roles of actuaries and actuarial … (61-83) ponno_jonat… · governance in indonesia ......

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ROLES OF ACTUARIES AND ACTUARIAL ASSOCIATION IN DEVELOPING ACTUARIAL PROFESSIONALISM IN ADDRESSING GOOD

GOVERNANCE IN INDONESIA

(A STUDENT’S POINT OF VIEW)

Ponno Jonatan

Indonesia

Abstract. Governance is a regulation, code of conduct, principle, and practices that will bring the company towards mission, vision, and its long-term goal. Good Governance intends to provide higher customer satisfaction, to increase the moral and commitment of the employees, to increase the value of company and to provide contributions in solving public issues. Actuary as a profession that works in financial institutions market, mostly in non-bank financial institutions market, has a major role in addressing either good corporate governance or good pension fund. Therefore, actuaries along with actuarial association must be developing actuarial profession either by quantity or quality to get the recognition or accountability in playing the major role. There are three ideas involved in a profession; they are continuous learning, organization, and a spirit of public service. By those ideas, I try to describe what Society of Actuaries of Indonesia (PAI) has been doing in developing actuarial professionalism in addressing good governance in Indonesia for the last few years. Key-words: - 1. Introduction The Destination Statement of National Committee for Good Governance for year 2009 is to place Indonesia in the top-quartile of International Good Governance rating1. Many people doubt that this goal can be achieved due to the bankruptcy of many companies, banking miss-management, high numbers of corruption practices and various corporate scandals that have occurred and placed Indonesia way behind top place in good governance rating. Even in Asia, Indonesia, as the most corrupted country, will need many efforts to clean its reputation. The proverb said it is better late then never. In other words, if we never try to do something in order to address the good governance in Indonesia, than the Destination Statement would never be fulfilled. The corruption investigation and high functionary arrestment on corruption presumption that happen nowadays has showed us that government supports the implementation of fairness, transparency, supervision mechanism and responsibility towards all stakeholders as directed by good governance. The rest depends on every role of institutions and or professional associations to implement those values.

1 KOMPAS Newspaper, May 2005, “A long way to Good Governance”

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The connection between superior returns and good governance cannot be demonstrated mathematically. But common sense should lead us to agree that if the interest of the management, the interest of the board members is well aligned with the interest of the shareholders, the probability that they will all benefit is increased and even better, the potential negative impact of conflicts of interest is greatly diminished. A study done by Lipper and Governance Metrics International of 725 large cap domestic equity funds demonstrates that portfolios weighted with corporations with above average corporate governance score reported better performance over 3 and 5 year periods2. Actuary as a profession that works in financial institutions market, mostly in non-bank financial institutions market, has a major role in addressing either good corporate governance or good pension fund governance. International Actuarial Association (IAA) describes an actuary as multi-skilled strategic thinker who has trained in the theory and application of mathematics, statistics, economies, probability, and finance. He/she has been called financial architect and social mathematician because his/her unique combinations of analytical and business skills are used to address a growing variety of financial and social challenges worldwide3. Based on descriptions above, an actuary should be able to conduct risk management, asset and liability management, asset valuation, and other function with full integration. Nevertheless, the fact tells us that CFA, MBA, CHFC, CPA, and other professions are more popular in market compared to actuaries. The depreciation of Rupiahs to US Dollars in 1998 has caused a major crisis in banking sectors and many life insurance companies, especially whose policies are quoted in US Dollars, have become collapse. Many economists still believe that Indonesia is still in crisis now. The uncertainty of investment climate has limited insurance companies or Pension Funds in developing a long-term investment projection. Thus, an actuary’s skills to perform a projection and dynamic strategic planning are needed by the industries. The government has developed appointed actuary concept in order to address good governance in insurance companies and pension fund. Moreover, actuaries along with actuarial association are expected to develop actuarial profession either by quantity or quality to get the recognition or accountability in playing the major role.

2. Good Governance a) Goals and Definition

Governance is a regulation, code of conduct, principle, and practices that will bring an institution towards its mission, vision, and long-term goal (written or not). Good Governance intends to provide higher customer satisfaction, to increase the moral and commitment of the employees, to increase the value of the company and to

2 Governance and Actuary, Claude Lamoureux, Toronto Actuaries’ Club, March 24th

,2004 3 Nagasawa, Takayuki. The activities of actuaries in Japanese Trust Banks for Good

Governance. 12th East Asian Actuarial Conference, Philippines, 2003

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provide contributions in solving public issues. In other words, good governance is not only for the sake of the shareholder but also the stakeholder.

b) Good Governance Main Indicators

The main indicators of good governance are transparency, accountability, and power sharing. Transparency is interrelated to information that could be accessed properly by those who need it. Good information should represent the true conditions through accurate data that must be available at the right time. The second indicator, accountability, is the clarity of functions or roles of every party. That means there is a solid definition of every function and a chain of command especially in management’s side. The management must be independent and fair in the decision making process according to the current regulation and the company’s principles. The last indicator is power sharing whereas each party has the role that is directed by a fair regulation so no one is going to be harmed.

c) Ideal Condition and Actuary Roles

Good governance means that there is a fulfillment of needs for all stakeholders which will be shown by the maximum achievement of the company’s value either in short term or in long term.

