Bailing Out Bumiputera Life

Bumiputera's problems began with its status as a mutual, rather than a limited, company. With this kind of model, it has not been managed with sound insurance company principles. The management is weak and the company seems to function in an extremely complex way. For example, Bumiputera has a Members Representative Board, as well as a board of commissioners, to oversee the directors.

This mutual type of company has a long history. Boemi Poetra was established in 1912 to improve the welfare of teachers. In 1966, the name was changed to Asuransi Jiwa (Life Insurance) Bumiputera. The company grew rapidly and was once ranked among the 10 largest insurance companies in Indonesia. It has policyholders across the country, mostly outside cities.

Unfortunately, this nation has yet to have a law regulating mutual companies. In April 2014, the Constitutional Court, responding to requests arising from a legal review of the Insurance Companies Law, called for legislation to deal with this problem. However, two and a half years past the Court ruling deadline, neither the government nor the House of Representatives (DPR) had followed up on it. As a result, Bumiputera continued to operate with all its complexities.

The chronic problems of the company remained unresolved, frequently due to non-business reasons. Historically, Bumiputera the first company established by native Indonesians was seen as an artefact that needed to be protected. Proposals to turn it into a limited company were seen as a conspiracy to "sideline the only major national insurance company."

Predictably, this old insurance company fell behind the times, hobbled by the competition. In 2013, the Financial Services Agency (OJK) carried out an intense audit of the company, after its risk-based capital ratio had risen to 250 percent, far above the 120 percent maximum. The OJK issued two warning letters following revelations of these financial problems. The gap between assets and obligations had widened in the last few years. The income from premiums had not been insufficient to cover claims and operating costs. The number of investors fell and this affected the company's financial situation. Bumiputera became unstable, on the verge of collapse.

At this stage, the OJK removed a number of Bumiputera directors and commissioners, then appointed seven people as statutory managers. The oversight body is empowered to do this, to protect the interests of policyholders. Various measures to save the company were implemented, including involving consultants and financial institutions. The DPR stressed that state funds should not be used for this. The warning from Senayan is spot on.

If the rescue fails, the shock might affect the Indonesian insurance industry. With 6.7 million policyholders, the collapse of Bumiputera would affect public trust in insurance. The government would have to contend with the anger of millions of policyholders.

Meanwhile, policyholders should be aware of the risks of choosing mutual insurance companies. Under this business model, the company divides profits and risk among the policyholders, who are also its shareholders. This means that policyholders receive dividends if the company makes a profit, but must bear the losses if the company fails to do so.

The government should take the initiative to correct the legal status of Bumiputera. The mutual company model has proven to be vulnerable in the face of competition. In many countries, such companies have merged, or have been demutualized.

Change in the corporate management must be carried out in the right way. Members of the statutory team must be clean and honest, and not have conflicting interests. Otherwise, there could be lawsuits that would disrupt the company's restructuring.

The government should look for investor options that will bring the most benefit. The only consideration should be whether the new owners are able to produce the best returns for Bumiputera. There must be nothing based on nationalistic jargon. Only in this way can the company be saved. The interests of the 6.7 million policyholders must be protected. (*)