Indonesia Consolidate 4 State-owned Insurers

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 Indonesia's minister for state-owned enterprises. He wants to drastically cut the number of SOEs and their subsidiaries from some 800 currently.

Jiwasraya - 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.

Asabri - 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.

Industry - 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. Analysts are upbeat that the consolidation will prove positive, but still say there is a case for including the other two companies.

In the long run, the industry at large is also expected to benefit. Improved operational synergy between state insurers could speed up technological and product innovation, which in turn will increase insurance penetration in Indonesia.

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.

The industry is expected to witness higher growth from 2021 onwards due to increased awareness and earlier forecasted a compound annual growth rate of 7% for gross written premiums in Indonesia's life insurance industry, reaching 253 trillion rupiah in 2024.