The ideal condition can be seen by a mutual relationship of every stakeholder of the company that is shown in figure 1.

Figure 1. The ideal Condition of Good Governance

In the mechanism shown in figure 1, an actuary expectedly has a role to become a manager who tries to develop all indicators explained before. An actuary must be independent and fully integrated in reporting actuarial valuation that has been made. It is an actuarial role, whether statutory or otherwise, to inform the board on the implications to the financial affairs of the company of future financial risks and obligations4. In other words, actuary’s role is not simply to record or calculate Company’s liability and solvency, but also to do projection on future risks and analyze the action and control system that could be taken to diminish those risks. That is why, an actuary will not be expected to discuss about the past performance

4 Actuaries and Accountability, Eduard Simon Siauw, 6th Actuarial Congress of Society of Actuaries of Indonesia, 21st July 2005.

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only but also to identify and articulate financial implications to directors, management, and regulators so there will be a guardianship for the long-term sustainability of the entity and its obligations to all stakeholders in the enterprise. While reviewing the financial condition of a company, an appointed actuary cannot be influenced or be intimidated by the Board to favor their side. For example, in reserve and solvency valuation, Risk Base Capital (RBC) valuation or insurance policy pricing process, an actuary must have a full authority to present the result and opinion on analysis that has been done. However, it does not mean that an actuary is responsible on bad financial condition of the company. In spite of actuary’s narrow technical roles, actuaries hold a major function to keep the stability of a company’s financial condition that will lead to the country’s stability, for example, actuary’s roles in pension fund industry, which is largest investment in Indonesia with a total of 68.41 trillion Rupiahs5 projected up to the end of 2005.

Figure 2. Roles of an Actuary in Pension Fund Industry

For employers sponsoring a pension fund, actuary’s function is not only to calculate employer contributions or the present value of benefit obligation but also to design a pension plan that meets the company’s profiles and fulfills current government regulation and pension fund regulation. An actuary can also take part as a financial analyst or a financial consultant in performing a valuation that is suitable to Indonesian macroeconomic and microeconomic situation. An actuary also has a role to supervise the administration system so that every member can receive their entitlements according to the regulations or agreement. Another role of an actuary is to conduct asset and liability management, to give opinion on investment portfolios and funding system of a pension fund and to perform cash flow projection on future potential risks. For the pension fund members, an

5 BISNIS INDONESIA Newspaper, May 2005, “Pension Fund Investment is Rp 40 billion”


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actuary can be a mediator between the employer and the employee (pension fund member) in communicating the current pension fund’s policy and current related regulations. For the government, an actuary can be actively involved such as in designing post-employment benefits regulation or social security program. Moreover, an actuary can be a public speaker who explains the importance of continuing earnings to public and to give guidance in choosing the right vehicles that offered in market. Roles of an actuary in pension fund industry are shown in figure 2.

3. Profession and Professionalism of an Actuary a) Definition of Profession and Professionalism

Profession is a vocation that requires competences, skills and advanced knowledge that can be acquired by a formal and non-formal education and by working experiences. Furthermore, Professionalism can be defined by following requirements. First, a profession must be associated with a skills and intellectual techniques. Second, a profession must have a code of conduct or ethics with a formalized mode of enforcement upon its membership. The last one, as the most important requirement, there must be a commitment by every member of the professional community toward the greater community interest. In summary, there are three ideas involved in a profession; they are continuous learning, organization, and a spirit of public service6.

b) Criteria of Actuarial Profession

Based on the previous definitions, an actuary can be categorized as a profession. The knowledge is a combination of mathematical, statistical, demographic, economic, financial, analytical, and modeling skills7. This knowledge is obtained trough continuous learning by formal education and by non-formal education such as workshop, seminars, and courses that are conducted by actuarial association and by interaction with other professions. Their competencies will be assessed by examinations and review process held by the actuarial association in which an actuary is a member. An actuary perform his/her duties based on actuarial standard of practices and a code of conduct that have been enforced. Moreover, actuary’s contributions as a professional with technical competencies will serve the public interest. c) The Challenge of the Future

