Insurers in Indonesia can expect more changes in the pipeline as the regulator works tirelessly to boost the country’s insurance market and its governing framework. In this exclusive interview, Dr Firdaus Djaelani, CEO of Non-Bank Financial Industry Supervision, Otoritas Jasa Keuangan (OJK) tells us more.
Q: How would you assess the insurance industry’s performance in 2014, and in view of the current regional economic conditions, what would be your expectation of Indonesia’s insurance market performance for 2015??
In general, we have seen Indonesia’s insurance industry in 2014 continue to grow and will attribute it to initiatives taken with regard to premium rates for property and motor vehicle; the passage of a national health insurance programme which also contributed to the increase in assets and premiums; and the result of collaboration among the OJK, associations and the industry-at-large to encourage financial inclusive programmes to promote financial access for low income people and support government programmes.
Going forward, the country’s insurance performance in 2015 is likely to be affected by the economic slowdown in Indonesia. Nevertheless, I am convinced that the Indonesian insurance market will continue to grow although the growth may not be as big as last year’s.
We are confident the government’s commitment to boost infrastructure development and various other programmes that will require the support of the insurance sector will help the industry in its growth. Furthermore, the country’s low insurance penetration will encourage insurance companies to continue to expand their marketing to improve people’s access to insurance.
Q: What are the regulations currently in the pipeline and when will they be announced?
Currently, the legislative drafting process is still ongoing. Amongst the OJK, associations and the insurance industry, we will coordinate intensively to ensure that the regulations are implemented effectively when released.
There are actually more than 40 Non-Bank Financial Institution (NBFI) regulations that are in process this year. Those regulations include implementing the regulations of Law of Republik Indonesia No. 40 Year 2014 on Insurance.
The OJK has mapped out regulations that have to be made according to the mandate of Law No. 40. From the mapping, it is known that regulations that must be made can be simplified into 16 regulations. Twelve OJK Regulations will be drafted in 2015 and four OJK Regulations will be drafted in 2016. From the 12 OJK Regulations that are drafted in 2015, six regulations will be released this year. We have enough confidence that in 2016, all 16 regulations can be finalised and implemented.
The latest regulation that has been implemented is OJK regulation (POJK) No. 1 regarding The Application of Risk Management. And so far, the industry response has been positive because the associations and the industry had been involved in preparing the draft regulation since the beginning and their responses and request have been taken into consideration.
In general, the regulations are made with consideration to adjust the development of insurance industry, increase protection for policyholders, strengthen supervision of insurance companies, and in order to implement good corporate governance.
The Protection for policyholders is specified in, including but not limited to, regulation on deposit insurance programme which will be regulated in upcoming law proposed by the Ministry of Finance, enacted no later than three years since the enactment of Law No. 40 Year 2014.
Q: Currently in the non-life insurance market, there are 79 direct insurers and five reinsurers, and most of the direct insurers have met their paid-up capital of IDR100 billion (US$6.9 million) by 2014. What will happen to those companies which have not met solvency requirements and what are your thoughts on market consolidation?
For those that have not met solvency requirements, the OJK is asking them to submit their financial restructuring plan. They are also prohibited from distributing dividends or rewards in any form to shareholders.
In the event that the company solvency level is less than 40%, the company is penalised first and then as a last warning, it is to submit its financial restructuring plan and/or will be prohibited from distributing dividends or rewards in any form to shareholders.
All of the actions above are stipulated on the regulation and the OJK’s actions are based on the regulation.
We still have much room for market consolidation. However, at the moment, the unstabilised condition does not give a real picture of the insurance market. When the economy and political environment are in a more stable condition, the insurance market will have a more accurate picture.
As for M&A, the OJK has issued a regulation on minimum capital of IDR100 billion. Based on our records, companies have responded to the regulation by merging. We foresee that as time goes by, with the development of the insurance industry and the increasing demand of insurance, there is an opportunity to do business in the insurance sector and this will attract the owners of capital to set up an insurance company.
Q: One of the most-discussed developments in the Indonesia market is also OJK’s announcement of the local reinsurance cession rules last December. It has been nine months since the implementation of the rule, how would you assess the industry’s reaction and progress to comply with the rule?
