Small insurers told to plan for mergers to comply with rules

The Jakarta Post, JAKARTA | Fri, 01/16/2009 5:37 PM  

Racing against the 2010 deadline for tougher new capital requirements, small-sized general insurers need to start taking steps to prepare themselves for mergers, says an association. 

"It is hard for even a large insurance company to get more capital from investors during the current financial crisis," said Kornelius Simanjuntak, chairman of the General Insurance Association of Indonesia (AAUI). 

"That's why they have to be ready for a merger," he said in a press conference Thursday. 

The merger call, a rarity from a business player, came after the government recently agreed to extend the deadline for new capital requirements for insurance companies. 

On Dec. 31, the government agreed to extend the deadline set in June, by issuing a regulation stipulating that every insurer must have a capital base of at least Rp 100 billion (US$8.9 million) by 2014. 

Under the new regulation, an insurer must achieve the obligatory capital target in three phases within six years -- Rp 40 billion by 2010, Rp 70 billion by 2012 and Rp 100 billion by 2014. This new regulation has amended the previous one issued in June, which required insurers to achieve the capital requirement in three years. 

The December regulation was made in response to objections by the AAUI to the June regulation, with the grouping forming an ad hoc team and demanding a review of the regulation on the grounds that it would impact greatly and negatively on the industry, especially on small players. 

AAUI said that more than 40 general insurers still had equity worth less than a total of Rp 40 billion. 

Kornelius said the association welcomed the revised regulation, saying it had saved more than 5,000 workers from layoffs. 

"Small companies now have more time to prepare a merger or cooperation. A choice of merger is better than selling the company to foreign investors for a cheap price," he added. 

According to existing laws, foreign investors can only have a maximum 80 percent share in an insurance company when it is established. 

The investors, however, can dilute their local counterpart's shares by injecting more capital later. 

During the January-September period last year, the country's general insurance industry collected Rp 19.4 trillion in gross premiums, disbursing Rp 6.3 trillion in claims. 

Of the total gross premium, more than 50 percent was contributed by property and automotive sectors. 

"But the insurance industry may see a lower growth this year because of a significant decrease in vehicle purchasing," Kornelius said, but declining to give a growth estimate. 

An association representing the automotive manufacturers has estimated weakening demand could push down auto sales this year by around 30 percent as bank credits are scarce, emulating the squeeeze on global liquidity. (hwa)