An actuary faces challenges in increasing their professionalism as follows:

• How to meet market demand on actuarial profession that has been accelerated by the growth of national economies and the global access to services through technological progress;

• How to play a bigger role in the actuary’s traditional roles (insurance and pension fund);

6 CONTIGENCIES, March/April 2005 7 Guerard, Yves. IAA Wider Fields, 11th Asian Actuarial Conference, Hong-Kong, 2001

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• How to compete with other profession in a non-traditional business (bank, money market, etc.);

• How to develop tools and methodologies to keep pace with a changing socio-economic environment;

• How to compete in a world that demands higher quality and strong professional standards;

• How to broaden the recognition of actuarial profession in all countries around the world.

d) Key Requirements

To answer the challenges above, actuaries along with actuarial association must fulfill the following requirements:

• Good Governance

Actuaries should have addressed self-governance before they implement good governance in industries where they give contributions.

• Good Education system and Appropriate Entrance Requirements

A good educational and examination system will enable actuaries to serve broader needs in evolving markets. Therefore, the syllabus, membership examinations, and certification must be reviewed periodically. The actuarial association must be able to support all members by providing them with education facilities and systems that can enforce all members to improve their professionalism.

• Professional conduct of members

The actuarial association need to develop and maintain a strong code of conduct through a discipline system to all members. Therefore, every member will act professionally in every situation they face.

• Research and Standard Process

Actuaries must be responsive to technological development, economic and financial issues, and change in related regulations so they can be a leading profession in the broader area. Hence, actuaries along with the association need to conduct continuous researches, especially in developing enforceable actuarial professional standard, so they will have tools, methodologies, and point of view that are suitable to the current condition and be able to work according to the current regulations.

• Continuing Professional Development

Actuaries must improve their professionalism in order to meet market demand and to compete with other professions through continuous learning. The need of these improvements must come up from themselves with the support of the association.

• Good Communications

A good communication need to be built among actuaries, between actuaries and their employer or client, and between actuaries and the public. Thus, actuaries should have a good communication skill so they will be able to discuss, articulate and present their job to others.


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The next section will describe how the Society of Actuaries of Indonesia (PAI) takes steps in developing actuarial professionalism in Indonesia.

4. Society of Actuaries of Indonesia (PAI) a) Overview

Society of Actuaries of Indonesia (PAI) was established in Jakarta on 19 October 1964. Despite its existence as actuarial profession organization for almost 41 years, actuarial profession is not well known among the public, even in insurance business where actuaries play their major roles. Currently, PAI has 309 members (125 fellows/FSAI and 185 associates/ASAI). With the annual growth rate of 16.7% for the last 17 years, actuarial profession is considered rare and exclusive compared to more than 200 million people in Indonesia. The growth of PAI membership since 1987 to 2004 is shown in figure 3:

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ASAI 8 8 8 9 11 14 16 16 18 28 40 74 112 133 149 180 183 185

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

About 80% of PAI members came from insurance industry with the expertise on life insurance and pension fund. Most of them are located in Jakarta as the capital city of Indonesia. The distribution of PAI members (ASAIs and FSAIs) can be shown in next figures:

Source: PAI

Figure 3. The Growth of PAI Membership (1987-2004)

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Figure 4. ASAI Distribution

Life Insura nce

Ge nera l Insuranc e

C o nsulta nt

P ublic A cco untant

B ankGo vernm ent

R einsuranceP ensio n F und

Univers it iesOthers

Figure 5. FSAI Distribution

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Despite their small number of members, PAI has been consistently developing actuarial profession in Indonesia either in quantity or quality. PAI has been an observer member of International Actuarial Association (IAA) and has constantly tried to become a full member. PAI has been periodically conducting workshops, seminars, and conferences in Indonesia and always send their delegations to international actuarial events8. b) Organizational Structure

PAI is recognized as a non-profit, non-political, and non-governmental organization. The boards of PAI are elected trough a convention and have been placed to positions as shown in figure 6:

8 Actuaries Bulletin., 2nd edition, January 2000

Source: PAI

Source: PAI


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Figure 6. PAI organization chart (2002-2004)

Those in above positions are professionals in their own field of work and have gained trust among the entire members to work toward vision and mission that have been established. PAI vision for period 2002-2004 is to be a professional organization that will be recognized internationally. In order to achieve the vision, PAI will be working under its mission that is to be a professional organization by developing quality, skills, and profession development of all members through continuous educational system and by gradually developing the entrance requirements through examinations that will be acknowledged internationally, and eventually to gain recognition from International Actuarial Association9. c) Entrance Mechanism

