JAKARTA — Indonesia’s consolidation of four state-owned insurers under one holding entity is intended to breathe new life into an industry rocked by mismanagement scandals. But what has been left out of the government’s plan is raising questions.
Bahana Pembinaan Usaha Indonesia, a financial group fully owned by the government, has been made the parent of four state insurers with a combined 60 trillion rupiah ($3.6 billion) in assets, under a decree signed by President Joko Widodo last month.
The quartet of companies are Jasa Raharja, which focuses on travel accident insurance; Jasindo, which does general insurance; Askrindo, financial and general insurance; and Jamkrindo, which provides credit insurance for trade and business.
The consolidation is part of a wider restructuring program overseen by Erick Thohir, Indonesia’s minister for state-owned enterprises. He wants to drastically cut the number of SOEs and their subsidiaries from some 800 currently.
But the insurance plan does not so far include two other insurers, Jiwasraya and Asabri. Management scandals at both companies were widely assumed to have been the impetus for the accelerated consolidation.
Jiwasraya is the country’s fifth largest — and oldest — insurer with a 5.9% market share and a wide range of products including health and life insurance and pension plans. But since the company defaulted on 802 billion rupiah of claims in 2018 — a figure that ballooned to 12.4 trillion rupiah late last year — it has been mired in scandal.
Prosecutors have alleged years of mismanagement, including investments in bad stocks and window dressing of financial statements, that are believed to have cost the state nearly 17 trillion rupiah in losses. Several people have been named as suspects in the case, including former company executives.
A similar scandal was revealed this January at Asabri, which specializes in insurance and pension funds for military and police retirees. A Supreme Audit Agency official said Asabri’s alleged malfeasance may have cost the state over 10 trillion rupiah in losses.
But Indonesia’s SOE ministry says the purpose of the consolidation goes beyond simply rescuing scandal-hit companies and is really about improving the overall performance of state insurers.
“We’ve had an experience of merging bad, damaged banks into Bank Mandiri,” SOE ministry spokesman Arya Sinulingga told a hearing with lawmakers last month, referring to Indonesia’s second largest lender by assets. “[Mandiri] has become good. Now it is a mainstay of the government. So, we’re designing a solution [for state insurance firms] in a similar direction.”
Industry players have expressed concerns that the Jiwasraya and Asabri scandals could erode public trust in insurers in a still largely under-penetrated market.
However, data from the Indonesian Life Insurance Association, or AAJI, shows that the gross written premiums of the industry grew 6% to 196.7 trillion rupiah in 2019, reversing a decline in the previous year.
And the size of the market has almost doubled from 101.5 trillion rupiah in 2014, making Indonesia among the fastest growing globally, according to London-based data and analytics company, GlobalData.
Analysts are upbeat that the consolidation will prove positive, but still say there is a case for including the other two companies.
“The holding company was formed with the stated objective of transforming state-owned insurance firms to make them competitive, enforce prudential regulations and effective risk management,” said Madhuri Pingali, insurance analyst at GlobalData in Hyderabad, India. “A similar transformation is necessary to ensure perpetuity of Jiwasraya and Asabri and safeguard the interests of policyholders. Hence, bringing these firms under one umbrella seems to be a prudent strategy.”
In the long run, the industry at large is also expected to benefit. Pingali said improved operational synergy between state insurers could speed up technological and product innovation, which in turn will increase insurance penetration in Indonesia.
Lee Young Jun, Jakarta-based research and development manager at securities company Mirae Asset Sekuritas, said the consolidation is expected to generally improve business culture in the industry. Lee said that if challenges involving inflexibility and regulation can be overcome, “then I think we will see spectacular changes in (the) industry.”
Optimism over the consolidation, however, comes just as the coronavirus pandemic is injecting uncertainty into the industry as an economic slowdown is expected to reduce purchases of insurance products.
“Of [my] dozen of years of experience working in the life insurance industry, this beginning of 2020 is [the period] that raises so many questions, has so many challenges — probably more than in previous years,” AAJI chairman Budi Tampubolon told media last month.
Nevertheless, some expect improvement after the pandemic. “The industry is expected to witness higher growth from 2021 onwards due to increased awareness,” said Pingali, who had earlier forecast a compound annual growth rate of 7% for gross written premiums in Indonesia’s life insurance industry, reaching 253 trillion rupiah in 2024.
“The pandemic has highlighted the need for personal financial planning and the importance of life insurance in this,” she added.
The insurance holding entity is the second SOE consolidation commissioned by Thohir, who was sworn in as a cabinet member in October. It follows the creation of a pharmaceutical holding arrangement in February. Vaccine maker Bio Farma, fully owned by the government, has been appointed the holder for two publicly listed drug makers — Kimia Farma and Indofarma.
Thohir has said he also wants a holding set-up for state-run hospitals to be launched in the middle of the year.
The consolidation efforts build on the policy of his predecessor, Rini Soemarno, who established state-owned holdings in mining and oil and gas.
Additional reporting by Ismi Damayanti.