T

he fast deterioration of the financial balance sheet of Indonesia’s oldest and largest insurance company, AJB Bumiputera, with an estimated 6.5 million policyholders, raises questions about the span and quality of oversight of the Financial Services Authority (OJK), which is responsible for micro-supervising all financial services companies.

Why did the OJK put Bumiputera under its special supervision in September 2013 only after its risk-based capital (RBC) worsened to below the minimum 120 percent? This ratio measures the solvency of an insurance company to meet the claims of its policyholders and other related financial risks. Why did the OJK take over management of Bumiputera only last October?

Unlike banks that can suddenly face severe liquidity problems due to massive runs by jittery depositors, most of the liabilities of a life insurance company are clearly measured and are medium or long-term in nature (claims by customers whose policies mature). True, as Bumiputera is 103 years old, the number of its policies maturing each year may be large, but such claims should have been projected by its actuary department.

Yet more troublesome is the data quoted by Katadata online news portal from Bumiputera’s financial reports, which said that its RBC as of December 2015 was 256 percent, double the minimum requirement. Even though its premium income totaled almost Rp 5 trillion (US$371 million) while its payments of claims amounted to Rp 5.28 trillion, the deficit could still be covered by earnings from its investments.

The question then is why its financial condition deteriorated so fast so that that it is now facing severe liquidity problems. Latest reports estimate that Bumiputera payments of claims next year may reach Rp 7 trillion and will continue to increase to over Rp 8 trillion in 2019. The next question then is how reliable is Bumiputera’s audited financial statement?

The House of Representatives Financial Service Committee has hinted that not a single cent of the state budget can be used to bail out Bumiputera. But given the important role of Bumiputera as the largest domestic life insurance company and its large number of customers, this firm could be too large to fail.

Allowing Bumiputera to fail would damage the public’s trust in the insurance industry, which has been promoted as a source of long-term funds for infrastructure development and other investment needs. Yet more devastating is the fact that since Bumiputera is a mutual insurance company, its policyholders automatically become its shareholders, who get dividends if the company makes profits but who will bear losses if the company fails.

It is encouraging to learn that the OJK has been negotiating with potential new investors to take over Bumiputera. The latest reports say the potential investor is a publicly listed company that plans to make a rights issue to raise additional capital to acquire Bumiputera. But even if the negotiations with this private investor fail, the OJK and the Finance Ministry need to intervene to bailout Bumiputera, perhaps through acquisition or merger with a state-owned life insurance company.