Domestic insurers undergo facelift for wider coverage

By Devi M. Asmarani

JAKARTA (JP): It was arguably a good and bad year for Indonesia in 1998.

Major changes in the political scene gave hope that the nation was heading toward increased democracy, triggered by the resignation of president Soeharto on May 21 after 32 years in power.

But the year was also marred by a series of tragedies.

Riots, looting, brutal ethnic and religious clashes, the revelation of military violence toward civilians, growing crime rates, to name just a few -- and all the while the economy remained in the doldrums.

Insurance, especially general insurance or what is known as risk insurance, is one of the sectors greatly affected by the radical tides.

In the months following the notorious riots several days before Soeharto's resignation, the insurance industry has undergone a face-lift to adapt to ongoing changes in the political and social climate.

"It is an extraordinary time for the general insurance business," acknowledged one industry executive.

Extraordinary in the sense that in a time of economic crisis -- when buying a costly insurance policy could rank low on priorities -- risk insurance companies have been swamped by demand.

How could it be?

Policy premium rates have more than doubled in over six months, while the crisis has shrunk the incomes of most Indonesians.

And what about insurance clients, supposedly traumatized and discouraged by last year's clamor over unpaid claims from the May unrest?

There are several ways to justify flourishing demand for risk insurance policies.

The two main ones are simply that insuring safety is now considered by many essential ("better safe than sorry" has never been truer than now), and that there is, after all, a guarantee that this time no policyholder would be left unpaid should widespread unrest on the scale of the May riots erupt again.

Malicious damage

All this is thanks to the recently revised clause in the insurance policy which enables greater risk coverage than what was known as the riots, strike, and malicious damage (RSMD) clause.

The revisions are called the 4.1A and 4.1B clauses, and each differs in the extent of its coverage.

Casting technical details aside, you demand an explanation in simple English: what is the assurance that you will get the value of your losses back?

There may not be a complete assurance, but at least the new clauses give more protection than their predecessors.

The new system was endorsed by the Insurance Council of Indonesia (DAI) last December to improve the RSMD clause.

The latter triggered disputes over payment for damage sustained in the May riots. Foreign reinsurers initially argued the unrest was politically motivated, and thus uncovered under the clause, and refused to honor their contracts with the local insurance companies.

DAI's objective was to create clear-cut definitions over the nature of the unrest for the benefit of policyholders, insurance companies and their reinsurers.

The 4.1A covers riots -- and looting occurring during the riots -- strikes, lockouts, malicious acts and preventive acts, which are translated as "a legitimate authority to prevent or suppress the occurrence of any of insured perils or to minimize the consequences of such perils".

The 4.1B covers damage caused by all of the above plus terrorism, sabotage, civil commotion, popular uprisings and revolution without the use of firearms, and subversive acts.

It excludes popular uprisings and revolution with the use of firearms, rebellion, military power, invasion, civil war, war, and hostilities or looting, except when occurring during riots or civil commotion.

But it is feared that how the new clause differentiates between the events could lead to more disputes.

According to the revised clause, civil commotions constitute a large number of people gathering to disturb the peace with violence and a chain of destruction of many properties.

Civil commotion

During a civil commotion, there must be a cessation of more than one half of the normal commercial and public activity such as businesses, schools and public transportation in one city for 24 consecutive hours at the least.

Popular uprising is an uprising of a majority of the people in the country's capital, or in three or more provincial capitals within 12 days, demanding a change in the government, de jure or de facto.

DAI also considers it open resistance against the government, providing it does not amount to a rebellion.

There is a downside to the new clause in terms of pricing.

Policyholders would likely pay an average of three times higher for the 4.1B coverage than for the 4.1A coverage.

Under the new system, the premium rates are divided by types of property and a location's vulnerability to riots.

It divides Indonesia into three zones of X,Y and Z, with X being areas highly sensitive to unrest, covering all of Java, North Sumatra, Aceh and East Timor.

Y comprises Irian Jaya, West Kalimantan, South Kalimantan, East Kalimantan, Lampung, South Sulawesi and South Sumatra. Z covers the remainder of the country.

The highest annual rate at 11 per mill (per thousand) is, naturally, for the 4.1B coverage located in X Zone.

It applies to the first and highest risk category of department stores, supermarkets, shopping centers, staple food shops and warehouses, car dealerships, night entertainment establishments, and service and fuel stations.

The second category includes hotels, restaurants, office and multistory car parks, garment and shoe factories, non-staple food shops and warehouses, chain stores, tobacco, cigar and cigarettes manufacturers and beauty salons.

The third category includes movie theaters, assembly rooms and concert halls, pharmacies, radio and television stations, textile mills, laundry, bakeries and biscuit works, processed food factories and edible fats and oils producers.

If you want to insure your property, be it a house or a store, you should by now decide whether to get the 4.1A or 4.1B,

Keep in mind, however, that not all insurance companies endorse this revised clause because they could not afford to cover the risk.

And, as always, read the fine print before signing that insurance contract.