Turmoil In Indonesia Life Insurance Industry

Recent defaults by several prominent life insurers in Indonesia are likely to erode customer trust in the industry and dampen the sector's business growth. The incidents also highlight the need for insurers to maintain sound investment-risk management and good corporate governance to restore consumer confidence and survive the turmoil in the economy and capital markets. Fitch does not rate any of the defaulted companies

State-owned life insurer PT Asuransi Jiwasraya (Persero) failed to pay IDR13.2 trillion to customers whose policies matured in 2018-2019. Private insurer PT Asuransi Jiwa Kresna Life failed to make payments of IDR6 trillion on products that offered fixed investment returns of 7.75%-9.75% for 3 to 24 months, above the time deposit rates of 5%-7%.

Jiwasraya's case has spilled over to other insurers, such as privately owned PT Asuransi Jiwa Adisarana Wanaartha (WanaArtha Life), which had its securities accounts blocked by the Attorney General's Office in connection to its investigation into corruption at Jiwasraya.

In addition, Kresna Life exceeded the limit of 25% of total investment assets invested in affiliated entities, which raised its investment risk. The financial sector regulator has ordered Kresna Life to reduce its investments in affiliates, but it may have difficulty doing so while market conditions are weak during the coronavirus pandemic. The regulator has prohibited Kresna Life from adding new business until its order is carried out.

PT ASABRI (Persero), which handled social insurance and pension funds for the national police, military and Ministry of Defense employees, faces significant losses. The Audit Board of the Republic Indonesia (BPK RI) found that ASABRI's net loss of IDR6.21 trillion in 2019 was mainly due to poor performance of its stock and mutual fund investments.

BPK RI also highlighted issues of investment mismanagement at Jiwasraya and ASBRI, with the board saying that the insurers' equity investments were of low quality. The equity investments plunged in value, to the point that the companies had insufficient liquidity to meet obligations. The corruption investigation into Jiwasraya also shows shortcomings in the insurer's corporate governance.

Most insurers also provide savings-plan products, but the promised returns of 3%-7% are lower than those of Jiwasraya and Kresna Life. In addition, these products accounted for a small portion of the insurers' total premiums. In addition, most life insurers allocate their investments to lower risk instruments. This group of nsurers are not expected to face significant disruption to their securities accounts from the Attorney General's investigation into Jiwasraya.

Most insurers may put more emphasis on mitigation of investment risk, transparency, accountability, ethics and integrity following the recent defaults and investigations. The government plans to establish an agency to ensure insurers are able to make payments on maturing policies and minimise policyholders' losses if an insurer defaults.