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Ada Pertanyaan? Hubungi Kami Fathan Qorib, Christina Desy
The Business Competition Supervisory Commission (KPPU) has delivered an opinion to the Financial Services Authority (OJK) objecting to the OJK setting minimum insurance premiums.
The minimum premiums are set out in the OJK Circular Letter No. SE.06/D.05/2013 on Determination of Premium Tariffs and Acquisition Fees for Insurance for Motor Vehicles and Property, and Specific Risks including Flood, Earthquake, Volcanic Eruptions, and Tsunami (“Circular”).
In the opinion, the KPPU says that the OJK should not set minimum tariffs for insurance premiums. Maintaining free market pricing mechanisms is seen as necessary to maintain businesses efficiency and an atmosphere of healthy business competition to benefit consumers.
According to Nawir Messi, KPPU Chairman, insurance companies have adjusted their premiums in compliance with the Circular, which is likely going to lead to relatively similar tariffs in the market. Such circumstances may consequently cause a price cartel in contradiction with business competition principles.
While the KPPU understands the purpose of the Circular, which was aimed to resolve a cost-cutting premium war, nonetheless Mr. Messi is of the opinion that such concerns should not be addressed by artificially setting premiums. He suggest the better approach is the maintenance of an open market which will boost efficiency and increase competition between market players.
The KPPU further explained that setting minimum premiums more often than not results in entry barriers for insurance companies that could provide premiums below the prescribed minimums. Needless to say, this is seen as disadvantageous for consumers who are artificially having their options for competitive premium rates limited.
In support of the alternate approach he is suggesting, Mr. Messi offered to support the OJK through competition related enforcement actions under KPPU’s authority to deal with the insurance sector’s concerns about predatory pricing. From the KPPU’s point of view, this approach is more effective than fixing minimum premiums.
The Circular itself implements Article 20 of Government Regulation No. 73 of 1992on Performance of Insurance Business, and has been in force since 20 January 2014. Under the Circular, the OJK establishes minimum and maximum premiums for various types of insurance.
The tariffs are calculated based on risk and loss profiles coverng at least a five year projection, as mandated by Article 19 of Minister of Finance Decree No. 422/KMK.06/2003on Organizing Insurance and Reinsurance Businesses. Premiums are also determined according to the insurance type of insured object.
Firdaus Djaelani, Head Executive of OJK Supervisors for Non-Bank Financial Industries, stated that the Circular aims to prevent unfair business competition among insurance and reinsurance companies. Additionally, the setting of premiums is also designed to protect consumers by providing for stronger insurance providers.
The maximum premiums are designed to prevent over-pricing, while the minimum premiums are designed to prevent insurance companies from applying a premium that results in an inability to pay claims. Under the Circular, the minimum tariff represented a 300% increase compared to previous premium levels.
Other than protecting consumers, the Circular is also targeting to decrease the deficit of ongoing transactions in the reinsurance sector. Over the last 20 years, the deficit has been increased to more than IDR 250 billion. This is apparent from data on premiums transferred by national insurance companies to foreign reinsurance companies. Mr. Djaelani is worried that the deficit will keep on increasing if the situation is not fixed immediately.
The Circular not only applies to insurance and reinsurance companies, but also to banking and financing companies which undertake insurance related business. It is generally expected that industry stakeholders will comply with the existing rules out of a fear of being penalized for not doing so.
“The applicable sanctions cover the ambit of suspension from selling insurance products, up to a fit and proper test for a company’s directors for repeated non-compliance,” said Mr. Djaelani.
Dumoly F. Pardede, OJK’s Deputy Commissioner of Supervision on Non-Bank Financial Industry II said that the OJK had not yet received the KPPU’s opinion. Nonetheless, the OJK is aware to the letter’s content. To that extent, Mr. Dumoly argued that the OJK is authorized to set premiums and the Circular will not cause unfair business competition.
Mr. Dumoly’s opinion is shared by Julian Noor, Executive Director of the Association of General Insurance of Indonesia (Asosiasi Asuransi Umum Indonesia – “AAUI”) which was involved in the drafting process. Mr. Noor goes further in that he is of the view that the Circular will solve the unfair tariff war that could result in insurance companies not being able to settle claim payment obligations with policy holders.
