Life insurance firms still rely on agents to win customers

Transcription

1 Special Insurance Edition August Life insurance firms still rely on agents to win customers Insurance agents still contribute the greater part of the premium incomes of local insurance companies despite the increase in the use of banking channels, or bancassurance, to net new policyholders, according to the Indonesian Life Insurance Association (AAJI). AAJI chairman Hendrisman Rahim said agents played the largest role in winning customers, followed by bancassurance and various channels such as telemarketing. Our data shows that the agents contributed almost 50 percent of last year s Rp 121 trillion [US$8.85 billion] of life insurance premiums, he said, adding that his body aimed to have 500,000 agents by this year-end and 1 million agents by As many as 454,706 licensed life insurance agents were recorded as of June, a percent increase from the 356,731 agents recorded in The annual average growth since 2013 reached 17 percent, according to the association s data. AAJI acting executive director Togar Pasaribu revealed that the contribution by agents was closely followed by bancassurance at around 48 percent while the remainder came from other sources, including telemarketing. However, I doubt that online marketing will work for Indonesian customers any time soon because currently they prefer to have face-to-face briefings prior to deciding to buy an insurance product, he said. Togar went on to say that online marketing would work only if Indonesian customers were fully literate in insurance terms. The growing number of life insurance agents has also led to a rise in the membership of the Million Dollar Round Table (MDRT). The MDRT also known as the Premiere Association of Financial Professionals is an association of professional insurance agents from around the globe. Having been established in 1927, the association now has more than 38,000 financial and life insurance professionals from around 450 companies in 74 countries as its members. To become a member, an agent has to book premiums amounting Rp million per annum and a further Rp 1.63 billion and Rp 3.26 billion to qualify as a member of the Court of the Table (COT) and the Top of the Table (TOT), respectively. According to data of the Financial Services Authority (OJK), life insurance net premium income as of June amounted to Rp trillion, jumping more than 130 percent from the Rp trillion recorded in March.

2 Country chairman of Indonesia MDRT, Lucy Dewani, said that her association aimed at educating life insurance agents to be professional and successful agents. We are ready to give training and disseminate information on the benefits of becoming a member to agents of various local insurance companies, she said, adding that usually foreign jointventure insurance companies, such as Prudential, Allianz and AIA, were already aware of her association. Over 860 Indonesian agents are MDRT members. Although this represents only 0.19 percent of the total number of agents in the country, it stands as the second highest in the Asia Pacific region. The Philippines tops the ranking with 1,240 MDRT members, Thailand comes third with 854 members, Singapore and Malaysia with 845 and 672, respectively. Source: 2

3 Impact of the New BI Regulation on the insurance industry by the MKK Insurance Team New BI Regulation Bank Indonesia ( BI ) recently promulgated Regulation No. 17/3/PBI/2015 on the Mandatory Use of Rupiah in the Territory of the Republic of Indonesia (the New BI Reg ). The New BI Reg is an implementing regulation of Law No. 7 of 2011 on Currency (the Currency Law ). The Currency Law provides an exemption to use IDR if an agreement provides for payment in a foreign currency: However, the New BI Reg goes one step further in that foreign currency is not allowed for any transaction taking place within the territory of Indonesia. The only exemptions are for transactions involving an offshore party or for contracts that had been entered into before the July 1 st deadline. The purpose of promulgating this New Reg is ostensibly that of asserting financial sovereignty, but certainly it is also a defense of the Rupiah, which this year has been the worst performing currency in the ASEAN region. The effective date of the New BI Reg is still relatively recent (July 1, 2015), so in fact, there may still be amendments, further Circular Letters, etc. but we thought it necessary to opine at this moment on the impact of the New BI Reg on the insurance industry as a whole. OJK letter The OJK letter stipulates that marketing of certain foreign-denominated insurance products is acceptable, but significantly, other transactions involving USD activities are not specifically covered. Those who claim that the OJK letter exempts the insurance industry are probably over-interpreting. It does explicitly state that it allows (i) marketing of foreign currency products in certain situations and (ii) obtaining reinsurance offshore if onshore capacity does not exist. Close coordination with the OJK may be necessary to remain within acceptable bounds since on a close reading of the OJK letter, some may read point (ii) as nothing more than a restatement of UU 44/2014 (the New Insurance Law ) and not an exemption, i.e. reinsurance can be obtained offshore if it is not available onshore. If BI issues a warning letter to a carrier, ultimately it is up to the regulator (OJK) to issue sanctions. In the case of the insurance industry, since the regulator has issued an approval letter to use foreign currencies in certain situations as long as carriers stay within those bounds, they should find that their operations are not heavily impacted. Carriers are implementing varying strategies, including allowing USD policies with IDR equivalent premium invoices at an agreed exchange rate. Strictly speaking, if the New BI Reg applies, any amendment to a sum insured post July 1 st 2015 may have to be denominated in IDR. Others do not want to take the currency exposure if premiums are payable offshore in USD. Some carriers will want to be seen to comply with the New BI Reg regardless of whatever is stated by OJK. While a letter from OJK as the insurance 3

