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Indonesian state-owned insurer's failure raises spectre of systemic risk

By Bitra Suyatno - posted Wednesday, 10 June 2020

Over the last few months the Coronavirus epidemic raging across the entire world, including Indonesia, has dominated Indonesian daily news. Every day on the news experts discuss the latest developments and speculate about the future. The pandemic has displaced other previously hot issues – such as the Jiwasraya insurance case.

Why was this case a hot issue? As presented in the news, because of investment mismanagement and alleged corrupt behavior, Jiwasraya, a state-owned insurer, has failed to pay its policyholders' matured policies, worth trillions of rupiah.

Basing its estimates on preliminary calculations, the Supreme Audit Agency (BPK) announced that the losses could reach amounts of Rp16.9 trillion (more than AUS$1.7 billion). Current news reports indicate that the State-Owned Enterprises (SOEs) Ministry is actively processing the payment of the Jiwasraya policyholders' claims, prioritizing conventional (life insurance) products because most of the policy holders for these products are retirees.


Much-discussed topics included the role of Jiwasraya and the insurance sector in Indonesia's financial crisis, the extent to which insurance involves systemic risk, and implications for insurance regulation. According to Supreme Audit Agency (BPK) chairman, Agung Firman Sampurna, Jiwasraya could "potentially carry systemic risk" for the country's financial industry.

The Financial Institution Supervisory Agency and the Ministry of Finance's representatives hold an opposing view. They tend to believe that the insurer's failure is not systemic.

Actually, both in Indonesia and in the international context, there is no widely accepted definition of systemic risk and consequently, there is debate on how systemic risk should be assessed.

The definition and measurement of systemic risk is important because, among other things, policy makers and regulators need definitional certainty when they handle each individual case, and also because agreed assessment of systemic risk will reduce the moral hazard that comes with "too-big-to-fail" financial institutions. If a financial institution collapses, a regulator needs to understand clearly whether systemic risk was a cause, or not. With that information, the authority can decide whether or not to assist the company, or to liquidate it.

The existing Law on Prevention and Mitigation of Financial System Crisis (UU PPKSK) has mainly provided measures regulating the financial system, in particular the banking system, but not other financial institutions.

Billio et. al (2011) argue that a learning from the Financial Crisis of 2007 – 2009, is that the concept of systemic risk, which originally associated with bank runs and currency crises, now should be applied more broadly to shocks to other parts of the financial system including hedge funds, broker/dealers, and insurance companies. The reason is their inter-connectedness – and the reason why now is that many of the ties among these entities are new, having emerged only in the last decade. The researchers propose several econometric measures of connectedness as applied to the monthly returns of selected banks, hedge funds, broker/dealers, and insurance companies in the U.S. Their research finds that all four sectors have become highly interconnected through a complex network of relationships, in the process likely increasing the level of systemic risk in the finance and insurance industries – although the banks still play a much more important role in spreading shocks than others.


Another study, conducted by Weiß et. al (2013), reveals that of a sample of 409 international domestic and cross-border mergers of insurance companies, firm size, leverage, and diversification across insurance lines all add to the destabilizing effect of insurance consolidation. Geographic diversification is found to contribute to financial stability.

On the other hand, Bierth et. al (2015) find that the contribution of 253 international life and non-life insurers to systemic risk between 2000 and 2012 was minor, although peaking during the financial crisis. The interconnectedness of large insurers was a significant driver of the insurers' exposure to systemic risk but in contrast, the actual contribution of insurer companies to systemic risk appears to be primarily driven by the insurers' leverage.

James B. Thomson, a vice president in the Office of Policy Analysis of the Federal Reserve Bank of Cleveland in his 2009 policy paper, "On Systemically Important Financial Institutions and Progressive Systemic Mitigation" has developed measures to define systemically important financial institutions. These are based on several criteria: size threshold, whether it be asset-based, activity-based, or both; contagion effect ­– even if a financial institution is relatively small its closing can have the potential to disrupt the international payments system and imposed nontrivial losses on its counterparties; correlation, a source of systemic importance also known as the "too many to fail" problem; concentration of dominant firms in key financial markets or activities; and financial market conditions.

This article presents studies that could be used as a trigger for related authorities to start reviewing. If suitable, they could adopt and adapt best practices for the Indonesian context. The impact of financial crisis can be very severe. Hendri Saparini, a prominent Indonesian economist, says that the financial crisis leading to political instability in Indonesia between 1997 and 1998 caused banking recapitalization at a cost of up to Rp650 trillion (including BLBI) and increased the national debt by tens of billion US dollars, burdening the country up to this day.

To conclude, the Government, OJK, Central Bank of Indonesia and other parties, including but not limited to the financial sector, need to sit together to discuss and determine measures of connectedness and systemic risk in the financial sectors, not only for banks, but also for insurance companies, pension fund institutions, microfinance institutions, finance companies, entities involved in capital market and other financial institutions.

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About the Author

Bitra Suyatno ( is a Doctor of Business Administration who graduated from Victoria University, Melbourne, Australia in 2018. Currently he is working at the Ministry of Finance the Republic of Indonesia. His posts represent his own views. He blogs at

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