Indonesia Loosens Foreign Cap On Insurance

So now the government has agreed to change its tack. President Joko "Jokowi" Widodo signed a presidential regulation on Jan. 16 to allow an exemption from the cap for foreign investors if they could raise their capital through an "initial public offering in Indonesia."

The rule also drops the requirement for a local partner, which, according to the old rule, had to be a locally-based entity wholly controlled by Indonesian citizens.

Dody Dalimunthe, the executive director of the Indonesian General Insurance Association (AAUI), welcomed the new rule, saying foreign investors' local partners are often individuals with either shallow pockets or little expertise to commit more capital in the insurance industry.

"The government's latest policy seems to accommodate the real needs of the insurance business, [to help it] maintain its stability and sustainability," Dody said on Monday.

The new regulation comes as the local insurance industry is once again in crisis. Asuransi Jiwasraya, the largest state-controlled life insurer, currently needs Rp 32 trillion ($2.4 billion) in capital injection to keep it afloat following years of mismanagement and alleged fraud.  

The State-Owned Enterprises Ministry has said it is seriously considering the option of selling Jiwasraya's healthy subsidiaries to either local or foreign investors to save the insurer. 

Hong Kong Protest Hurts Life Insurance Industry

The sale of life insurance products to Chinese tourists has been rocked by months of unrest in Hong Kong, with the value of new life insurance policies taken out by mainland citizens dropping 18% to $1.2bn in the three months to September.

Amid political unrest, the number of tourists from mainland China dropped by 55%, and this is one of the main reasons for the decrease in sales, as Hong Kong regulations require visitors from the mainland to be physically present to purchase insurance.

Fourth-quarter momentum is expected to be even worse than the third quarter because protests accelerated in September, October and November. It will be a big challenge. 

Two of the biggest life insurers in the territory, AIA and Prudential, get up to 60% of their new business in Hong Kong from mainland Chinese customers. The overall insurance industry in Hong Kong reported strong growth in the first half of last year, but the situation turned around in the second half because of the social unrest that started in mid-2019. 

In order to counter the slowdown, some life insurers have begun offering transportation services whereby prospective Chinese customers are picked up from the airport or land border with the mainland to parts of Hong Kong that have not yet been affected by the protests, people familiar with the industry said. The protests have also encouraged some insurers to bring forward plans to expand in the mainland

Digitizing Insurance Broker

Brokers in Canada are seeing a wave of digitization ripple through their channel, whether it’s thanks to insurers implementing digital insurance proof systems, technology companies digitizing the end-to-end commercial lines submissions process, or brokerages themselves taking a digital step in-house.

However, to successfully digitize the broker channel, all invested parties have to be onboard. After all, no man (or broker) is an island in the insurance marketplace.

“We view a digital broker as having three characteristics – one is the connection with the broker’s customer, the other is the digitization of their agency – so using data and analytics for process efficiency and insights into their business – and a third component of that is the connection to the insurers,” said Steve Whitelaw (pictured), who was appointed Applied Systems’ vice president of industry and partner relations for the Canadian marketplace in August 2019.

While insurers are all recognizing the need for connectivity within the distribution channel – because they’re looking for operational efficiencies and using data versus information submitted on paper allows them to automate a number of processes – not everyone is on the same page.

“Where we are in that cycle is insurers are at various stages of having the capabilities to have that real-time data exchange. Many are in progress of replacing their legacy systems, and that is a massive initiative to replace a legacy system that’s been around and duct-taped together since the 70s in some cases,” explained Whitelaw, adding that Applied is ready to collaborate with insurers once they’ve enabled those new systems.

Coordination between parties is where the challenge lies, something the Insurance Brokers Association of Canada (IBAC) knows well as it works through the steps of its data exchange action plan. In September 2019, the association unveiled that its Data Exchange Working Group completed the ‘first notice of loss’ reusable data service function. Applied in turn is ready to go to add this to its platform for carriers, but the next hurdle is getting all carriers to sign on.

“We need to get the carriers to play with us because it’s the two sides. We pitch a transaction to them, they catch it and they send us a response. If they’re not in a position to catch it and send us a response, then we can’t do anything with it even though it’s a capability that exists within our system,” said Whitelaw, though there is a silver lining. “We’re all on different journeys and the nice thing is that everyone’s on that journey, and those that aren’t…we’ll have to see what happens to them in the future.”

The writing is on the wall – with fierce competition in the insurance marketplace, carriers have to optimize the ease of doing business with brokers. This digitization is critical, says Whitelaw, in terms of meeting customer expectations going forward.

