Domestic insurers undergo facelift for wider coverage

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.