Policy Guarantee Programme: Building Trust Without Burdening the Industry
When someone purchases an insurance policy, what is actually being bought is not merely a document, but a promise: that when a risk occurs, the insurance company will fulfil its obligations. Therefore, when an insurance company defaults or is unable to meet its obligations, the issue does not only affect a single company. Public trust in the entire industry can be compromised. This is where the Policy Guarantee Programme (PPP) becomes vital.
Indonesia has included this programme as part of the financial sector reforms through Law Number 4 of 2023 concerning the Development and Strengthening of the Financial Sector (UU P2SK). The law incorporates the policy guarantee programme as a key element in strengthening the insurance ecosystem. Preparations are now becoming more concrete. In recent developments, the LPS (Indonesia Deposit Insurance Corporation) continues to prepare the PPP, which is targeted to be operational by January 2028 at the latest, including in terms of regulation, human resources, information technology, and data integration with the OJK (Financial Services Authority).
However, there is one equally important question: how can we ensure that the PPP provides strong protection to policyholders without further burdening the insurance industry?
This question is crucial because the industry is currently undergoing various reform agendas. Insurance companies must strengthen their capital, implement PSAK 117/IFRS 17, prepare New Risk-Based Capital (New-RBC), strengthen governance, and improve the quality of risk management. The OJK itself is currently pushing these various reforms.
Therefore, the PPP should not be viewed solely as a mechanism for ‘collecting guarantee funds’. Beyond that, the PPP must serve as an ‘infrastructure of trust’ for the insurance industry.
Guaranteeing is Not Merely About Collecting Funds
Experiences from various countries show that policyholder protection systems can be designed with different principles. However, there is a common thread: consumer protection must go hand in hand with market discipline, risk management, and system cost control.
In Singapore, the Policy Owners’ Protection Scheme (PPF) is managed by the Singapore Deposit Insurance Corporation (SDIC). This scheme features a PPF Life Fund and a PPF General Fund, where the characteristics of life and general insurance businesses are not treated identically, with funds sourced from levies paid by members that are risk-based. For life business, the basis includes protected liabilities, while for general business, it may use protected liabilities or gross premium income depending on business conditions. Singapore’s protection funds are placed primarily in safe and liquid assets, rather than being formed to chase the highest possible investment returns.
This scheme does not merely wait for a company to fail. In cases of insurance company failure, resolution options may include transferring the business to another company, policy run-off, or terminating policies with compensation according to regulations.
Singapore also provides an important lesson regarding consumer communication. Covered products must explicitly state that the policy is protected by the PPF, including the protection limits. Thus, consumers understand that protection is available, but it does not mean that all business risks of the company are automatically borne by the state or the guarantee fund.
In Malaysia, Perbadanan Insurans Deposit Malaysia (PIDM) operates the Takaful and Insurance Benefits Protection System (TIPS), where protection is automatically provided to policyholders who meet the requirements. For protected benefits, there are specific protection limits, while health benefits receive protection according to applicable regulations.
In terms of financing, PIDM explicitly uses a differential levy system, which is a levy that considers risk profiles, where institutions with better risk profiles are charged lower levies and vice versa. PIDM also states that one of its mandates is to provide incentives for member institutions to implement good risk management and to carry out their mandate by minimising costs to the financial system.
In the United Kingdom, the Financial Services Compensation Scheme (FSCS) is funded by the industry through levies divided by funding class, so companies pay according to their relevant business group. There are also levy caps for each group so that the financing burden is not unlimited. The FSCS also strives for recoveries from assets or responsible parties to reduce the industry’s levy burden.
International benchmarks in these countries show that guarantee funds do not have to consist of uniform levies. From these various experiences, there is one conclusion that should serve as a fundamental principle for Indonesia: a good guarantee programme is not one with the highest levies, but one capable of providing adequate protection with efficient system costs.
The PPP Scheme Should Not Be an ‘Industry Tax’
The insurance industry is certainly interested in the presence of the PPP because this programme can increase public confidence that the risk of company failure does not have to be borne entirely by the policyholders. However, if PPP contributions are set too high, are flat, and do not…