Insurance firms must merge to boost capacities

JAKARTA (JP): Indonesian insurance companies should follow the banking industry's merger move to boost their underwriting capacities, a senior insurance executive has said.

Insurance council chairman Moenir B. Sjamsuddin said Saturday the country's 200 insurance firms, the largest number in Asia, should be squeezed into only five giant operations to become more competitive in the upcoming free market era.

He said the current economic crisis provided the momentum for the restructuring, adding that several private national banks had announced plans to merge.

He likened the insurance industry to a sibling of the banking industry. "If an elder brother gets the flu, he's likely to infect the younger brother with the virus," he was quoted by Antara as saying. Most major Indonesian banks have insurance ventures.

He said that part of the restructuring process would include a new requirement to increase minimum paid-up capital to between Rp 500 billion and Rp 1 trillion.

At present, life insurance operations in Indonesia are required to have a minimum capital of Rp 2 billion, while general insurance Rp 3 billion.

Calls for the insurance industry to merge and increase capital are not new.

Despite the industry's fast growth over the past three years, the country's insurance service deficit level has been swelling. Together with shipping services, it is one of the major contributors to Indonesia's widening current account deficit.

According to the council, the deficit jumped from Rp 211.34 billion in 1990 to Rp 1.2 trillion in 1996.

Industry analysts attributed the dire situation to the lack of capital. Premiums and commissions had gone to foreign firms because local ones could not underwrite large insurance risks, said Munir.

Analysts said several constraints had discouraged the industry from merging. This included fears of losing management control, and the complex technical and administration process involved.

Publicly listed insurance firms would also face difficulties when merging, as the capital market authority stipulates that listed firms give priority to existing shareholders every time they offer new shares.

Another discouragement is that a merger would also result in an extra income tax on revalued assets. "The additional tax does not improve the liquidity of the new merged company," said one analyst, adding that the government should provide incentives to ease such a burden.

Many Indonesian insurance firms are also believed to be technically insolvent because investment allocation is larger than capital reserves.

Without adequate cash reserves, insurance firms may fail to pay a clients claim immediately.

Insurance consultants reported that Indonesian insurance companies have a tendency to invest heavily in property and bank time deposits. And since last year, there has been a greater allocation of stocks.

With the property sector heading for a crash and an anemic stock market, the picture for the domestic insurance industry would be not so different from the banking sector, which has seen confidence decline following the closure of 16 banks in November and the sharp depreciation of the rupiah against the U.S. dollar. (08).