Insurance firms may switch to stocks as bank guarantee ends

Insurance firms may switch to stocks as bank guarantee ends

Fitri Wulandari, The Jakarta Post, Jakarta

The government's plan to phase out its bank guarantee program
will likely push insurance companies to increase their investment
exposure in bonds or in the stock market rather than in bank time
deposits as investments, an industry expert says.

"Placing money in banks would have the same risk like in other
investments ... so gradually, insurance companies would invest
more in the stock market or bonds," Indonesian Insurance Council
(DAI) chairman Hotbonar Sinaga told The Jakarta Post over the
weekend.

With the higher risk and the current declining trend in
interest rates, bank time deposits would become less attractive
to insurance companies, he said.

The government is planning to gradually terminate the blanket
guarantee on bank deposits and claims starting early next year.
Under the plan, time deposits worth more than Rp 5 billion would
no longer be eligible for the blanket guarantee. And starting
February 2004, the blanket guarantee facility would be completely
scrapped, but the government would continue to protect small
depositors (funds worth Rp 100 million and less) by introducing a
new insurance deposit scheme.

The blanket guarantee scheme was initiated in 1998 to instill
confidence in the banking sector. Under the scheme, the
government covers all of the banks' obligations, including
depositors' money, if they are closed down. But the blanket
facility is very costly to the cash-strapped government and
creates "moral hazards" among banks.

The termination plan, however, has raised concern among
insurance companies which have put their money mostly in banks as
the investment was considered to be less risky than investment in
stocks.

According to the Ministry of Finance, total investments made
by the insurance industry in 2000 was Rp 32 trillion, up 10
percent from the previous year's total of Rp 29.2 trillion.

Of the total, 59 percent went to bank time deposits and
savings, followed by private placement, and investment in bonds.

An insurance company here is restricted from investing more
than 20 percent of its funds in one single bank. In stock market
investment, an insurance firm can only put up to 20 percent of
its money in one single listed company. The same rule applies
with investment in bonds.

Hotbonar, however, said that while investing in bank time
deposits and savings would become less desirable, non-life
insurance firms would still put priority in time deposit as it
suited their short-term funding needs to pay claims.