Local insurance firms urged to increase capital

JAKARTA (JP): The government should require general insurance firms to increase their capital so they can underwrite large projects and reduce the deficit in the balance of payments services account, an industry executive said Tuesday.

General insurer PT Asuransi Central Asia president Teddy Hailamash said Tuesday the insurance service deficit would become larger unless the government took actions to strengthen local insurance firms' capital structure.

"Net insurance retention by local insurance firms was very small because they did not have much capital. They reinsured most of their risks to foreign reinsurance firms," Teddy said.

Indonesian Council of Insurance data shows the deficit in current account insurance services had increased from Rp 211.34 billion in 1990 to Rp 282.5 billion in 1991, Rp 353.85 billion in 1992, Rp 398.74 billion in 1993, Rp 456.70 billion in 1994 and Rp 826.15 billion in 1995.

Premium levels, commissions and claims paid by local general insurance firms to foreign reinsurance firms caused the deficit rise.

Mutual life insurance firm Bumiputra 1912 president Suratno Hadisuwito said the current account insurance services deficit was mainly because of general insurance firms, not life insurance firms.

"In the life insurance industry, we take all premiums. We never reinsure our risks to other firms, even local insurers," Suratno said.

Teddy said local general insurance firms did not have enough capital to cover all risks.

The insurance business has increased quickly, but the local industry's capacity to cover the risks has been relatively stagnant.

"Ten to five years ago, a US$10 million obligation was already a large policy to close for an insurance firm. And the insurer could cover all the risks by itself," Teddy said.

"But now, the obligations have increased so fast. A $10 million project is nothing. You even have billion dollar projects. And it is impossible for an insurance firm with a capital of only Rp 3 billion (US$1.25) to cover all risks of such a huge project."

The minimum authorized capital for a general insurance firm is Rp 3 billion while for life insurance firms it is Rp 2 billion.

A general insurance firm may close a policy for any project, no matter how big, but the risk it covers is limited to only 10 percent of its capital.

So many local general insurance firms prefer to act as insurance brokers rather than insurance underwriters. This is why local underwriting revenue is small.

It is almost impossible to stop local insurance firms reinsuring their risks to foreign reinsurance firms because they do not have the capacity to cover the risks.

Teddy said several local firms, especially those participating in the Inter-Company Agreement, often shared the risk on certain projects.

"However, if their capital remains very small, they cannot, even through a consortium, underwrite all risks by themselves. They must spread the risks to foreign reinsurance firms. Otherwise, they are highly vulnerable to insolvency when the claims come," Teddy said.

Ministry of Finance data shows that as of last September only five of Indonesia's 104 general insurance and reinsurance firms have authorized capital of over Rp 100 billion.

They were PT Asuransi Kredit Indonesia with Rp 253.3 billion capital, PT Asuransi Ekspor Indonesia with Rp 225.9 billion, PT Jasa Raharja with Rp 181.4 billion, PT Panin Insurance with Rp 140 billion and PT Asuransi Jasa Indonesia with Rp 122.8 billion.

Four have less than the statutory minimum of Rp 3 billion capital. They are PT Asuransi Ganesa Danamas with Rp 1.89 billion, PT Marunnu Mario Asuransi with Rp 2.8 billion, PT Sagita Sarana Raharja with Rp 2.2 billion and PT Asuransi Wuwungan with Rp 1.87 billion.

Premiums

Meanwhile, international reinsurance firm Swiss Re has predicted Indonesia's insurance industry premiums will grow 15.5 percent in the general insurance sector and 16.4 percent in the life insurance sector in the next five years.

It estimated the insurance premium increase would be in line with Asian growth, which makes up almost half the world's life insurance premiums.

Indonesia's insurance industry collected US$1.97 million in premiums in 1994, of which $753 million came from life insurance and $1.21 million from general insurance.

General insurance premiums grew 21.8 percent and life insurance premiums increased 41 percent in 1994, placing Indonesia 37th in the world and 11th in Asia.

However, Swiss Re said Indonesia's insurance premium density reached $10.2 per capita in 1994, of which $6.3 came from general insurance and $3.9 from life insurance.

This placed Indonesia fifth in Southeast Asia and 61st in the world in terms of insurance premiums per capita.

Swiss Re forecasted the insurance industry in other Asian countries would increase in the next five years. It expected the high growth would come from life insurance. (02/rid)