VZCZCXRO5339
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #0978/01 0950113
ZNR UUUUU ZZH
R 050113Z APR 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 4200
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHKO/AMEMBASSY TOKYO 0452
RUEHBJ/AMEMBASSY BEIJING 4028
RUEHBY/AMEMBASSY CANBERRA 0622
RUEHUL/AMEMBASSY SEOUL 4037
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 07 JAKARTA 000978 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
AIDAC 
 
DEPT FOR EAP/MTS AND EB/IFD/OMA 
TREASURY FOR IA-SEARLS 
SINGAPORE FOR TREASURY-BAKER 
COMMERCE FOR 4430 - BERLINGUETTE 
USTR FOR KATZ 
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR FINEMAN 
DEPARTMENT PASS EXIM BANK 
DEPARTMENT PASS USTR 
 
E.O. 12598: N/A 
TAGS: EFIN EINV ECON PGOV KCOR ID
SUBJECT: INDONESIA'S INSURANCE SECTOR STILL STRUGGLING 
 
 
¶1. (SBU) Summary.  A decade after the financial crisis, Indonesia's 
small insurance sector continues to suffer from weak regulation and 
poor enforcement, inadequate training, low professional standards, 
and insufficient capital.  A few players dominate the sector, and 
some small, non-transparent firms are insolvent.  Industry insiders 
say one of the largest life companies, Bumiputera 1912, with 9.7 
million policyholders and $1 billion in assets, is currently 
operating as a Ponzi scheme with an estimated $500 million in 
liabilities above its equity.  Though in poor financial shape, the 
domestic industry has been resistant to reform and professional 
training and certification for insurance underwriters has only 
recently begun.  Weak regulation and fallout from the bogus 
bankruptcy cases against Manulife and Prudential have made for a 
treacherous operating environment for foreign firms, and 14 
international insurance companies in Indonesia closed their doors 
from 2000-04.  In July 2006, the Government of Indonesia (GOI) and 
Bank Indonesia launched a policy package aimed at strengthening the 
banking industry, non-bank institutions and capital markets by 
resolving insolvent insurance firms, improving the quality and 
effectiveness of insurance industry regulation, and subjecting 
insurance company management to fit and proper tests.  The World 
Bank has recommended the GOI resolve weak and bankrupt firms, 
improve the Ministry of Finance's (MOF) enforcement and regulatory 
capacity, and launch a sustained education campaign to develop the 
industry.  Finance Minister Sri Mulyani Indrawati and foreign 
industry representatives support these recommendations and are 
searching for ways to implement them.  This cable uses the exchange 
rate of Rp 9090 per dollar.  End Summary. 
 
¶2. (U) Indonesia's insurance sector pre-dates independence in 1945 
when most insurance companies were foreign-owned including some 
founded by the Dutch.  Asuransi Jiwa Bersama Bumiputera (or 
Bumiputera 1912 for short), one of the largest, was created as a 
mutual insurance company by a group of teachers in 1912 and remains 
Indonesia's only mutual insurance company.  As of December 2005, 
there were 152 insurance companies in Indonesia, comprising 51 life 
insurers and 97 non-life insurers. 
 
---------------------------------- 
Table 1: Insurance Companies, 2005 
---------------------------------- 
Life, State-Owned           1 
Life, Private              34 
Life, Joint-Venture        16 
Non-Life, State-Owned       3 
Non-Life, Private          75 
Non-Life, Joint-Venture    19 
Re-insurance                4 
 
Total:           152 
 
¶3. (U) Despite the considerable number of firms, the sector is small 
and concentrated.  In 2005, insurance sector assets were equivalent 
to 2.8% of GDP and 4.1% of total financial sector assets. 
Approximately 60% of these assets are concentrated in the ten 
largest companies, while the ten smallest ones account for less than 
1% of the market. 
 
------------------------------------------- 
Table 2:  Assets and Liabilities - Overview 
------------------------------------------- 
             Assets        Liabilities 
                (in Rp trillion) 
------------------------------------------- 
Life          53.9           46.4 
Non-life &    22.4            5.0 
Reinsurance 
------------------------------------------- 
TOTAL         76.3           51.4 
 
TOTAL 
$billion      $8.4           $5.7 
 
 
JAKARTA 00000978  002 OF 007 
 
 
Source: Ministry of Finance, 2005 data. 
 
