Indonesia's Insurance Policy Guarantee Program: Balancing Protection and Risk

Addressing Moral Hazard Concerns

Indonesia's upcoming insurance policy guarantee program (PPP) is poised to cover approximately 90% of insurance policies in the country, potentially catalyzing the revival of the insurance industry. However, experts caution that the program must be carefully designed to mitigate the risk of moral hazard.

Dedy Kristianto, an insurance expert and member of the Indonesian Insurance Writers Community (Kupasi), highlights four critical aspects that need clarification to ensure the program's effectiveness: 1) eligibility criteria for covered companies, 2) robust fraud control and solvency audit standards, 3) risk-based contribution formulas, and 4) clear resolution mechanisms for failing companies.

Differentiated Coverage Limits

Kristianto emphasizes the importance of differentiated coverage limits based on product categories. He suggests that pure protection products should have higher coverage limits compared to investment-linked products. This differentiation is crucial as different insurance products carry varying levels of risk. Without such differentiation, the risk of moral hazard increases significantly.

Initial Coverage Limit Considerations

The proposed coverage limit range of Rp500 million to Rp700 million by the Deposit Insurance Corporation (LPS) is considered a reasonable starting point by experts. This range is expected to cover the majority of insurance policies in Indonesia. However, Kristianto stresses that the final coverage limit should be dynamic and based on risk profiles, fund adequacy, and product dynamics.

Accelerating Implementation to 2027

The possibility of accelerating the PPP implementation to 2027 is viewed positively by experts, given that some insurance companies are already well-prepared in terms of risk management and solvency. However, this acceleration should be accompanied by industry-wide improvements in governance, fraud control, and data harmonization to ensure a level playing field and prevent systemic risks.

Ferdinan D. Purba, a member of LPS's Board of Commissioners overseeing the PPP, confirms that LPS is fully prepared to implement the program ahead of the original 2028 schedule mandated by Law No. P2SK. The accelerated implementation is expected to restore public trust in the insurance industry, which has been challenged by cases of insurer defaults and low policyholder confidence over the past decade.