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Indonesia Insurance Sector Dangerously Close to Imploding
Trouble at two firms may signal wider problems for industry, government

The disaster suffered last week by two state-backed Indonesian insurance companies has its roots in a largely corrupt and unregulated financial sector dominated by Suharto-era tycoons who have lost millions of dollars through financial mismanagement, raising concerns that widespread insurance failures may follow.
Five suspects have been arrested in the failure of Insuransi Jiwasraya including two tycoons, Benny Tjokrosaputro, better known as Benny Tjokro, and Heru Hidayat. The others are finance director Hary Prasetyo, managing director Hendrisman Rahim and former head of investment Syahmirwan. Benny and Heru have been accused of selling off their stocks, which collapsed Jiwasraya’s investment value.
The apprehensions over the insurance sector reflect bigger concerns over Indonesia’s big state-owned enterprise sector, which is believed to be in serious trouble with almost-insurmountable debts, although accounts are opaque at best. Garuda Indonesia, the state flag-carrier, is said to be among those in financial crisis.
Growing nervousness over the SOE sector, which has become a topic among political circles in Jakarta, led President Joko Widodo to appoint Erick Thohir, the billionaire chairman of the media conglomerate Mahaka Group and former owner of the Inter Milan and DC United football clubs, to the SOE portfolio. In an effort to calm markets, Thohir recently said a plan is being formulated to prop up one of the companies although there is no government support mechanism to do so and no regulatory guarantee for investors despite the firm’s state backing.
Anyway, Asuransi Jiwasraya and Angkatan Bersenjata Republik Indonesia, or Asabri, are both believed to be in deep financial trouble – with Jiwasraya believed to be nearly US$2 billion in debt — after failing to pay out customers’ policies after they came due. Asabri is a state insurer and pension fund manager for military and police personnel and Defense Ministry employees. The firm said Rp10 trillion in losses from disastrous stock investments are only temporary and won’t affect its ability to meet customer obligations. Thohir issued a statement in support, saying Asabri’s cash flow hasn’t been affected.
The two insurers are believed to have used customers’ funds to invest in so-called “pump-and-dump” stocks – named for the practice of artificially inflating share prices through fraudulent practices, then dumping them on other unsuspecting investors in quick sales. With Indonesia’s share market seesawing wildly through 2019 and with the economy faltering, the strategy appears not to have worked.
It’s uncertain how many other small domestic insurance companies are in similar shape, but there are concerns that, as one analyst put it, Jiwasraya’s failure could have a systemic impact on the financial services industry. In 2014, five insurers including Bakrie Life, Asuransi Jiewa Tugu Mandiri and AA General Assurance were found not to meet capital requirements in 2014. In 2016, Bumiputera, a mutual insurance company owned by its 6.7 million civil servant policyholders, also collapsed.
“We are now at a point where this could all blow up,” said an executive with longtime experience in the Indonesian insurance sector. Indonesians, he said, have not traditionally turned to insurance products, instead depended on family connections that grew out of village life to support them in time of crisis.
But as a middle class has begun to grow, especially among government employees, that has begun to change, with so-called unit-linked products, or ULIPs, which enable the holder to combine an investment portfolio in a range of other investments, becoming increasingly popular not just as insurance but as investment vehicles.
Few of those buying the products, our sources tell us, know what they are getting, believing especially that state-enterprise-backed agencies are secure. In this case, they aren’t. Most of the domestic insurance companies got their licenses because of connections. The non-banking sector is only about 20 percent of the overall financial sector, and it has been an area that has been allowed to fester on its own.
The insurers are begging for state bailouts to stave off catastrophe. However, Thohir must tread carefully given the history of bailout of Indonesia’s banking sector in 1998 and 2008. Billions were poured into failed banks, including the notorious Bank Century, which was rumored to be the repository of hundreds of millions of dollars in slush funds for then-President Susilo Bambang Yudhoyono’s Democrat Party, only to see the money stolen by bank officials nearly as fast as it went in and whisked away to Singapore, whose banks still hold the funds to this day.
Thohir is said to be contemplating possibly forming a holding company capitalized with Rp2 trillion (US$146.5 million) for state insurers to salvage Jiwasraya. Given the controversy over the bank bailout and the allegations of irregularities, plus the lack of a regulatory guarantee mechanism, as with the bank deposit guarantee fund established in the wake of the 2008 crisis, a direct bailout is unlikely. That, however, depends on the clout of the tycoons. In past years the government has repeatedly rescued ailing concerns, particularly those of the Bakrie family conglomerate.
Several multinational firms operate in Indonesia including AIA Zurich, Cigna and Prudential, among others. They are governed by international standards. But local firms operate on a different wavelength, with the entire field characterized by lack of commitment to global best practices that, one source said, stems as much as anything from the country’s stubbornly prevailing political nationalism and antagonism to outside advice. In 2018, only 18 supervisors were in charge of overseeing 137 insurance companies, according to a Bisnis Indonesia article.
In 2013, Indonesia’s Financial Services Authority (OJK) was assigned to oversee all banks and non-bank financial institutions, including insurance and reinsurance companies. The OJK is also responsible for issuing insurance business licenses for insurance companies, reinsurance companies and other insurance business companies.
But, the industry sources told Asia Sentinel, “basically little has changed.” At the time of the Bumiputera crisis, on realization of the firm’s insolvency, the regulators actually weren’t sure how to deal with a mutual insurance firm. It appears that the risk-based capital regulation put in effect years ago, provides a lot less of a guarantee for security, since control and enforcement under the OJK are a major issue.
Indonesia, it seems, must restructure or replace its regulatory oversight to seriously conform with international best practices. Without that, insurance will not have a chance to make its needed contribution to the country’s economy and the security of society at large.