¶4. (U) A few players dominate both the life and the non-life 
sectors.  In the life sector, the top five companies have 53% of 
market assets (see Table 3).  In the non-life sector the top five 
companies have 43% of the market by assets (See Table 4). 
 
---------------------------------------- 
Table 3: Assets and Liabilities (Life) 
---------------------------------------- 
        Assets as of 2005   Liabilities 
               (in Rp trillion) 
---------------------------------------- 
State-owned: 
Jiwasraya         3.7         3.3 
 
Private: 
Bumiputera 1912   9.7         9.6 
Sequis Life       2.8         2.4 
Panin Life        2.6         0.8 
Indolife 
Pensiontama       2.2         1.8 
 
Remaining 30      6.7         5.4 
---------------------------------------- 
Subtotal         23.9        20.0 
 
Joint Venture: 
AIG Life          6.7         5.6 
Manulife          4.7         4.3 
Prudential        4.1         3.5 
AIA Indonesia     3.6         3.2 
 
Remaining 14      7.3         6.5 
--------------------------------------- 
Subtotal         26.3        23.1 
 
TOTAL            53.9        46.4 
 
TOTAL $ billion  $5.9     $5.1 
 
 
------------------------------------------ 
Table 4: Assets and Liabilities (Non-Life) 
------------------------------------------ 
                Assets       Liabilities 
                    (in Rp trillion) 
------------------------------------------ 
State-owned: 
Jasindo           1.5            1.0 
Kredit Indonesia  0.9            0.1 
Ekspor Indonesia  0.6            0.1 
-------------------------------------- 
Subtotal          2.9            1.2 
 
Private: 
Panin             2.2            0.1 
Tugu Pratama      2.1            0.6 
Astra Buana       2.0            1.4 
ACA               1.3            0.5 
 
Remaining 71      7.4            4.1 
-------------------------------------- 
Subtotal         15.0            6.7 
 
Subtotal 
Joint Venture     3.3            1.6 
 
TOTAL            21.2            9.5 
 
TOTAL $ billion  $2.3           $1.0 
 
Source: Ministry of Finance, 2005. 
 
JAKARTA 00000978  003 OF 007 
 
 
 
Low Level of Insurance Penetration 
---------------------------------- 
 
¶5. (U) In addition to a very low level of social security, insurance 
penetration in Indonesia is small.  Reasons for this include 
Indonesia's low per capita income, a lack of public understanding of 
insurance products, and a traditional cultural reliance on the 
extended family for financial support.  Finance Minister Mulyani 
commented at a seminar in 2006, "My mother would say, 'Why do I need 
a pension or insurance?  I have six children.'"  Mulyani doubted the 
current generation of young people would relay on family in the same 
way, however.  Hasbullah Thabrany, Chairman of the National 
Association of Health Insurance and Guarantee Management Experts 
(PAMJAKI) said that the low penetration rate is due to the lack of 
both education and interest.  Despite several massive natural and 
manmade disasters in Indonesia from 2004-2006, few insurance 
companies were affected since so few people carry disaster or 
property insurance. 
 
---------------------------------------- 
Table 5: Insurance Penetration 2005 
---------------------------------------- 
Country    Insurance Premiums       %GDP 
             (In $ Billions) 
---------------------------------------- 
 
Indonesia       3.8                 1.4 
Malaysia        5.6                 5.4 
Thailand        4.9                 3.5 
ASEAN          24.3                 3.4 
Australia      40.4                 8.0 
Canada         59.2                 6.8 
Japan         479.1                10.8 
OECD        2,709.8                 9.0 
 
Source: Indonesian Capital Markets and Non-Bank Financial 
Institutions Supervisory Agency; Swiss RE; OECD. 
 
