Consolidating to survive the overcrowded industry

Consolidating to survive the overcrowded industry

Rikza Abdullah, Contributor, Jakarta

Consolidating to survive the overcrowded industry

Indonesia's life and health insurance companies are taking
massive consolidation measures to enable them to survive the
competition in the overcrowded life insurance market.

Some of them are strengthening their basis of operations by
increasing their equities in a bid to raise their risk-based
capital (RBC), and others have merged with stronger firms.

Asuransi Jiwa Bersama Bumiputra 1912, the only mutual
insurance company in the country, for example, increased its
equity by 42 percent to Rp 159.29 billion (about US$17.7 million)
as of the end of 2001, from Rp 112.25 billion the year earlier.

The company also raised its reserves for future claims by 8.6
percent to Rp 4.9 trillion from Rp 4.51 trillion. The company did
not reveal its RBC but reported an increase in net profit to Rp
15.13 billion in 2001 from Rp 8.54 billion in 2000, despite the
fresh capital injection.

PT Asuransi Jiwa Manulife Indonesia took similar steps by
raising its equity by almost 36 percent to Rp 285.54 billion from
Rp 210 billion. This raised its RBC to 175.16 percent as of the
end of 2001. It also increased its reserves for future claims by
23.8 percent to Rp 1.65 trillion as of December 2001, from Rp
1.33 trillion as of December 2000.

And the company's net profit shot up to Rp 75.54 billion last
year from Rp 46.77 billion the previous year.

PT Asuransi Allianz Life Indonesia raised its equity by 160.6
percent to Rp 78.17 billion as of last December, from Rp 29.99
billion as of the end of 2001. And it increased its reserves for
future claims by 76.9 percent to Rp 273.73 billion from Rp 154.74
billion, but at the cost of its profitability.

However, its RBC was still low, at 47 percent as of last
December. Its operational losses surged to Rp 97 billion last
year from Rp 44.37 billion in 2002, even though its income from
investments increased to Rp 20.11 billion from Rp 4.71 billion.

PT Asuransi Kesehatan Indonesia, the only company specializing
in health insurance, increased its equity by 32.8 percent to Rp
510.8 billion as of last December, from Rp 384.65 billion the
year earlier. And it raised its reserves for future claims by
88.9 percent to Rp 480.64 billion from Rp 254.38 billion, while
its net profit rose 380.3 percent to Rp 143.61 billion in 2001
from Rp 29.9 billion in 2000. This company did not publish its
RBC.

Such measures to increase equity are in line with the
government's policy of requiring insurance firms in the country
to increase their RBCs to a minimum of 75 percent by the end of
2002, to 100 percent by the end of 2003 and to 120 percent by the
end of 2004. The government, with Government Regulation No.
63/1999, has also tightened the requirements for new companies to
enter the country's insurance industry. It now requires companies
to have a minimum paid-up capital of Rp 100 billion for insurers
and Rp 200 billion for reinsurers. By comparison, the government
previously required new life insurance companies to have a paid-
up capital of only Rp 2 billion, and Rp 3 billion for new general
insurance companies.

The new requirements are seen as appropriate for protecting
insurance clients, because many of the country's insurance
companies, particularly those specializing in life insurance, are
suffering from operational losses. The high capital base is also
needed to enable the companies to face the increased competition,
especially with the implementation of the ASEAN Free Trade
Agreement (AFTA).

AFTA, which will be fully implemented in 2003, will provide
companies from within the ASEAN region greater freedom to operate
or offer services in Indonesia.

Since the opening of Indonesia's insurance industry to foreign
investors in 1988, the life insurance industry has been dominated
by foreign joint ventures. At present there are 20 joint
ventures, but their assets exceed 40 percent of the total assets
held by all of the country's 60 life insurance firms.

According to companies' annual financial reports, collected by
a research team at Investor magazine, of the 54 life insurance
firms that published their annual reports in the mass media, 29
or 54 percent suffered operational deficits in 2001, while the
other 25 recorded a total profit of Rp 403 billion. The remaining
six life insurers did not publish their annual reports.

Four life insurance companies are now facing the possibility
of being liquidated by the end of this year if they fail to
improve their financial condition. The four companies are PT
Asuransi Jiwa Berkah Harta Sentosa, PT Asuransi Jiwa Buana Putra,
PT Asuransi Namura Tata Life and PT Nabasa Life.

The first company, which suffered a deficit of Rp 1.61 billion
last year, held a negative net worth of Rp 16.05 billion as of
the end of 2001. The other three failed to publish their
financial reports.

Some life insurance companies have strengthened their
operations through mergers. PT Asuransi Jiwa Principal Indonesia,
for example, merged with Asuransi Jiwa Manulife in September
2001. In 1997, Asuransi Jiwa Manulife acquired PT AMP Panin Life,
and it acquired PT Ongko Life in 1998.

PT ING Life Insurance and PT Aetna Life reached an agreement
in July 2001 to merge themselves into PT ING Aetna Life
Indonesia.

The Ministry of Finance's director of insurance, Firdaus
Djaelani, said recently that the life insurance industry, which
enjoyed 30 percent growth in 2001, had the opportunity to improve
its performance in the future, particularly when the country
recovered from the prolonged economic crisis.

Industry executives said that in spite of the economic crisis,
life insurance companies would be able to increase the sales of
their services if they introduced innovative products and
educated the public about the importance of insurance coverage.
Such education is seen as vital because the number of
policyholders -- only about 30 million -- is minuscule when
compared to the country's total population of about 210 million.

Firdaus said he was sure the insurance industry would get
stronger by 2004, when each of the insurance companies had a
minimum RBC of 120 percent. By that year, the supervision of the
insurance industry should have already been transferred from the
Ministry of Finance to the newly established Financial Sector
Authority Institution.