Insurance firms suffer lower profit
Evi Mariani, The Jakarta Post, Jakarta
The country's insurance industry will experience a lower profit this year amid declining domestic interest rates, chairman of the Indonesian Insurance Council (DAI) Hotbonar Sinaga said on Thursday.
To mitigate the impact on the bottom line, insurance companies have started to shift their investment from bank time deposits to other investment options like bonds or mutual funds.
He said that while at the end of 2002, insurance firms put half of their money in banks, that amount has now declined to around 40 percent.
"I think insurance companies should cut the proportion of bank deposits to 30 percent by the end of the year," he told reporters during an award ceremony held by Investor business magazine.
The central bank has been aggressively cutting its benchmark rate during the past year amid a relatively benign inflation environment. The move is partly aimed at pushing banks to lower their lending rates to make loans more affordable to the corporate sector. The interest rate on one-month Bank Indonesia SBI promissory notes is now at 9.17 percent, compared to more than 13 percent earlier in the year. There has been expectation that the SBI rate could go down further to around 8 percent by the end of this year.
The lower benchmark rate has pushed down the rate on bank time deposits.
Hotbonar said that if insurance companies, particularly life insurers, failed to quickly switch their investment in banks they could go bankrupt.
He said that life insurance companies had promised policy holders a certain amount of "benefits," which could become higher than the interest revenue gained from deposits amid the weakening interest rate environment.
"The insurance firms may face negative spread," Hotbonar said. "A similar thing happened in Japan and some large companies went bankrupt."
A DAI report showed that the profit growth of life insurance companies in 2002 jumped 450 percent to Rp 188.1 billion (US$22.6 million) from Rp 41.2 billion in 2001.
The financial report of the first semester of this year is not available yet.