As for brokers, they’re seeing digitization as a given as opposed to something they have to consider moving ahead on. In fact, Applied has seen a 72% lift year-over-year in adoption of its software by this channel.

Coming from his work on the carrier side of the equation into his new role for Applied, Whitelaw sees an opportunity to influence the ongoing digitization of the broker.

“One of the goals is to improve the level of collaboration that’s required to digitize a broker. You can’t digitize a broker without engaging with your stakeholders, the insurers, so having that level of engagement with them and the associations [is important],” he told Insurance Business. “I think attitudes are in the right place definitely and that sense of urgency is growing to say, ‘We have to do this, sooner, faster, better.’”

Wells Fargo - Sales Scandal

Federal regulators have slapped former Wells Fargo Chief Executive John Stumpf with a $17.5 million fine for his role in the bank's sales practices scandal.
The Office of the Comptroller of the Currency also announced Thursday it was suing five other former Wells Fargo executives for a combined total of $37.5 million for their individual roles in the bank's poor practices. Two other executives also settled with the OCC, paying million-dollar fines as well.

This is the first time regulators have punished individual executives for Wells Fargo's wrongdoing. The San Francisco-based bank has paid hundreds of millions of dollars in fines and penalties for encouraging employees to open up millions of fake accounts in order to meet aggressive sales goals. Executives like Stumpf did give up tens of millions of dollars in bonuses and pay, but those actions were taken by Wells Fargo itself.

In its investigation, the OCC laid the blame of Wells Fargo's failures directly at the feet of its former management in its suit against the executives. As part of their settlements and lawsuits against these Wells' executives, the OCC seeks to ban all of them from ever working in the banking industry again.

“The root cause of the sales practices misconduct problem was the Community Bank’s business model, which imposed intentionally unreasonable sales goals and unreasonable pressure on its employees to meet those goals and fostered an atmosphere that perpetuated improper and illegal conduct,” the OCC said in its complaint.

“Community Bank management intimidated and badgered employees to meet unattainable sales goals year after year, including by monitoring employees daily or hourly and reporting their sales performance to their managers, subjecting employees to hazing-like abuse, and threatening to terminate and actually terminating employees for failure to meet the goals.”

The highest profile former executive the OCC is suing is Carrie Tolstedt, who was head of Wells Fargo's community banking business until her resignation in 2016. Tolstedt was the executive most directly in charge of Wells' consumer bank, and has been largely blamed for Wells' poor banking culture.

The OCC has sued Tolstedt for $25 million for her role in the bank's scandal, a suit that Tolstedt's lawyers say they intend to fight. Stumpf's fine of $17.5 million is less than Tolstedt because Stumpf settled with the OCC.

“Throughout her career, Ms. Tolstedt acted with the utmost integrity and concern for doing the right thing," said Enu Mainigi, a lawyer who represents Tolstedt. "A full and fair examination of the facts will vindicate Carrie."

The two other executives who settled with the OCC and will pay a fine include Hope Hardison, the bank's top human resources executive, and Michael Loughlin, who was the bank's chief risk officer. Hardison will pay a $2.25 million fine and Loughlin will pay a $1.25 million fine.

Wells Fargo, which has cycled through two permanent CEOs and a host of interim ones since the scandal occurred, agreed with the OCC's decision.

“The OCC’s actions are consistent with my belief that we should hold ourselves and individuals accountable," said Charlie Scharf, who became Wells Fargo's CEO late last year. "They also are consistent with our belief that significant parts of the operating model of our Community Bank were flawed."

Jiwasraya - A Lifeline

Indonesia will designate state-owned financial firm PT Bahana Pembinaan Usaha Indonesia as a holding company that will help state insurers get in better financial shape. The holding company will help pool funds among state-owned insurers and may also help raise funds by seeking strategic partners, citing a statement from the Cabinet Secretariat.

The government is now taking action to help troubled state-owned insurers, such as life insurer PT Asuransi Jiwasraya, which reportedly owes customers IDR16.42 trillion (US$1.20 billion) in maturing payouts.

Recently, Indonesian President Joko Widodo called for reforms in the insurance and pensions sector.

“Insurance and pension funds need reform,” Widodo, who was speaking at an industry event in Jakarta, was quoted as saying in the report. “Improvements, be it on the regulatory side, or supervisory, or even in capital requirements, are all important.”

