Insurance firms must merge to boost capacities

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).