The Complicated Problems of Insurance

The Problems

Insurance industry is one of the business way that initially supposed to be one of the most prospective industry in Indonesia since the country have large people population. However, in the process of the industry, there are many problems which has been attached. Start from the market structure problems, until the customers’ ones.

First, there are over supply phenomenon between insurance producer and the consumers. Whereas, Indonesia with the population until 220 million people should be an affluent market to grow. So, what’s the problem? The affluent market has convoked may players to play within. So, the players is too many, and they just become minor companies so that they get difficulties to expand their operations. As we know, the market leader here only have 12,08% market share.

Second, in the industry, risk management principle has enforced the companies to diversify the customers into small pitches. The companies (commonly) prefer to choose small customers with small expected premium in the large numbers instead of the big customers with big expected premium in the small numbers. Therefore, they just concentrated in the individual customers more than corporates customers. Indirectly, they has been lost the opportunity to gain bigger profit from the corporates insurance.

Third, investing in unitlink form is just a dilemma. Usually, we know insurance with its functions as risk transfer and assets protection. Nowadays, with the unitlink product, insurance company provide combination functions as investment and insurance. However, the return is not larger than investment in stocks or bonds. Insurance try to give a beneficial in form an asset protection against the risk. Factually, the benefit still couldn’t stimulate the investors to invest here.

Fourth, the lack knowledge of the people about insurance and its benefit is irrefutable fact. It has been impacting people unwillingness to go with insurance programs. The lack knowledge above including the administrative procedure knowledge, claiming procedure knowledge, the policy should take, and many more. The unwillingness is caused by uncertainty condition within consumers’ decision making to take the insurance policy.

Low income of Indonesian people make they reluctant to spend some money for insurance policy. They prefer to spend the money to fulfill their primary needs. In other words, many people still consider the insurance program is not reasonable for them.

Five, lack of capital to fund the operating activities is the classical problem of insurance industry in Indonesia. Insurance company is a service company which have big risks within their business so that it must be supported by big capital. By expanding the capital, normally the company can meet their obligation to avouch their client risks. In the end of 2008, 47 of 133 insurance companies in Indonesia cannot meet the minimum capital at Rp 40 billion according to PP No 39/2008 about insurance operational (Kompas:2008). The government has provided some punishments for the companies which cannot meet the minimum capital by isolating them. Those companies only can operate in certain area. In the final punishment, the government can ban the product.

The low solvency of the insurance company can be measured by their debt to equity ratio. It shows the weighted of their financial mix between liabilities and equity. In Indonesia, mostly insurance companies use short-term liabilities to fund their operational activities. It makes the companies not solvable. That unsolvable condition can cause the default risk when the policy is claimed together. The high risk above potentially can minimize the risk based capital (RBC). As we know that regulator enforce the 120% RBC. It means that the insurance company must be covering the risk under 20% of their capital.

Beside the problems above, negative perceptions against insurance still revolving in the customers’ mind share, especially for claiming of accident. Many people complain about the complicated procedure to claim that.

The Solutions

First,the lack of financial power and the smaller ‘divided market pie’ is the main factor supporting the difficulties of insurance development in Indonesia. The merger and acquisition issues has been proposed to solve the problem. The merger don’t cause negative impact to the labors since they have big probability to be retained by outsourcing them. At least, it’s much better than doing re-insurance to the abroad companies since it can be affected by exchange rate’s exposure and minimize the profit.

The minimum capital companies is better to be taken over by the bigger companies. Logically, the merger between bad company with better company will just produce equal condition, let alone with the same company.

Second,the minimum risk based capital (RBC) and paid in capital (PIC) must be done to protect the industrial quality. It will be a barrier to entry for unqualified companies to play in insurance industry. It can reduce the over supply condition caused by unqualified companies, so that the qualified companies can expand the operations easier.

Third,market education must be done by the insurance companies. When the consumers has been educated, they will be more aware with the benefits of insurance. So, the ‘unwillingness to pay’ will be reduced and the market pie is getting bigger. This market education should activate by insurance company alliances in Indonesia. Beside that, the insurance company have to re-brand their bad image in the consumers’ minds caused by their unethical operations by making asymmetric information about the policy, or one side mutual termination by clients.

Salam,

The original article is typed here