Competition drives insurance premiums too low

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)