What has the OJK done so far to set Bumiputera 1912 back on track? How else should its interim statutory operator respond to Bumiputera’s two-year old report as having financial problems? Will it ever operate again as a healthy independent financial entity?
We need to be realistic about what the OJK has achieved to date - avoid any illusion that this Indonesian super body has delivered a laudatory rescue of the ‘people’s company’. More obviously - but less proudly - it has just been kicking a can down a road.
Bumiputera and crisis
As a mutual venture, Bumiputera has been in perpetual financial crisis – hallmarked by a persistent gap between assets and liabilities. Indeed, incorporated under article 6 of the Bumiputera Statutes without a capital base as an association, the company has experienced ‘crisis’ at its foundation.
Bumiputera’s establishment as an association authorised it to conduct business under civil law rights similar to those granted a limited liability company operating under Dutch statues of the time (Article 10/Netherlands Kingdom, 28 March 1870, and 2/1870 Staatblad 64 issued by governor general of the Netherlands East Indies on 6 April 1915).
Under provisions of 1870 Staatblad Number 64 an association can operate legally if it doesn’t generate commercial profit and ultimate authority to amend the articles/dissolve the association rests with its general membership. This authority can only be exercised through a general meeting among members – no other organ.
Staatblad 64 of 1870 facilitated incorporation of numerous organisations prior to independence. They included the NU in 1926, Muhammadiyah in 1912 and the Syarikat Islam in 1906. All became recognised national assets. One founder of Dwijosewojo Bumiputera was also first secretary of the Boedi Oetomo organisation and a Syarikat Islam member, elements in the nationalist movement that pioneered independence. They were among delegated groups who travelled to Holland in 1912 lobbying for an Indonesian Assembly Council (Voldkraad) that was finally formed in 1918 and on which it sat as a member until 1931
Bumiputera’s stature as an association is evidenced by the Netherlands Indies government provision of a 300 guilder monthly subsidy from 1913 until 1923
Measured by risk-based capital (RBC) as typically applied in the industry, Bumiputera was insolvent from the outset. How else do you describe a company that has no capital? Its initial operational capital came from premiums paid by its member policyholders. As policies were issued, the company automatically assumed obligation for the sum assured.
Over its 106 year history, Bumiputera has recorded crisis on at least six occasions; the 1930 Great Depression, post WWII 1945, the 1965 upheavals, the 1997 Asian crisis, the 2008 global financial crisis, and in 2016 prior to the instalment of the current management regime . After each one Bumiputera’s finances emerged bruised and battered because it had no mechanism to increase its mutual capital. However, with the exception of the 2016 crisis, Bumiputera has always managed to survive by independent efforts of management to steadily improve its performance.
Since application of the RBC, improvements have become impossible for gradual deployment. The regulation requires a capital adequacy ratio to be publicly published annually. Asset and obligation comparisons revealed the deficit that came as a legacy of the crisis. This deficit marks out Bumiputera as a ' sick ' company; terminating its era as the market leader in the life insurance industry.
Government role
A mutual company is a company owned by its policyholder. The earliest form of business insurance, ‘Mutuals’ have sprung throughout Japan, USA, Europe and have proven globally to be more resilient than other models when facing crisis (Sigma Swiss Re 2016). With no less than 5m policyholders, Bumiputera now needs to be treated as a public company.
Unfortunately, the government has failed to do this. Since law No. 2/1992 on insurance (requiring creation of a Mutual ACT), later updated (under No. 40/2004 regulating PP Mutual), the government has paid little attention to mutual ventures. Even the constitutional court orders issued after the judicial review of No. 2/1992, in a case filed and won by policyholders, have been ignored.
Bumiputera operates under the problems of adapting to RBC tools designed for capital-based companies. Serious solvency and corporate governance issues arise from Bumiputera not having an appropriate reference frame. It suffers by being treated as a limited public company with regular reprimands and sanctions coming from regulators relating to shortfalls in its capital ratio.
The absence of regulation for mutuals also hits Bumiputera. It has a problem imposing any joint losses onto its policyholders. Policyholders as owners of the company have only enjoyed reversionary bonus profit sharing on payment of the claim, as a form of dividend. But the burden of losses – especially from the post-war financial crisis - have been left for management to handle alone.
