This article was written on Kompas.id with the title “Insurance Company Capital Additions Are Not Collateral dated 12/27/2023 at 17:48 (https://www.kompas.id/baca/ Ekonomi/2023/06/11/cepatan- insurance-capital-does-not-guarantee-customers-free-risk-of-failure)
Liga Asuransi – In the dynamic era of the insurance industry, challenges and changes persist, compelling insurance companies to continuously adapt to ensure financial resilience. This article delves into the significance of the plan to increase capital in insurance companies in Indonesia, aligning with the steps taken by the Financial Services Authority (OJK).
While additional capital is expected to enhance financial resilience, is it truly a guarantee against the risk of defaulting on the company’s obligations? Through interviews with insurance observers and stakeholders, we explore the complexities of factors influencing the stability of the insurance industry, including the role of regulatory supervision, management integrity, and good governance. Let us welcome this change as a step towards a stronger, more competitive insurance industry.
The role of capital for insurance companies in Indonesia is pivotal in conducting their business operations. This capital encompasses the financial resources required by companies to fulfill obligations to policyholders and engage in various operational and managerial activities.
Insurance company capital consists of two main types: authorized and paid-up. Authorized capital is the maximum amount of capital a company can hold, under prevailing regulations. Meanwhile, paid-up capital is the amount contributed by shareholders.
This capital is essential for insurance companies to safeguard the interests of policyholders. In this context, capital serves as financial security that companies can utilize to pay insurance claims, cover administrative costs, and meet other obligations. Adequate capital instills confidence in policyholders that the company possesses the financial capability to respond to claims and maintain operational continuity.
Moreover, capital is a determining factor in assessing the credibility and sustainability of insurance companies by regulators and other stakeholders. Generally, financial supervisory bodies, such as the OJK in Indonesia, set minimum capital requirements for insurance companies to operate legitimately.
Capital for insurance companies also plays a crucial role in determining the company’s risk capacity. With sufficient capital, companies can bear larger risks and diversify their portfolios to achieve sustainable growth.
Overall, capital for insurance companies in Indonesia is not only a legal requirement but also a financial foundation supporting operational continuity, instilling confidence in policyholders, and serving as a benchmark for the company’s credibility in the eyes of regulators and other stakeholders. Therefore, capital management is an integral part of the strategy and policies of insurance companies to achieve their business objectives.
Insurance observer, Irvan Rahardjo, asserts that the Financial Services Authority’s (OJK) plan to encourage additional capital can enhance the financial resilience of insurance companies. However, Irvan emphasizes that this step does not automatically eliminate the risk of default on the company’s obligations to policyholders.
Irvan explains, “The assumption is that with the increase in paid-up capital, there is no risk of default. However, it won’t automatically be the case.” He made this statement when contacted in Jakarta on Sunday (11/6/2023). According to him, several other factors, such as regulatory supervision, management integrity, and governance, can influence the risk of default for insurance companies.
Budi Herawan, the General Chairman of the General Insurance Association of Indonesia (AAUI), adds that the plan to increase the minimum capital needs evaluation based on the financial performance of the insurance industry. Budi reveals, “The general insurance industry is currently not in a healthy state, so our top priority is how to restore the health of the industry.”
Previously, OJK’s Executive Head of Insurance, Guarantee, and Pension Fund Supervision, Ogi Prastomiyono, explained that OJK plans to raise the minimum capital as the current requirements are deemed too low compared to the business risks. The plan involves amending OJK Regulation 67/2016 on Licensing and Institutional Business of Insurance Companies, Sharia Insurance Companies, Reinsurance Companies, and Sharia Reinsurance Companies.
Currently, the minimum capital for conventional insurance companies, both general and life insurance, is IDR 100 billion. The plan is to increase this to at least IDR 500 billion in 2026 and IDR 1 trillion in 2028. Meanwhile, the minimum capital for conventional reinsurance companies is currently IDR 200 billion. The plan is to raise this to IDR 1 trillion in 2026 and IDR 2 trillion in 2028.
