Managing Performance During Chaos

The life insurance industry is increasing the portion of time deposits in its investment portfolios and decreasing that of stocks after suffering a significant slump in investment returns amid the ongoing global stock market rout.

The Indonesian Life Insurance Association (AAJI) revealed Thursday that its members had decreased investment placements in stocks to 25.5 percent of overall portfolios in the second quarter this year from 29 percent in the same period last year.

Meanwhile, investment allocations for time deposits rose to 17.6 percent from 14.7 percent during the same period.That was after life insurers saw investment returns plunge by 103.4 percent to minus Rp 710 billion (US$49.96 million) in the April to June period this year from Rp 20.78 trillion in the corresponding period a year ago, according to the industry group’s report.

“The country’s economy, especially the stock market volatility, affects the decrease in investment returns. However, the life insurance industry still recorded positive growth,” AAJI chairman Hendrisman Rahim said on Thursday.

Indonesia’s six-year low of economic growth in recent quarters, international funds exiting emerging markets because of US economic improvement and China’s slowdown and yuan devaluation, have all contributed to a slump in the local stock market.

The Jakarta Composite Index (JCI), the main price indicator on the local stock exchange, has slumped 20 percent so far this year, the worst performing index in the region, with net foreign outflows amounting to Rp 6 trillion to date. The rupiah has also passed the 14,000 mark against the US dollar, a level unseen since the 1998 financial crisis.

The life insurance industry’s investment value amounted to Rp 320.51 trillion in the second quarter of this year, up 21 percent from Rp 264.97 trillion in the same period last year.Hendrisman expected that the stock market would soon rebound, hence increasing life insurers’ investment returns.

“Because investment value is high, it’s just the investment returns that have decreased,” he added.He also insisted that the industry had kept on growing despite the challenging economy, although total revenues dropped by 8.7 percent to Rp 69.97 trillion year-on-year (yoy) from Rp 76.6 trillion in the second quarter of 2014 because of the plunge in investment returns.

The AAJI is still optimistic about achieving a 20 to 30 percent total revenue growth this year.The life insurance industry recorded a premium income of Rp 67.82 trillion in the second quarter this year, a 26.6 percent increase from Rp 53.58 trillion last year. It was mostly driven by the new business premiums, which rose 28.2 percent to Rp 39.19 trillion this year.

“It means that people are more aware of the long-term nature of life insurance,” Hendrisman said. The surrendered claims growth has also decreased compared to the first quarter, as the panic stemming from the economic situation cooled off, according to AAJI alternative distribution canal department head Christine Setyabudhi. The surrendered claims rose 32.1 percent this quarter to Rp 19.63 trillion in the second quarter, but it was less than the 69.5 percent growth last quarter.

Meanwhile, partial withdrawals saw a 23.7 percent increase to Rp 10.69 trillion compared with a 61 percent growth on the first quarter.“It was driven by the policyholders’ need for cash. They got into a panic in the first quarter, but they began to calm down in the second quarter,” Christina said.

The number of policyholders has also increased by 22.9 percent to 57.02 million people from 46.41 million people last year.In a bid to further boost the still-low number of policyholders, life insurance firms have started to venture into micro-insurance for low-income people. “With the slowing economy, the industry needs to work even harder to educate the people about life insurance, but we are still on track, hopefully until the end of the year,” he said.