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.