Competition Growing Domestically 
-------------------------------- 
 
¶6. (U) Despite weak enforcement and regulation, competition in the 
insurance sector is getting stiffer.  The World Bank estimates that 
from 2000-05, assets and premiums in the life sector almost tripled. 
 In the non-life sector, assets increased about 75% and premiums by 
about 90% over the same period.  The World Bank projects premiums 
could grow another 15-20% if GDP growth meets the GOI's projections 
of around 6% in 2007.  As in the banking business, with relatively 
few new industrial customers, many insurance companies are targeting 
property-owning wage earners with consumer products, competing by 
offering low premium rates.  An executive at a general insurance 
company told us vehicle insurance premiums are sometimes discounted 
by as much as 50%.  However, the tight competition for a limited 
customer base has translated into low premium growth over the last 
couple of years.  One international consultant told us "the last 
thing you want is rapid growth in a sector which is in weak 
financial condition and weakly regulated." 
 
Weak Regulation and Enforcement 
------------------------------- 
 
¶7. (U) The Capital Markets and Financial Institutions Supervisory 
Agency (BAPEPAM-LK), an agency under the Ministry of Finance, is 
responsible for regulating and supervising the insurance sector. 
However, the agency operates under a weak legal framework, the 
Insurance Law of 1992, which established prudential regulations 
while at the same time muddying responsibility for resolving 
insolvent companies.  The GOI took a major step in 1999 by launching 
Regulation No. 63/1999 which significantly increased the minimum 
paid-up capital requirements from Rp 3 billion ($330,000) to Rp 100 
billion ($11 million) (Rp 200 billion or $22 million for 
re-insurance).  However, existing ones were "grandfathered" under 
 
JAKARTA 00000978  004 OF 007 
 
 
the previous, lower capital requirement. 
 
¶8. (SBU) According to many insurance industry insiders, years of 
weak regulation and indifferent supervision have left Indonesia with 
a number of insolvent domestic companies that may present a serious 
risk to the sector.  Numerous small insurers are under-capitalized 
and unlikely to withstand stiffer market competition in the future. 
While stricter capital requirements have been in place since 1999, 
and the MOF has withdrawn the licenses of some small companies, none 
have been closed.  Insolvent insurers with licenses revoked, 
continue to issue policies without penalty.  An industry contact 
told us that a bank certificate of deposit was sometimes used to 
show the regulator that the insurer had the required minimum 
capital, then cashed after the business approval was received.  A 
lengthy, 7.5 year audit cycle has allowed some insurers to operate 
with very little scrutiny.  "There is a lot of fiction in the 
reported numbers," an industry contact noted.  "It is pretty common 
knowledge that most companies keep two sets of books."  There is no 
requirement for insurance companies to be rated, and ratings agency 
Pefindo rates less than ten domestic insurers. 
 
Resistance to Reform Among Domestic Insurers 
-------------------------------------------- 
 
¶9. (SBU) Not surprisingly, Indonesia's domestic insurance companies 
have proven resistant to reform.  Lack of transparency about the 
ownership of many small insurers has left it difficult to gauge the 
true state of the sector.  Some companies are owned or controlled by 
influential Indonesians, including members of Parliament, who may 
not be keen for regulatory reform.  As the World Bank notes, 
"international experience indicates that costs of resolution 
increase consistently as a resolution decision is delayed." 
 
¶10. (SBU) Another factor that has propped up an unreformed, domestic 
industry is excessive international reinsurance capacity.  Industry 
sources told us that international reinsurers often offer local 
companies very attractive terms that reduce the need for them to 
follow best practices.  The downside comes when there is a large 
event which small domestic insurers cannot afford to cover, forcing 
them to their international re-insurers.  After the riots of 1998, 
for example, international re-insurers took many months to decide 
whether the riots were an "excluded event" or not.  Although they 
eventually paid, international joint venture companies paid claims 
quickly and without difficulty. 
 
Bumiputera 1912: Ticking Time Bomb? 
----------------------------------- 
 
¶11. (SBU) There is a consensus among expatriate insurance 
professionals that the financial condition of Bumiputera 1912 is one 
of the biggest risks facing Indonesia's insurance sector. 
Bumiputera had 13.4% of the life insurance market's gross premiums 
in 2005 (down from 38% in 1985), and remains the biggest life 
company in terms of customer base.  It has approximately 9.7 million 
policyholders.  The Ministry of Finance showed its assets of Rp 9.7 
trillion ($1 billion) and liabilities of Rp 9.6 trillion ($1 
billion) in 2005.  However, a financial sector consultant and an 
industry contact we spoke with estimate it currently has $500 
million more in contractual liabilities than it has in assets, and 
is, in reality, insolvent by both domestic and international 
standards.  The MOF was aware of Bumiputera's financial woes as far 
back in 1999 when it enacted new capital requirements, and made an 
exception for "mutual life insurance companies."  Bumiputera is 
Indonesia's only mutual life company.  Then and now, Bumiputera's 
millions of middle class policyholders represent an important 
political force. 
 
