Indonesia’s insurance industry, little understood and often treated as the orphan of the financial services sector, is in trouble again with state-owned Asuransi Jiwasraya and the military’s Asuransi Sosial Angkatan Bersenjata Republik Indonesia (ASABRI) unable to pay out on policies and investments worth nearly US$2 billion.
Insurance experts say the two cases, which appear to be interlinked, underline once again the need for stricter Finance Ministry supervision of the country’s powerful state-owned enterprises (SOEs) and a revamp of the Financial Services Authority (OJK), the industry’s independent regulatory body.
“This whole thing is a catastrophe, not only for those who are involved directly, but for the already hardly-existing commitment to institutional protection in general,” says one former insurance executive. “The absence of insurance DNA within the Indonesian environment is ultimately what has got us here.”
“Given its low penetration, insurance does not rank as anything of importance to the ministry,” he says. “This is also reflected in its insurance directorate where there is clearly no expertise or interest in applying global standards to supervision.”
As it is, the problem of poor oversight predates 2011, when the newly established OJK took over responsibility for the insurance sector from Bank Indonesia and the Finance Ministry. Says one senior banker: “The OJK is the last in a line of compliant and complicit regulators.”
Measured as total premiums relative to GDP, insurance market penetration in Indonesia is less than 2%, compared to 5% in Thailand and 4.3% in Malaysia. But, as with its retail market, that belies the country’s enormous potential, offered by a large and increasingly affluent and urbanized population.
The lingering controversy from the 2008 bailout of privately-owned Bank Century rules out any similar government rescue plan for Asuransi Jiwasraya, although Parliament is more sympathetic to helping out the customers of a state firm.
More than 400 of them are local Korean residents who, lured by unusually high 9% interest rates, were encouraged to buy Asuransi Jiwasraya bancassurance products sold by the local branches of two Korean banks. Their claims have not been paid since October 2018.
The Attorney-General’s Office (AGO) has detained former Asuransi Jiwasraya president-director Handrisman Rashim and four other suspects on corruption charges, including Benny Tjokrosaputro, 52, the president-director of publicly-listed real estate company PT Hanson International, and Heru Hidayat, 46, president commissioner of PT Trada Alam Minera, another listed company engaged in sea transportation and mining.
Controversy is nothing new for Tjokrosaputro, a veteran stock market player dating back to his late teens. Since 2017, he has also been the plaintiff in a long-running $1.1 billion legal battle with American investment bank Goldman Sachs International over an allegedly unlawful share transaction, which has yet to be resolved.
Because it falls under the Defense Ministry, ASABRI’s predicament is less clear, with Political, Legal and Security Affairs Coordinating Minister Muhamad Mahfud and State Enterprise Minister Erick Thohir both tip-toeing around the issue of malfeasance and insisting the insurer’s financial condition remains stable.
But only days after the AGO had decided there was insufficient evidence for a corruption inquiry, the National Police announced it had opened an investigation into possible corruption, noting that police officers make up about two-thirds of ASABRI’s 940,000 customers.
With travel bans in place on many of Asuransi Jiwasraya’s former managers, it will likely take an exhaustive search by the watchdog Financial Transaction Reports and Analysis Center (PPATK) to trace any suspicious flow of funds that might point to criminal behavior.
Even then, as shown by the jailing last year of former Pertamina state oil company president-director Karen Agustiawan, proof of what is known as “losses to the state” are often sufficient to win a corruption conviction without evidence of personal enrichment.
Asuransi Jiwasraya and ASABRI both appear to be the victims of a prolonged slowdown in the share market. “The trouble begins when share prices begin to tumble,” says one market analyst. “They’ve always been able to get out of it in the past, but not this time. Things are coming home to roost.”
Although the AGO began its investigation last year after Asuransi Jiwasraya failed to pay out $879.3 million on maturing policies, the firm’s troubles actually go back as far as 2006, when it recorded negative equity of $226 million. That negative figure rose to $404 million two years later.
Moreover, the Supreme Audit Agency (BPK) has revealed that ASABRI, which manages the social insurance and pension funds of the police, armed forces and Defense Ministry, is facing losses of at least $709.2 million. Auditors warn the figure could go higher to $1.1 billion.
And that’s not all. Weighed down by a deficit of $1.6 billion, mutual insurance firm AJB Bumiputra 1912 (AJBB) also continues to struggle, announcing last month that its revenue target from liquidating some of its property holdings has met only half of the firm’s total outstanding claims of $283 million.
Two years ago, a group of industry professionals, including a former chief executive of AJBB, sent a letter to newly-appointed OJK chairman Wimboh Santoso repeating their mounting concern over what they believed was the impending collapse of the mutual insurance giant.
Although the crisis was averted for the moment, there were fears then that the failure of a pending restructuring plan would undermine confidence in an industry one expert has called a “big swamp”, with many of the country’s 140 insurance firms under-capitalized — and ostensibly unsupervised.
Addressing the annual Financial Services Industry Conference in Jakarta last week, President Joko Widodo referred to those same contagion fears, warning that unless there were reforms in the non-banking sector a resulting lack of trust could undermine the economy.
Industry sources say Asuransi Jiwasraya executives met with OJK regulators several times over the past three years, promising to work out a plan to address its financial problems before the March 2019 elections. But nothing came of it.
One of the new Cabinet’s busiest members, the shirt-sleeved Thohir has unveiled plans to form a holding company with projected capital of up to $200 million to lead Asuransi Jiwasraya’s $2.3 billion rescue effort – the amount required to lift its risk-based capital ratio to the mandated 120%.
Thohir said the additional funding would come from the sale of the insurer’s stock and from bringing in four state enterprises as strategic partners, among them Bank Tabungan Negara, pawnshop operator Pegadaian, railway company Kareta Api, and Telkomsel, Indonesia’s largest cellular provider.
“The government can’t bail them out just like that, otherwise it would look too much like Bank Century,” says one analyst, pointing to the controversial $582 million rescue mission that led to the resignation of then-finance minister Sri Mulyani Indrawati in 2010.
A well-regarded reformer with plenty of political enemies, Indrawati, 57, subsequently spent six years as a managing director of the World Bank before the newly-elected Widodo persuaded her to return to a country that had turned its back on her.
While the State Enterprise Ministry is in charge of the management of SOEs, which have become an increasingly dominant force in the economy over the past five years, the OJK’s role as an independent financial overseer of the non-banking sector is now being called into question.
“The biggest portion of the blame rests with the OJK,” said Tempo magazine in an editorial. “It failed to smell a rat in the early stages and reveal suspected misconduct in Jiwasraya. Yet since 2016 audits have pointed to a series of anomalies in (its) investment books.”
In his presentation to the financial services conference, Santoso acknowledged the industry required “more attention” from the OJK, including long-pending reforms aimed at improving governance, risk management and investment performance reporting.
Critics say the OJK has to take institutional protection more seriously, with the experience and power to perform up to international standards. As one put it: “It must give up the nationalistic tendencies that ridicule global best practices.”
Meanwhile, despite the headlines, Asuransi Jiwasraya – a former Dutch company whose legacy dates back to 1859 — is performing normally, with its nationwide network racking up 3,000 new policies a month, according to industry insiders.
“The people who are insured probably have no idea what they bought and, as Indonesians, they still have in their minds the connection to the state enterprise system,” says one executive. “What can possibly go wrong, they must be asking, if the state is providing the guarantees?”