According to Widodo, the move isn’t solely because of the Jiwasraya case. Last month, state prosecutors said they had found evidence of fraud at Jiwasraya, where the former management allegedly placed most of its portfolio in poorly performing assets.

Prior to Jiwasraya, another state-owned life insurer Bumiputera also ran into financial difficulties. It has been undergoing restructuring since 2013. Both firms are over a century old and date back to the Dutch colonial period.

Medical Insurance Premiums Up 30%

Medical insurance premiums in Malaysia could rise by up to 30%, with insurers citing a spike in healthcare costs as behind the impending increase. Both insurers and agents have said that rapid inflation in medical and hospitalization costs in recent years made the increase “inevitable”.

“With the number expecting to rise further and outpace the general inflation rate, we have to make the necessary adjustments to your medical plan’s premiums so that they can keep up with healthcare inflation,” said a notice sent by AIA Malaysia to its clients.

A 2019 survey on medical trends by Willis Towers Watson found that Malaysia had among the highest expected increases in medical costs in Southeast Asia, the report said.

Data from the General Insurance Association of Malaysia (PIAM) showed that total health expenditures in 2018 were at MYR60.15 billion (US$14.77 billion). Of this amount, 52% was funded by the government, while the rest was paid out-of-pocket (35%), through private insurance (7%), and by corporations (4%) and other agencies (2%).

“If healthcare costs are not contained, the increase in premiums for medical and health insurance will be inevitable,” PIAM said, adding that if medical insurance becomes unaffordable, it will drive more patients to seek treatment at government hospitals and further worsen the already-burdened health system.

Jiwasraya Scandal Widens

Indonesian prosecutors detained five suspects, including a businessman who lost a case to Goldman Sachs in a share ownership dispute, as authorities widened a probe into investment irregularities at the nation's oldest insurer that's pushed it to the brink of collapse.

Benny Tjokrosaputro, president director of PT Hanson International, Heru Hidayat, president commissioner of PT Trada Alam Minera, and Hendrisman Rahim, former president director of PT Asuransi Jiwasraya were among those arrested on Tuesday, said Hari Setiyono, a spokesman for the Attorney General ST Burhanuddin. The suspects will remain in custody for 20 days for interrogation, he said.

Prosecutors are investigating financial irregularities at Jiwasraya that's facing a $2 billion hole on its books, stemming from what the state insurer has described as product mispricing, reckless investment activities, aggressive window dressing and liquidity pressure. The company is now betting on a government bailout as mounting leave it with a lack of cash to pay policyholders.

The scandal at Jiwasraya has been unfolding during the past three years, after a 2016 audit revealed violations of investment guidelines. Another audit last year showed the insurer had negative equity of 27.2 trillion rupiah ($2 billion), sparking calls for a lifeline. The probe also uncovered alleged irregularities and fraud in the management of its savings and investment plans, which offered guaranteed returns of as high as 13%.

State-Owned Enterprises Minister Erick Thohir lauded the auditor and the attorney general's office for the quick investigation and arrests. "Stern and indiscriminate actions are needed for justice and restoring the public trust in the corporation," he said in a statement.

Jiwasraya's stocks and mutual fund investments in violation of guidelines caused a potential state loss of 13.7 trillion rupiah until August, according to the attorney's office. The insurer also invested heavily in assets with high risks including medium term notes issued by Hanson International.

A spokeswoman for Hanson confirmed Tjokrosaputro's detention but deferred other questions to his legal team. Calls to Trada Alam's office were unanswered while lawyers for Rahim and Jiwasraya's former finance and investment director Harry Prasetyo, who was also arrested, could not immediately be reached.

Goldman Sachs last year won an appeal against a lower court ruling in favor of Hanson's Tjokrosaputro in a share dispute case. Hanson International shares slumped 58% last year and the company was probed by the market regulator for violating fund raising rules.

Insurer Facing $2 Billion Financial Hole Sparks Call for Rescue

The crisis at Jiwasraya affects 17,000 buyers of investment products and 7 million clients, and may pose systemic risks, Indonesia's audit board said last week. President Joko Widodo has ordered the finance and state-owned enterprise ministers to take steps to rescue customers' funds, his spokesman Fadjroel Rachman said Wednesday.

"The troubles at Jiwasraya have reduced confidence in Indonesia's overall financial system" though other rated insurers are unlikely to face similar issues, Jessica Pratiwi, an analyst at Fitch Ratings said in a statement. "Life insurers that underwrite a high proportion of products with high guaranteed interest rates" may have difficulties fulfilling their obligations.

