Indonesia’s state insurer on the brink of collapse with US$2 bil deficit

JAKARTA: Indonesian authorities are weighing the induction of a strategic investor into a unit of the nation’s oldest insurer that’s on the brink of collapse after alleged fund mismanagement left a US$2 billion hole in its books.

PT Asuransi Jiwasraya has submitted a restructuring proposal to the Financial Services Authority that includes the stake sale in unit PT Jiwasraya Putra and securing financial assistance from a planned holding company for state insurers, according to Riswinandi, commissioner for non-banking financial industry at the authority, known as OJK.

Jiwasraya is in dire need of a lifeline after audits revealed violations of investment guidelines, leading to the insurer reporting a negative equity of US$2 billion.

The crisis, stemming from alleged product mispricing, reckless investment activities, aggressive window dressing and liquidity pressure has hurt its more than 7 million clients.

The insurer’s revamp plan has been approved by Finance Minister Sri Mulyani Indrawati, Riswinandi said.

The State-Owned Enterprises Minister Erick Thohir has said the government was formulating a plan to rescue the insurer and OJK Chairman Wimboh Santoso has hinted a stake sale in the unit handling life insurance may ease the cash crunch at the company.

Shrinking funds

“Our requirement is that the investor must also be an insurance company, or is part of a business group that runs an insurance business,” Riswinandi said in an interview.

“We want the investor to have competence in this industry. Foreign entities are also welcome to invest.”

Authorities plan to make Jiwasraya’s life insurance unit more attractive to prospective investors by partnering it with state-owned lender PT Bank Tabungan Negara, pawn shop PT Pegadaian, railway operator PT Kereta Api Indonesia and mobile services provider PT Telekomunikasi Selular.

Jiwasraya Putra will meet the insurance needs of tens of thousands of employees of these companies and a captive market of that size will attract investors, Riswinandi said.

The insurer may also get funding from the insurance holding company the government will soon establish through a regulation, Riswinandi said, adding income from new premiums may help ease the cash crunch at the firm.

Jiwasraya may raise about 5 trillion rupiah from the stake sale and through the holding firm and improve its negative capital, Riswinandi said.

Jiwasraya will be allowed to partner with an insurance company to reinsure its products in due course and subject to it meeting all requirements, Riswinandi said.

The crisis at Jiwasraya has exposed the inadequacy in existing regulations and lax supervision of the insurance industry, with the government pledging to set up a rescue agency and tighter surveillance.

Regulators have also cracked down on volatile penny stocks at the centre of the Jiwasraya scandal besides arresting some former executives for their alleged role in causing financial losses.

OJK is partnering with the stock exchange and the market custodian to obtain investment data for verification of those filed by the insurance companies to prevent future defaults, Riswinandi said.

“One thing that we have started changing is our approach to supervision. It is now based on risks, not on compliance,” Riswinandi said.

OJK is also working with Bank Indonesia to raise supervision standards of the non-banking financial industry to the same level as the banking industry, he said.