The policy was taken to encourage the insurance companies operating in Indonesia, be they local insurance companies or joint venture insurance companies to manage risk optimally. The OJK believes that currently, insurance companies operating in Indonesia have not been maximising the ability to manage these risks.
We have seen a good response to the policy by the industry although initially there were some concerns from them. Many of the companies have implemented their reinsurance programmes early, even before the regulations were issued. In earlier applications, they had started planning based on the appeal of Chief Executive of NBFI Supervisor letter No. 77, 2014.
The regulation draft is currently in the final stage of our rule-making process, and will be issued by the end of this year.
Q: On the implementation of the IFRS standards in the industry, we note that Indonesia has not fully adopted the standards. What is the current progress and what challenges remain?
For the insurance industry, Indonesia has embraced IFRS 4 (insurance contracts) as outlined in Indonesia Accounting Standard (PSAK) No. 62. To our knowledge, Indonesia is committed to apply the IFRS even though only for a substantial matter (not fully implemented). The OJK plans to implement IFRS 4 Phase II in 2017 for insurance companies. The adoption of IFRS will assist insurance companies facing competition in the international arena.
In general, the biggest challenge in the implementation of IFRS is the readiness of the industry and regulators to understand well the standards in IFRS. The application of IFRS also requires an infrastructure that can support the effectiveness of the implementation, and Indonesia also faces constraints in the preparation of infrastructure.
Q: Indonesia has also unveiled a plan to implement a compulsory national health insurance system, Jaminan Kesehatan Nasional (JKN), with the aim of making basic healthcare available to everyone by 2019. Are there any plans to encourage more insurers to support this scheme?
The National Health Insurance (Jaminan Kesehatan National) is a national programme that must be supported by all elements. The existence of the programme is to provide access to healthcare systems for the Indonesian people. With affordable premium, Indonesian people can obtain adequate basic health services.
This programme is a true challenge for insurance companies to be able to work together, but it is also an opportunity for them to capture the part of the market where its needs are not addressed by the JK programme and not covered by Badan Penyelenggara Jaminan Sosial Kesehatan (BPJS). And we strongly encourage the cooperation between health BPJS and private insurance companies in order to broaden the BPJS service.
Currently, we continue to conduct intensive talks with the industry to discuss the scheme of Contribution of Benefits (COB). For improved services for the public, Health BPJS has the broadest open space for participants to gain more benefits through the COB schemes with private insurance companies.
It is stipulated in Article 28 of Presidential Decree No. 111 of 2013, the COB scheme is expected to improve services for participants who can afford to pay more (middle or upper class level). BPJS participants can buy additional health insurance from a private insurance player that has cooperation with the Health BPJS.
Q: On the topic of the ASEAN Economic Community, we note that Indonesia plays an instrumental role helping to realise the goal of a more integrated economic region. What are your thoughts on the fulfilment of the AEC?
As part of ASEAN, Indonesia has committed to regional economic integration through the initiative of the ASEAN Economic Community (AEC) which will be implemented in 2015. The AEC programme also includes the integration of the financial sector, announced in the ASEAN Financial Integration Framework (AFIF) and ASEAN Banking Integration Framework (ABIF).
Indonesia is one of the main targets for insurance companies from other ASEAN member countries, especially from the countries which insurance penetration levels have already saturated. Indonesia’s population is 40% of the entire population of ASEAN, however, insurance penetration is still very low. We see a big opportunity for insurers in Indonesia.
There are some concerns of industry players regarding the AEC. But we believe that Indonesian insurers have the advantage in anticipating this issue since they have more understanding on the local market. We have also been encouraging them to keep improving their professionalism, IT, human resources and governance.
Q: What is the next step forward for Indonesia and the local insurance industry?
For integration of the financial sector, the OJK has done several projects (work stream) along with regulators in ASEAN countries that include the harmonisation of regulations with international standards, the development of infrastructure of financial institutions, capacity building for supervisors and the financial industry.
We will actively participate in the formulation of AFIF and ABIF to ensure the financial industry and the public benefit from the regional integration.