The mess at Jiwasraya has spurred the government to consider setting up an agency to shield policyholders of troubled insurance companies. The government has also put on a watch list PT Asabri, which manages the pension and insurance of millions of police, military and defense personnel, after the value of its stock investments eroded.

Malaysian Reinsurance Broker Scam

The Insurance Regulatory and Development Authority of India (IRDAI) has penalised Unison Insurance Broking Services, and barred from Indian insurance and reinsurance market, Malaysian Confiance International Reinsurance Brokers LLC and Jaipur-based Global Master Consultant (GMC) for their involvement in a fraudulent crop reinsurance deal with Tata AIG General Insurance Co Ltd.  

In two separate orders issued last week, Sujay Banarji, member (distribution) of IRDAI barred Malaysia-based Confiance International Reinsurance Brokers, its managing director Steven Chetty, as well as Dr Mukesh Ranwan and Sachin Agarwal, both directors of GMC, which is official representative of Confiance, from doing any insurance or reinsurance business in India. Mr Banarji also levied a penalty of Rs1 crore on Unison Insurance Broking for its failure to verify re-insurance slips provided by Confiance and GMC. 

Coming down heavily on the Malaysian reinsurance broker, IRDAI observed that "Confiance betrayed the trust of the reinsurance market and caused damage to the financial strength of Tata-AIG in India, which cannot be ignored by the IRDAI. The IRDAI is of the firm view that the actions of Confiance were deliberate and harmful. Such actions cannot under any circumstances be tolerated as it put the existence of general insurance companies in peril. 

During the entire episode, Confiance made no efforts to clarify its stance and simply return the premium, which in turn proves that Confiance intentionally committed this act by not placing the risk with the foreign reinsurers and issued forged reinsurance slips to the Indian reinsurance broker."

 

Insurance or re-insurance business is based on trust. A cedant (a party in an insurance contract that passes financial obligation for certain potential losses to the insurer) relies on the reinsurance slip submitted by the reinsurance broker to assume that the risk is placed and there is no gap in reinsurance protection. lf the reinsurance protection is found to be non-existent, the entire risk that was supposed to be passed on to the reinsurer falls into the lap of the direct insurer who is obliged to make good the loss, as he has issued an insurance policy to the policyholder. It is because of this important nature of transaction that utmost care has to be exercised by the insurer and the insurance broker. Any shortcomings can have very serious consequences even to the extent of a failure of an insurance company.

 

The regulator found that the Malaysian reinsurance broker has cheated Unison Insurance Broking Services as well. It says, "The actions of Unison put Tata-AIG in a difficult position. They suffered a loss because they did not have adequate reinsurance protection as a result of which their financials were impacted. However, given the documents shared by Unison with the Authority, it appears that Unison were themselves cheated by Confiance. Confiance who could not place reinsurance for crop insurance, forged the reinsurance slip and submitted as original to Unison."

 

During FY2018-19, Unison lnsurance Broker made facultative reinsurance arrangements to support crop reinsurance risk cover of Tata AIG through Confiance International involving its Indian representative GMC. In two emails, Confiance gave Tata AIG, terms for placement with two reinsurers, Tokio Marine Kiln Syndicate 510 (TMK) and US-based Best Meridian lnsurance Co (BMI). 

 

The reinsurance placement was confirmed with copies of signed slips of the participating re-insurers, one slip signed and stamped by TMK on the letter-head of ARB International and another one from BMl. Unison then remitted reinsurance premium of Rs1.13 crore and Rs6.17 crore to Confiance after deducting its brokerage in two transactions in September and October 2018.

 

However, during November, officials of Tata AIG found that TMK was not participating in facultative placement of its crop business. When asked about this, TMK told Tata AIG that is has not provided any support for reinsurance and the slip was not issued by them. Similarly, official of BMI also denied issuing any slip for the crop re-insurance of Tata AIG.

 

Tata AIG later found that the fraudulent slips were provided by GMC, the Indian representative of Confiance. It filed a complaint to IRDAI against Unison lnsurance Broker on 21 December 2018 alleging fraud in reinsurance placement pertaining to crop insurance in Rajasthan cluster for Kharif 2018. 

 

Unison Insurance Broker informed Confiance about the fraud. Mr Chetty, MD of Confiance, accepted full responsibility for the fraud and on 26 November 2018 refunded the reinsurance premium paid. 

 

Unison lnsurance Broker also filed a first information report (FIR) against Confiance and its Indian representative GMC in the economic offences wing (EOW) of Mumbai police. The case is under investigation.