¶12. (SBU) "The GOI is losing sleep at night over Bumiputera," our 
industry contact told us, "it is a ticking time bomb."  Another 
industry contact said "insurance companies should not be 
pay-as-you-go," noting that Bumiputera is simply paying claims from 
the premiums of new customers.  The GOI is aware of Bumiputera's 
problems, and has quietly approached several international insurance 
 
JAKARTA 00000978  005 OF 007 
 
 
companies to purchase it.  However, international insurers are 
reluctant to do so unless they are held harmless for Bumiputera's 
liabilities.  Raden Pardede, the newly appointed chair of the 
Executive Forum of the Financial Sector Stability Forum, 
acknowledged that Bumiputera, "is absolutely a Ponzi scheme, but 
hopefully will survive for now.  It urgently needs restructuring, a 
buyer or a rescue program."  Despite the its weak condition, IMF 
Senior Resident Representative Steven Schwarz told us he did not 
think a collapse of Bumiputera would create contagion to the banking 
sector.  "There are not close linkages to the banks," he concluded. 
 
Uneven Playing Field and Professional Gaps 
------------------------------------------ 
 
¶13. (SBU) Regulations that protect weak companies at the expense of 
good ones represent another challenge for the sector.  An example is 
a 2004 Ministry of Finance "Local Priority Treaty" that endorses 
domestic retention of premiums.  The decree restricts the flow of 
premiums overseas to international reinsurers, and requires that 10% 
of the reinsurance business stay with domestically incorporated 
companies.  International companies call this policy an example of 
the "good propping up the bad" and say it disregards the basic 
fiduciary responsibility of an insurance company. 
 
¶14. (SBU) A lack of professional training of many insurance company 
employees also hampers the sector.  While Indonesia has regulations 
mandating training and certification of insurance employees, the 
industry does not comply.  Companies are also mandated to spend 5% 
of personnel budgets on training and education, but unlike in the 
banking industry, the MOF has not enforced this policy in the 
insurance sector.  One organization is addressing the professional 
gap.  The Institute of Risk Management and Insurance (STIMRA) in a 
joint initiative with the Ministries of Finance and Education along 
with donors, is now providing the first professional training for 
the insurance sector.  STIMRA began a one-year accelerated program 
for individuals employed in the sector, and will graduate its first 
class of 32 in March 2007 with a Bachelor's in Insurance and Risk 
Management.  Three and four-year diploma programs will see their 
first graduates in 2009 and 2010, and graduates are likely to 
receive multiple offers from an industry with a dearth of skilled 
employees.  STIMRA will offer a certification program in 
underwriting personal auto, personal home-owners' and commercial 
property policies will, also a first for Indonesia. 
 
Slow Steps to Reform 
-------------------- 
 
¶15. (SBU) The Ministry of Finance is aware of problems in the 
insurance industry and is moving slowly to reform the sector. 
Responding to criticism of weak regulation and supervision, it is 
working on an "insurance industry blueprint".  In May 2006, MOF 
appointed a dynamic, hard-working, new Director for Insurance, Isa 
Rachmarwata, an experienced actuary who trained in Canada.  The 
Coordinating Ministry for the Economy tasked Rachmarwata with a 
report on the financial condition of domestic insurance companies by 
the end of 2006.  Our MOF contacts tell us the report is complete, 
and awaiting review by the Finance Minister.  However, a Ministry of 
Finance consultant cautioned us that the new Director's job is 
"massive."  "He is starting to do what hasn't been done in twenty 
years." 
 