4 regulator carries some weight, a true exemption from the New BI Reg would require a letter from Bank Indonesia. Insurance company operations Rupiah compliance does not necessarily mean that business will suffer. It does mean that carriers may have to convert the sums insured into an IDR equivalent, so premiums can also be denominated in IDR. The challenge is in managing the exchange rate risk on premium payments. Claims can be buttressed by a currency clause which agrees on claims recovery at an exchange rate either at date of loss or date of reinstatement. However, currency risk is still implicit in specialty classes of insurance which are stated in USD. The composition of balance sheet assets and liabilities may indeed change given any change in currency shift from USD-denominated assets backing USD-denominated liabilities to IDR-assets/liabilities. The impact of the New BI Reg on a specific insurer depends on the currency that it does its business in: this depends in turn on the carrier s strategy and business model. The functional as well as the reporting currency may both be impacted. Carriers must be alert to not create dangerous mismatches between the functional currency and the reporting currency and mismatches between assets and liabilities. Benchmarking pricing still does not eliminate currency risk since at the end of the day you receive IDR, and the next day or week the IDR may fluctuate. Additional costs may have to be borne. The controlling factor is that the invoicing and paying is in IDR, and thus the implicit currency risk remains. In any case, we recommend that carriers take a good look at core and non-core activities and as a show of good faith, try to use IDR in as many activities as possible. Some workarounds may be necessary for core activities, and the OJK Letter may give latitude in certain situations. Our advice is based on common sense: follow the letter of the law as closely as possible to mitigate regulatory risk as much as is practicable. 4

5 OJK Circular on Integrated Corporate Governance by Angel Rumondor, S.H. After the crises of 1998 and 2008, regulators all over the world have been under pressure to tighten up controls to account for market risk, liquidity problems and integrated risk in financial groups. The OJK s Circular letter on Integrated Corporate Governance for Financial Conglomerates (Circular Letter No. 15/SEOJK.03/2015, CL ) is part of this global move. The issues addressed in the OJK CL are those of intra-group risk. Transactions within groups are, or are very much like, related-party transactions and can lead to concentrations of risk that are not transparent and which, ultimately, could lead to cascading default in a financial group if not regulated. Risk concentrations can accumulate in financial groups that are not immediately noticeable to outsiders, and even within the group they often go unnoticed because of blurred lines of control and/or breaks in communication among group companies. The corporate governance (CG) guidelines that led to the 2008 crisis were self-assessed, and we note that the guidelines set out in the Circular are also on a self-assessment basis: 1. Structure 2. Process 3. Result (compliance, objectivity and efficiency) Since self-assessment carries with it implicit risks (lack of standards, etc.) structures have been mandated by the OJK to internalize and formalize the self-assessment requirement: the head company must set up (i) a Corporate Governance committee, (ii) a compliance work unit and (iii) an internal audit. Special software exists to allow business leaders to follow the condition of their affiliates financial condition in real time; they allow for a level of communication and transparency that previously could not be attained. However, face to face meetings are also important, and integrated corporate governance will never be achieved with a purely IT solution. Companies may engage in different types of business, and even those in the same field may have different business models. Off-balance sheet liabilities need to be identified and communicated to the rest of the group in a transparent manner so that the risk manager has a full grasp of the risk situation. 5

6 Cross-border risk of companies with foreign share ownership is a parallel concern. Intragroup conflicts of interest must be considered, calculated and dealt with in an effective and transparent manner. They run a risk of cascading failure beyond that of purely local companies. Independence, professionalism, accountability must be maintained at all times and the requirements to serve on the BoD and BoC of the holding company must be clear and transparent. The BoD and BoC must have clear duties and responsibilities. The Integrated CG committee, the Integrated Compliance Working Unit and the Integrated Internal Audit Work Unit must be operated according to the same principles. The implementation of the integrated Risk Management must be overseen, and the holding company is responsible for the drafting and implementation of the integrated CG plan. Some companies may already have existing integrated CG plans/structures/systems/it solutions in place; however, the OJK retains the right to ask the company to modify such structures to comply with this CL. Deliverables There are two reports that the Holding Company must make. The first is a semi-annual self-assessment report to be submitted to the OJK every August 15 and February 15, and the second is an annual implementation report which must be drafted at the end of the financial year. The self-assessment report must detail the shareholding structure of the group, the Holding Company s organizational structure and the intra-group policy to identify, manage and record transactions between group companies. 6