it was technically bankrupt. The successive failure of insurance companies is certainly very concerning and it is necessary to look for an elegant solution. There are at least three aspects that need to be fulfilled in its completion.
First, in the context of policyholder customers, they cannot be harmed. This means that the payment of claims must be given at least a number of policies that have been paid.
Second, justice, that is, those who become managers must be investigated whether the investment mismanagement is purely due to economic conditions or due to corruption. The case of the Jamsostek board of directors who received a kick back on investment proves that many insurance directors are naughty in holding this mandate.
Third, shareholders or the government must be responsible because the board of directors is elected by them. Of course this does not apply to AJB Bumiputra, but still those who are members of the Member Representative Body (BPA) are held accountable. Moreover, the majority of BPA members are government officials as well.
At this point we do not need to argue at length. We need to emulate how China was able to build a 1,000-bed Coronavirus hospital from an empty building in two days.
Now what is needed is action to save this industry and save public confidence in insurance services. Apart from halal and haram conflicts over insurance services, this financial product is still needed and is one of the pillars of a country's economic development.
From the perspective of the larger national interest, the World Bank's view on this issue is very appropriate. Indonesia must maintain the credibility of the financial system by overcoming the problem of weakness in the insurance industry. Like finding a young child in a motorcycle accident, a doctor must not find fault as a driver but must first save his life.
To be honest, insurance is a complex industry, both in terms of risk, pricing of guarantees (premiums), to the market structure. In contrast to the banking industry whose systems and business models are relatively standardized and easy to observe and supervise, the insurance industry is the opposite. Hence what is very important is how the strategic decision-making or governance process is carried out. Unfortunately this is a complex area that not even the Financial Services Authority (OJK) has the means to get into. Only the results of these decisions can be observed in terms of performance. Therefore, in the future OJK must develop an early detection mechanism for irregularities in the strategic decisions of the directors. This is important so that directors are not reckless in making strategic decisions that will endanger the company and the industry as a whole.
Asymmetric information is still a central issue in the supervision of financial institutions, including insurance. If directors have the malicious intention of deceiving financial performance, insurance companies are the easiest place to camouflage themselves through creative accounting practices. As it is known, insurance contracts, especially life insurance, are quite long term and there is no risk of sudden withdrawal of funds such as in banking. Moreover, there is a reinsurance facility which is quite comprehensive. This means that liquidity risk is relatively easy to predict. Another problem is when the investment is not carried out carefully.
Jiwasraya's failure was mainly due to Jiwasraya's failure to pay customers related to the Saving Plan investment product. This is a life insurance plus investment product known as unit-linked. This product is offered on a massive scale due to cooperation with a number of banks as selling agents.
When this product fails, it will more or less impact the bank's reputation as an agent. What actually happened was underwriting risk, where in fact Jiwasraya did not have sufficient expertise to manage large amounts of funds in a fast time. Moreover, there are many directors who are shortsighted by investing their funds in instruments whose risk-return is not appropriate.
The situation is exacerbated by the fact that some of the capital is in the form of illiquid and unproductive office assets purchased at prices above market prices.
Responding to this problematic condition of the insurance industry, OJK as the authority must act quickly to organize this industry by compiling the Architecture of the Indonesian Insurance Industry. This is important to ensure how this industry will work and contribute to national development while at the same time contributing to maintaining the stability and integrity of the national financial system.
Several members of the OJK Board of Commissioners in the selection process at the DPR have actually made this promise. Hopefully this successive case in the insurance company will trigger more concrete steps to make it happen.
OJK should not panic about the discourse of returning the supervision of financial institutions to Bank Indonesia (BI). Rationally, Bank Indonesia (BI) is no longer interested because supervision of financial institutions has a very high reputation risk. In contrast to overcoming inflation and the exchange rate, which are the determining variables of which are very many, the failure of supervision of financial institutions is seen as the failure of only one institution, namely the supervisor.
The public does not understand that there are many variables that make a financial institution fail, including the relationship between directors and political forces that make financial institutions become "cash cows" for certain interests.
The government as soon as possible provides bailouts to Jiwasraya in the form of liquidity injections to pay customers. The Minister for State-Owned Enterprises (BUMN) must act quickly and not be bothered by stalling this issue. This is important to maintain public confidence in the insurance industry and the financial industry as a whole. This problem should not be allowed to drag on because the impact will be bad. It is also important to show that the government is present in maintaining financial system stability.
Remember, the depth of our financial system (financial system depeening) is very low compared to several countries in the Asean region. Failure to resolve will be traumatic for the insurance industry.
The government and authorities have a role to play in removing habitual distrust on the financial and insurance industry in particular. Currently, there are too many discourses and news that increasingly make the habitual distrust of insurance in society flourish. Habitual distrust is a situation that works in the subconscious mind of the majority of people not to believe in something. The establishment of the Deposit Insurance Corporation (LPS) is part of an effort to eradicate habitual distrust in the community. Paying or bailing out Jiwasraya and Bumiputra's obligations will make a real difference. The insurance industry needs a fundamental refresher in terms of governance (governing), investment regulations and capital. OJK needs to learn a lot in regulating and supervising as well as directing this industry to become an asset for national economic development.
Currently, the insurance industry is seen as a burden to national development. Excessive investment of policy funds for high-risk investments must be strictly regulated. Only competent companies are allowed to issue complex insurance products. Insurance capital provisions must be revamped to cover future liabilities, not just current positions. This means that comprehensive and revolutionary steps are needed in order to build a reliable and useful national insurance industry.
*) STIE Perbanas Surabaya
This article has been published on Investor.id with the title "Urgensi Menghapus Habitual Distrust pada Industri Asuransi"
On Tuesday, February 4, 2020