The insurance industry is fundamentally an industry that sells\npromises of protection when risks truly materialise, which only holds\nvalue if the insurance company has sufficient capital resilience to\nfulfil them. Amid the increasingly uncertain global economic\ndynamics\u2014from financial market volatility and geopolitical conflicts to\nrising disaster risks\u2014the resilience of the insurance industry becomes\never more crucial.<\/p>\n
Over the past two decades, the Risk Based Capital (RBC) system has\nserved as the primary indicator of the financial health of insurance\ncompanies in Indonesia. The current RBC is essentially a ratio between\nthe company\u2019s solvency level and the minimum capital requirement\nstipulated by the regulator. Simply put, the RBC formula is the\npercentage of available capital compared to the risk-based minimum\ncapital requirement.<\/p>\n
Regulations require insurance companies to maintain a minimum RBC\nratio of 120%. This means the company must have capital at least 1.2\ntimes the risk-based minimum capital requirement to ensure it has\nsufficient capital to face potential claims.<\/p>\n
In the current model, capital requirements are calculated from\nseveral main risk components: underwriting risk, arising from the\npossibility of claims exceeding estimates; asset\/investment risk,\narising from losses due to declines in investment values; credit risk,\nwhich is default by counterparties such as reinsurers or bond issuers;\nand asset-liability mismatch risk, which is the mismatch between\ninvestment assets and policy liabilities. This model is relatively\nsimple and aggregate. That is, risk calculations are done in broad\ncategories without accounting for risk dynamics in great detail. This\nmodel has been quite effective in maintaining industry stability over\nthe past two decades, but it is beginning to show limitations when\nfacing increasingly complex modern risks.<\/p>\n
Industry developments demand a more advanced approach. The complexity\nof risks faced by insurance companies today is far greater than two\ndecades ago.<\/p>\n
Changes in financial reporting standards through PSAK 117 on\ninsurance contracts also require a solvency approach more aligned with\ninternational practices. Therefore, the Financial Services Authority is\npreparing an RBC reform towards a New RBC framework that is more\nsensitive to the company\u2019s risk profile.<\/p>\n
New RBC is a development of a solvency framework that is more\nrisk-sensitive and forward-looking. In this model, capital requirements\nare not only calculated based on broad risk categories but also consider\nthe company\u2019s risk profile in a more detailed and dynamic manner.<\/p>\n
The main objective of New RBC is to more realistically reflect the\ncompany\u2019s risks, improve the quality of risk management in the industry,\nand align Indonesia\u2019s solvency standards with global practices.<\/p>\n
Indonesia is not the only country updating its insurance solvency\nframework.<\/p>\n
Global Practices<\/p>\n
In Europe, the Solvency II system has been the standard for\nsupervising the insurance industry since 2016. This framework requires\ncompanies to calculate capital requirements based on very detailed risk\nexposures, while strengthening risk management governance. In Asia,\nsimilar reforms have also occurred. Singapore\u2019s financial authority\nthrough the Monetary Authority of Singapore has implemented the RBC 2\nFramework Singapore, which updates the solvency system to be more\nresponsive to market risks and investment volatility. Countries like\nJapan and South Korea have also adjusted their solvency models to better\nalign with global practices.<\/p>\n
As a result, the insurance industries in those countries have become\nmore transparent, more disciplined in risk management, and enjoy higher\nconfidence from international financial markets. The reform being\nundertaken by Indonesia through New RBC is essentially on the same\npath.<\/p>\n
In this context, the Financial Services Authority\u2019s step to conduct a\ntrial implementation of New Risk Based Capital (New RBC) should be\nviewed as an important momentum for industry reform. This policy is not\nmerely changing the way capital adequacy is calculated for insurance\ncompanies. More than that, it marks a paradigm shift in how the industry\nunderstands and manages risks.<\/p>\n
As an initial stage, OJK will conduct trials on insurance and\nreinsurance companies with equity above Rp5 trillion. This phased\napproach provides room for the regulator and industry to assess the\npolicy\u2019s impact before wider implementation.<\/p>\n
The implementation of New RBC has far broader implications than just\nchanging the capital calculation formula. To date, many insurance\ncompanies have viewed RBC as an indicator of regulatory compliance. As\nlong as the solvency ratio is above the minimum threshold, the company\nis considered safe. However, New RBC encourages a change in approach.\nCompanies\u2019 capital requirements will be calculated based on more\ndetailed risk exposures, from underwriting risk, credit risk, market\nrisk, to operational risk. Thus, companies\u2019 business strategies will be\nmore directly linked to risk management and capital structure.<\/p>\n
This paradigm pushes for a transformation from mere regulatory\ncompliance to risk intelligence. Insurance companies cannot just meet\nregulatory requirements. They must be able to understand risk patterns\nmore deeply and use them as the basis for business decision-making.<\/p>\n
Although promising significant long-term benefits, the implementation\nof New RBC also presents no small challenges for the industry. The first\nis data readiness. The more complex solvency model requires much better\nquality data on underwriting, claims, and investments. The second is\navailability<\/p>", "url": "https:\/\/jawawa.id\/newsitem\/new-rbc-and-the-future-of-the-insurance-industry-1774425085", "image": "" }, "sponsor": "Okusi Associates", "sponsor_url": "https:\/\/okusiassociates.com" }