Budi Tampubolon, the Chairman of the Board of the Indonesian Life Insurance Association (AAJI), states that the long-standing minimum capital rules need to be increased considering the insurance industry faces more complex challenges. The additional capital is expected to enhance the resilience of companies in facing future challenges. Tampubolon also emphasizes that they will discuss with OJK to understand whether this capital increase will also impact the variety of insurance business allowed, similar to regulations in the banking sector.
Capital Requirements According to OJK
The capitalization of insurance companies in Indonesia is regulated by the Financial Services Authority (OJK) as the financial supervisory institution. OJK has stipulated requirements that insurance companies must adhere to, ensuring they possess adequate capital to run their operations and provide sufficient protection to policyholders. Here are some capital requirements for insurance companies in Indonesia according to OJK:
Minimum Capital:
OJK sets the minimum capital that insurance companies must have based on their business type and scale. This minimum capital is adjusted to the level of risk that insurance companies may face. Insurance companies are obligated to ensure that their capital remains above the minimum threshold set by OJK.
Capital Structure:
OJK also regulates the capital structure of insurance companies, including the distribution between authorized and paid-up capital. Companies must comply with regulations regarding the amount of capital to be contributed by shareholders and the allocation of capital in accordance with prevailing rules.
Financial Health Requirements:
OJK imposes requirements related to the financial health of insurance companies, involving specific financial ratios such as solvency ratios. These ratios reflect the company’s ability to pay insurance claims and maintain a healthy financial balance.
Monitoring and Reporting:
Insurance companies are obligated to regularly monitor and report their financial conditions to OJK. This includes submitting financial reports, risk reports, and other relevant information to ensure transparency and compliance with capital requirements.
Sanctions and Supervision:
OJK has the authority to impose sanctions on insurance companies that fail to comply with capital requirements. Sanctions may include warnings, fines, or other actions commensurate with the level of violation. OJK also conducts periodic supervision to ensure compliance with capital requirements.
With these capital requirements, OJK aims to protect the interests of policyholders, maintain stability in the insurance sector, and reduce the risk of failure for insurance companies. Therefore, insurance companies in Indonesia are expected to actively comply with and implement the capital requirements established by OJK.
Conclusion
In the face of the ever-evolving dynamics of the insurance industry, the Financial Services Authority’s (OJK) plan for additional capital becomes a focal point. Although a capital increase is expected to provide financial stability, observers and stakeholders highlight the complexities behind this step. In conclusion, additional capital is not a guarantee against the elimination of the risk of default on insurance company obligations. Other factors such as regulatory supervision, management integrity, and corporate governance also play a crucial role in measuring the resilience of the insurance industry.
The challenges faced by the insurance industry, especially in terms of financial health, take center stage. While an increase in minimum capital can be a positive step, a careful evaluation based on industry financial performance is necessary. Criticisms from the General Chairman of the General Insurance Association of Indonesia (AAUI) and the Chairman of the Board of the Indonesian Life Insurance Association (AAJI) underscore that the capital increase must align with efforts to restore the health of the insurance industry overall.
Thus, this step reflects a significant change in efforts to enhance the resilience and competitiveness of the insurance industry in Indonesia. Insurance companies need to not only assess capital increases but also pay attention to other factors that can shape the foundation of sustainability and trust for policyholders. Through collaboration between regulators, industry players, and stakeholders, it is expected that the insurance industry can face the future with greater resilience and responsiveness to continuous changes.
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This article will be published in book form The Rise of Our Insurance. Foreword by Prof. Muhammad Edhi Purnawan Member of the OJK Supervision Board. February 2024 296 pages + xiv ISBN Publisher IPB Press
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Irvan Rahardjo
Lebih dari 40 tahun berkecimpung di dunia asuransi dimulai dari asuransi joint venture hingga pernah menjadi Direksi Asuransi BUMN ; Komisaris Independen AJB Bumiputera 1912 dan Asuransi SOMPO Indonesia. Saat ini menjabat sebagai Komisaris Utama di L&G Risk Insurance Broker.
