Competition drives insurance premiums too low

JAKARTA (JP): The Insurance Council of Indonesia (DAI) has expressed concern over the unhealthy competition among insurance companies in the domestic market that has caused the premiums for general insurance to fall to an unreasonable level.

"The premium fees are so low that it could endanger the whole insurance industry," said chairman of DAI Munir Sjamsoeddin earlier this week.

He reminded that insurance companies selling policies at low premiums could easily fall into failure and be unable to meet future claims.

He said the average insurance premium to cover the risk of fire for a building in a stable area in Jakarta, for example, currently stood at only Rp 3,500 a year for every Rp 10 million claim value, compared to the 1998 average of Rp 10,000 a year.

"Such low rates are alarming ... the industry badly needs to reverse the downward trend," he told a press conference, which was also attended by Firdaus Djaelani, the Director of Insurance at the Directorate General of Financial Institution at the Ministry of Finance and a few insurance brokers.

Joining the chorus, Firdaus warned that the low insurance premium rate was only beneficial to clients in the short term as they purchased the insurance with less money, but in the meantime had to effectively face much greater risk of insurance companies failing to pay the claim due to insufficient reserves.

"The government is concerned about this. We will in fact conduct a random check on insurance companies operating here to ask them how they base their low premium rates," he said, adding that his office would warn people not to be easily enticed by insurance companies that offer unreasonable premiums.

Firdaus explained that in setting the premium fees, an insurance company had to base its numbers on the statistical reports that describe the risk and loss profile of every group of situations and insured object.

In the past, up to 1988, the government set the minimum premiums to be adopted by every insurance company operating here, but that practice was abolished as it breached the spirit of free market, said Firdaus.

Then after the abolishment of the compulsory minimum premium rate, DAI took over and introduced its own compulsory minimum rate, but it too was abolished 10 years later, in 1998.

Since then the premium rate has moved continuously downward due to unhealthy competition. The economic crisis complicated the problem.

Another DAI executive, Frans Sahusilawane, attributed the continuous lowering of insurance premium fees to the too high spirit of competition among insurance firms, being coupled by the zero demand growth for new insurance policy due to the economic crisis.

He also said the growing number of foreign insurance companies operating in Indonesia had helped make the tight competition even worse.

"We have to correct the current situation with a measure that is workable and acceptable," he said. (udi)