(hot/kc)
Fathan Qorib, Christina Desy
The Business Competition Supervisory Commission (KPPU) has delivered an opinion to the Financial Services Authority (OJK) objecting to the OJK setting minimum insurance premiums.
The minimum premiums are set out in the OJK Circular Letter No. SE.06/D.05/2013 on Determination of Premium Tariffs and Acquisition Fees for Insurance for Motor Vehicles and Property, and Specific Risks including Flood, Earthquake, Volcanic Eruptions, and Tsunami (“Circular”).
In the opinion, the KPPU says that the OJK should not set minimum tariffs for insurance premiums. Maintaining free market pricing mechanisms is seen as necessary to maintain businesses efficiency and an atmosphere of healthy business competition to benefit consumers.
According to Nawir Messi, KPPU Chairman, insurance companies have adjusted their premiums in compliance with the Circular, which is likely going to lead to relatively similar tariffs in the market. Such circumstances may consequently cause a price cartel in contradiction with business competition principles.
While the KPPU understands the purpose of the Circular, which was aimed to resolve a cost-cutting premium war, nonetheless Mr. Messi is of the opinion that such concerns should not be addressed by artificially setting premiums. He suggest the better approach is the maintenance of an open market which will boost efficiency and increase competition between market players.
The KPPU further explained that setting minimum premiums more often than not results in entry barriers for insurance companies that could provide premiums below the prescribed minimums. Needless to say, this is seen as disadvantageous for consumers who are artificially having their options for competitive premium rates limited.
In support of the alternate approach he is suggesting, Mr. Messi offered to support the OJK through competition related enforcement actions under KPPU’s authority to deal with the insurance sector’s concerns about predatory pricing. From the KPPU’s point of view, this approach is more effective than fixing minimum premiums.
The Circular itself implements Article 20 of Government Regulation No. 73 of 1992on Performance of Insurance Business, and has been in force since 20 January 2014. Under the Circular, the OJK establishes minimum and maximum premiums for various types of insurance.
The tariffs are calculated based on risk and loss profiles coverng at least a five year projection, as mandated by Article 19 of Minister of Finance Decree No. 422/KMK.06/2003on Organizing Insurance and Reinsurance Businesses. Premiums are also determined according to the insurance type of insured object.
Firdaus Djaelani, Head Executive of OJK Supervisors for Non-Bank Financial Industries, stated that the Circular aims to prevent unfair business competition among insurance and reinsurance companies. Additionally, the setting of premiums is also designed to protect consumers by providing for stronger insurance providers.
The maximum premiums are designed to prevent over-pricing, while the minimum premiums are designed to prevent insurance companies from applying a premium that results in an inability to pay claims. Under the Circular, the minimum tariff represented a 300% increase compared to previous premium levels.
Other than protecting consumers, the Circular is also targeting to decrease the deficit of ongoing transactions in the reinsurance sector. Over the last 20 years, the deficit has been increased to more than IDR 250 billion. This is apparent from data on premiums transferred by national insurance companies to foreign reinsurance companies. Mr. Djaelani is worried that the deficit will keep on increasing if the situation is not fixed immediately.
The Circular not only applies to insurance and reinsurance companies, but also to banking and financing companies which undertake insurance related business. It is generally expected that industry stakeholders will comply with the existing rules out of a fear of being penalized for not doing so.
“The applicable sanctions cover the ambit of suspension from selling insurance products, up to a fit and proper test for a company’s directors for repeated non-compliance,” said Mr. Djaelani.
Dumoly F. Pardede, OJK’s Deputy Commissioner of Supervision on Non-Bank Financial Industry II said that the OJK had not yet received the KPPU’s opinion. Nonetheless, the OJK is aware to the letter’s content. To that extent, Mr. Dumoly argued that the OJK is authorized to set premiums and the Circular will not cause unfair business competition.
Mr. Dumoly’s opinion is shared by Julian Noor, Executive Director of the Association of General Insurance of Indonesia (Asosiasi Asuransi Umum Indonesia – “AAUI”) which was involved in the drafting process. Mr. Noor goes further in that he is of the view that the Circular will solve the unfair tariff war that could result in insurance companies not being able to settle claim payment obligations with policy holders.
(hot/kc)