The problem with the absence of regulation culminates in intervention by various parties citing need for Bumiputera’s rescue. As of December 2008, Bumiputera has experienced regular 1-2 yearly management upheavals, without much rational explanation. Supposedly these are related to the performance of members of the representative body (CPA)-as the highest institution in the Bumiputera. This ignores that the company's financial management is not possible without the OJK’s blessing through a fit and proper test conducted almost every year.
Statutory Authority Management
OJK fixed this cure for Bumiputeras on 21 October 2016 based on 21 2011 (on the OJK) and ACT 40/2014 (on insurance regulation). The statutory manager was appointed by the OJK to replace the board of commissioners and the board of directors that had been appointed less than two months earlier and had been declared fit and proper test by OJK for a period of five years.
Before the PS took charge, the OJK had already met with management consultants who were to restructure Bumiputera, but has repeatedly changed the scheme for restructuring. Plans fluctuate from right issues through to deploying ' direct investment cooperative investors '. A day after the directors and Commissioners were deactivated, the PS moved strategic property assets belonging to company investors – but not so its obligations.
The PS then did a run-off, all company operations were stopped, except serving policyholders whose policies were still current. Bumiputera, which usually prints a premium income of IDR5tn every year, has to bite its fingers, because new business now goes into a subsidiary of Bumiputra formed as part of the restructuring strategy.
In the next step, the PS terminated 1,100 employees with a severance payment, and moved thousands of marketing agents to Bumiputera. Along with moving the employees who are spearheading marketing, PS facilitates the new company with a system and a product marketed by AJB Bumiputera 1912
Under a second phase, OJK entered a period when cooperation with all investor parties was stopped. Property assets already transferred, were ordered back to the bosom of AJB Bumiputera 1912. PT Bumiputera changed their name to Bhineka Life. But laid off employees became the property of the company. Bumiputera didn’t operate for more than a year. Liquidity became highly stressed. Financial assets had to be cashed prematurely. Bumiputera attracted a bad reputation. Claims disbursements were delayed for months because of funding difficulties. Employees experienced mental fatigue and disorientation. The big success of the PS was later recorded as having spawned a company called PT Bhinneka- ownership of which is unknown beyond that Bumiputera has no stake in it. So this company cleverly emerged without having to struggle recruiting, building HUMAN RESOURCES, creating products or to build systems. The PS successfully depreciated Bumiputra’s financial assets from IDR8tn to IDR3tn in just two years, payment claims were delayed many months and outraged policyholders added to employees growing mental fatigue.
The OJK, through the appointed PS, is trying to demutualize it. It is ignoring Bumiputera’s constitution that provides that any exit from its mutual format, i.e. dissolution of Bumiputera, can only be at the request of at least a half plus one of all members representing two thirds of the total Sum Insured by Bumiputera (article 40).
We need to draw the regulator’s attention to a mutual's unique capacity to raise capital - effectively demutualize - in accordance with its own Articles of Association. These can fill the Indonesian legislative gap in regulations governing mutuals.
Best practices can be adopted from countries like Japan, which have had experience demutualising major life insurance companies as the Dai- chi Mutual Life Insurance Co (2010), Daido Yamato (2002) or Met Life USA ( 2009 ). They've also reversed this process when mutualising the Met Life USA (1915)
There are also best practices to be found among industry associations, such as the International Cooperative and Mutual Insurance Federation ( ICMIF ) www.icmif.org or the International Association of Mutual Insurance Companies (AISAM)
There are numerous options for the recapitalization of a mutual life insurance company, depending on the specific nature and complexity of the problem. Options include cutting reversionary bonuses/dividends, securitization of fixed assets or the sharing of risk via collaboration among mutuals. The company can also owe funds from policyholders for a certain period, or reduce the sums assured under the policies. A suitable mix of these should be applicable to the needs of Bumiputera in the interests of all stakeholders.
Importantly, policyholders must be brought onside through education and socialization to support the sacrifices required of them as the company's beneficiaries.
Mr Irvan Rahardjo was AJB Bumiputera 1912 independent commissioner from 2012-2013 and current chairman of the Standing Committee for Finance Capital and Tanfidziyah Syarikat Islam. This article was originally published by Kompas Daily.