¶16. (U) In July 2006, the GOI and Bank Indonesia launched a policy 
package aimed at strengthening the banking industry, non-bank 
institutions and capital markets to boost the economy.  The package 
includes steps aimed at strengthening the capital structures of 
non-bank financial institutions, managing insolvent institutions and 
introducing good governance principles.  However, international 
insurers remain concerned that there have been inadequate industry 
consultations in developing needed reforms.  The five main policy 
actions in the plan are: 
 
A) Resolution of insolvent insurance firms by creation of a clear 
exit strategy. 
 
JAKARTA 00000978  006 OF 007 
 
 
 
B) Improving the quality and effectiveness of insurance industry 
regulation and supervision through amendments and new guidelines. 
 
C) Protection of policy holders via a mediation agency. 
 
D) Improvement of the quality of director's and commissioners in the 
insurance industry through fit-and-proper test of directors and 
commissioners of insurance companies (10% completed by the end of 
2006). 
 
E) Improving tax treatment of the insurance industry by recognition 
that claims paid by life insurers are tax deductible. 
 
¶17. (U) The GOI's reform priorities largely track with World Bank 
recommendations for reforming the sector.  The Bank has put forward 
three major reform priorities to the Ministry of Finance: 
 
- Rationalize the industry including resolving weak and bankrupt 
firms. 
 
- Improve the enforcement and regulatory capacity of the Ministry of 
Finance as supervisory authority. 
 
- A sustained education campaign to develop and promote the 
industry. 
 
Legacy of Manulife and Prudential Cases 
--------------------------------------- 
 
¶18. (SBU) The 2002 Manulife case and 2004 Prudential case continue 
to cast a shadow over foreign participation in the insurance sector. 
 In the former case, the Commercial Court granted a bankruptcy 
petition against a local subsidiary of Canadian insurance firm 
Manulife Financial Corporation, even though the MOF declared the 
subsidiary fully solvent.  The judges ruled Manulife Indonesia 
bankrupt for not paying a 1999 dividend, forcing the company to shut 
down operations for six days.  The Supreme Court later overturned 
the ruling after facing strong protests from the international 
business community and the Canadian government.  In a similar case 
two years later, a commercial court in Jakarta declared Prudential's 
local unit bankrupt after a former consultant to the company accused 
the insurer of not paying his fees.  A court-appointed receiver 
ordered the London-based insurer to suspend its local operations. 
The foreign business community heavily criticized this case as 
severely damaging to the investment climate. 
 
¶19. (SBU) Industry and business representatives, working with the 
Ministry of Finance and Parliament, submitted an amendment to close 
the loophole in the bankruptcy law.  In September 2004, Parliament 
passed Bankruptcy Law No. 37/2004, replacing Law No. 4/1998.  The 
amended law requires prior approval by the Ministry of Finance 
before a court can declare an insurance firm bankrupt.  It also 
specifies that only the Finance Minister can file a bankruptcy 
petition against insurance companies in commercial courts.  (The 
attorney general and the central bank are the only bodies permitted 
to file petitions against banks.)  Nevertheless, the judicial 
uncertainty revealed in these cases damaged the investment climate 
and spooked foreign companies.  From 2000-2004, 14 international 
insurance companies in Indonesia closed their doors. 
 
¶20. (SBU) Comment.  The MOF appears to be beginning to address some 
of the insurance sector's problems with help from STIMRA, donors and 
the insurance associations.  The World Bank told us that after 
delivering its recommendations for non-bank financial institutions 
publicly in January, it met for over five hours with Finance 
Minister Mulyani to discuss them in detail.  International industry 
players are pushing for an independent "Blue Ribbon Commission" to 
look at the condition of the insurance industry, and believe the 
sector needs the same level of scrutiny that the banking sector 
received after the 1997-98 financial crisis.  However, the 
challenges facing the sector are daunting, and resolving them may 
take years.  Despite Bumiputera's troubled state, our contacts agree 
 
JAKARTA 00000978  007 OF 007 
 
 
this politically sensitive case must be managed carefully so as not 
to create a crisis of confidence.  The MOF will also need to proceed 
carefully given powerful interests in domestic insurance companies. 
The good news is that Mulyani has shown, by her appointment of a new 
insurance director, her careful attention to World Bank and industry 
recommendations, and the inclusion of an insurance reform component 
in the financial sector reform package, that she is committed to 
improving the sector. 
 
HEFFERN