Foreigners increase capital participation in insurance industry

By Rikza Abdullah

JAKARTA (JP): Substantial decreases in the profitability of insurance businesses in Indonesia over the past few years have encouraged local companies to invite their foreign partners to increase capital participation, thereby promoting the latter's higher roles in the domestic insurance industry.

Bank Niaga, for example, has invited its U.S. partner, Cigna International, to finance the doubling of PT Asuransi Niaga Cigna Life's paid-up capital from Rp 10 billion to Rp 20 billion and then renamed the joint life insurance venture to PT Asuransi Cigna.

The venture reportedly suffered a pretax deficit of Rp 2.3 billion in 1999.

"PT Asuransi Cigna is now 80 percent owned by Cigna International and 20 percent by Bank Niaga," Asuransi Cigna's finance director David Batubara was quoted by InfoBank magazine as saying recently.

John Hancock International of the United States has also increased its share ownership in PT Asuransi Jiwa Bumiputera John Hancock from 70 percent to 94.9 percent and renamed the life insurance venture to PT Asuransi Jiwa John Hancock in June. The company was jointly established in 1984 by John Hancock and mutual insurance firm Asuransi Jiwa Bersama Bumiputera 1912, which then held a 30 percent share.

Communications officer Onkie Budidarma of Asuransi Jiwa John Hancock told The Jakarta Post on Thursday that the share increase indicated John Hancock's strong commitment to improving its business activities in the country.

He said the joint venture experienced a deficit of Rp 12.48 billion in 1999 and another Rp 9.58 billion in 2000.

Despite the increase in foreign partners' share ownership, some insurance companies have been or will be merged. PT Prudential BancBali Life, for instance, is reportedly planning to acquire the shares of PT Asuransi Jiwa Allstate, which suffered a deficit of Rp 13.93 billion in 1999.

PT Asuransi Guardian Royal Exchange Indonesia (AGREI) has been merged with PT Asuransi AXA Indonesia, a joint venture which is 80 percent owned by AXA Group of France and 20 percent by Kalbe Group of Indonesia, because the French group has acquired AGREI's principal company Guardian Royal Exchange International of Britain.

The ING Group's acquisition of Aetna International in the United States has also brought about the merger of PT Aetna Life Indonesia with PT ING Life Indonesia.

The latest annual report of the Indonesian Insurance Council (DAI) shows the profitability of Indonesia's insurance industry has decreased steadily in the past few years due to higher claims payments compared to premiums revenue.

The report shows that claims payments by the country's insurance companies increased by 44 percent from Rp 2.45 billion in 1995 and to Rp 3.53 billion in 1996, by 38.9 percent to Rp 4.91 billion in 1997 and by 172.8 percent to Rp 13.4 billion in 1998.

In 1999, because claims for retirement programs were no longer recorded as insurance claims, the claims payments decreased by 23.8 percent to Rp 10.21 billion.

Meanwhile, the gross premiums revenue of the companies increased by 17.4 percent from Rp 7.31 billion in 1995 to Rp 8.59 billion in 1996, by 21.3 percent to Rp 10.42 billion in 1997 and by 41.1 percent to Rp 14.71 billion in 1998, but declined by 5.9 percent to Rp 13.84 billion in 1999. Thus, the ratio of the claims payments against the premiums revenue increased from 33.6 percent in 1995 to 36.9 percent in 1996, to 47.1 percent in 1997 and to 91.1 percent in 1998 before declining to 73.3 percent in 1999.

The total number of insurance companies operating in Indonesia, according to the report, increased from 159 in 1995 to 163 in 1996, to 177 in 1997 and to 180 in 1998 and 1999. By July of 2000, the number deceased to 178 -- 62 operating in life insurance, 107 in general insurance, two in social insurance and three in a special insurance for civil servants and members of the armed forces and police.

The report says companies operating in life insurance gained a collective net profit of Rp 138.3 billion in 1997 but they suffered a collective deficit of Rp 1.54 trillion in 1998 and another Rp 45.1 billion in 1999, while reinsurance companies enjoyed a collective profit of Rp 16.7 billion in 1997 but suffered a collective deficit of Rp 21.4 billion in 1998 before gaining a profit of Rp 11.9 billion in 1999.

General insurance firms have shown a steady business and gained a collective profit of Rp 1.19 trillion in 1997, Rp 1.59 trillion in 1998 and Rp 1.09 trillion in 1999. The report did not present profit/loss tables for the other insurance companies.

According to InfoBank's research bureau, out of the 52 life insurance companies that made their balance sheets for 1999 available to the public, 22 suffered operational deficits that year, while 16 out of the 102 general insurance firms that published their annual reports experienced losses.

DAI chairman Bahder Munir Sjamsoeddin has often urged the council's members, particularly those finding difficulties in competing against their foreign counterparts, to increase their capital through mergers and improve their management. Increasing capital and improving management are important because Indonesia will have to open its market when the ASEAN Free Trade Agreement (AFTA) comes into effect in 2003.

Indonesian insurance companies will also need to improve their efficiency if they want to compete against foreign firms eying the local market. The fact that the number of people employed in the insurance industry increased by 43.4 percent from 25,619 in 1998 to 36,731 in 1999, that the number of individual insurance agents increased by 75.2 percent from 36,672 to 64,250 and that the number of institutional agents increased by 4.2 percent from 335 to 349, while, in the same period, profitability was on a downward trend, indicate that the industry is getting less efficient.

The low efficiency is also indicated by the domination of a few companies in the sector. Out of the country's 180 insurance companies, only eight managed to make a profit of more than Rp 50 billion each in 1999.

The low efficiency and the domination of the industry by a few firms have encouraged Indonesian insurance companies to practice unfair competition -- marked by underpricing the premium rates -- and caused a decline in the quality of their services.

According to DAI's report, the council in 1998 received complaints from 119 policyholders protesting the slow processing of claims payments. Out of the complaints, only 73 was settled in the same year.

In 1999, the council received complaints from another 99 policyholders and only 36 percent of the complaints was settled in the same year.

During the first seven months of the year 2000, the number of complaints reached 76, of which only 16 was settled in the same period.