According to PAI Statutes, someone can be a member of PAI if he/she has passed a series of examinations held by PAI. Those examinations are conducted in Jakarta twice in a year. An applicant who has passed the first five examinations can be a member of PAI with title Assistant of Society of Actuary of Indonesia (ASAI). Following are first five examinations for ASAI candidates:

AAI-1: Probability and statistics

AAI-2: Mathematics of Finance

AAI-3: Actuarial Mathematics

AAI-4: Mortality Table Construction

AAI-5: Economics The result recapitulation of examination held in June 2000 to 2004 is shown in table below:

9 Letter to PAI members (Number 006/S/PAI/VI/2002)

Source: PAI

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Table 1. Result Recapitulation for ASAIs Examinations (June 2000-2004)

Year Remarks AAI-1 AAI-2 AAI-3 AAI-4 AAI-5 Total

2000 No. of Applicants 88 96 101 67 57 409

No. of Success 31 27 30 21 21 130

Passing Rate % 35.2% 28.1% 29.7% 31.3% 36.8% 32.2%

2001 No. of Applicants 81 70 90 73 82 396

No. of Success 32 32 44 37 31 176

Passing Rate % 39.5% 45.7% 48.9% 50.7% 37.8% 44.5%

2002 No. of Applicants 67 55 66 82 89 359

No. of Success 48 9 25 41 29 152

Passing Rate % 71.6% 16.4% 37.9% 50.0% 32.6% 41.7%

2003 No. of Applicants 30 49 35 96 77 287

No. of Success 2 0 4 38 0 44

Passing Rate % 6.7% 0.0% 11.4% 39.6% 0.0% 11.5%

2004 No. of Applicants 27 42 28 10 37 144

No. of Success 0 0 3 7 0 10

Passing Rate % 0.0% 0.0% 10.7% 70.0% 0.0% 16.1%

Total No. of Applicants 293 312 320 328 342 1595

Total No. of Success 113 68 106 144 81 512

Passing Rate % 30.6% 18.0% 27.7% 48.3% 21.4% 29.2% Source: PAI

Graphically, it is shown in the following figure:

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Source: PAI

Figure 7. The result of ASAIs Examinations (June 2000 -2004)


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ASAIs can take the second series of examinations to become a Fellow of Society of Actuary of Indonesia (FSAI) and will obtain registration numbers inform the Minister of Finance Department as recognition from PAI of FSAI’s authority as a public actuary. Following are the second series of examinations for FSAI candidate:

AI-1: Life insurance Mathematics

AI-2: Pension

AI-3: Risk Selection

AI-4: Life Insurance Liability Valuation

AI-5: Life Insurance and Pension Fund Investment and Related Regulations

After passing above examinations, they must attend seminars and workshop that are conducted by PAI for actuary candidates. Then PAI will consider if the actuary candidate is deserved to get the recognition.

The result recapitulation of PAI examinations held in June 2000 to 2004 is shown in the table below.

Table 2. Result Recapitulation for FSAIs Examinations (June 2000-2004)

Year Remarks AI-1 AI-2 AI-3 AI-4 AI-5 Total

2000 No. of Applicants 17 29 23 19 25 113

No. of Success 4 11 8 9 11 43

Passing Rate % 23.5% 37.9% 34.8% 47.4% 44.0% 37.5%

2001 No. of Applicants 27 26 25 12 20 110

No. of Success 4 17 13 2 4 40

Passing Rate % 14.8% 65.4% 52.0% 16.7% 20.0% 33.8%

2002 No. of Applicants 28 19 20 19 24 110


Passing Rate % 14.3% 10.5% 35.0% 10.5% 4.2% 14.9%

2003 No. of Applicants 22 13 21 19 23 98

No. of Success 0 9 10 0 5 24

Passing Rate % 0.0% 69.2% 47.6% 0.0% 21.7% 27.7%

2004 No. of Applicants 24 5 13 23 19 84


Passing Rate % 16.7% 40.0% 53.8% 30.4% 31.6% 34.5%

Total No. of Applicants 118 92 102 92 111 515

Total No. of Success 16 41 45 20 27 149

Passing Rate % 13.9% 44.6% 44.6% 21.0% 24.3% 29.7% Source: PAI

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Graphically, it is shown in the following figure:

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Source: PAI

Figure 8. The result of FSAIs Examinations (June 2002-2004)

Examination materials developed by PAI are focused in area of Life insurance and Pension Fund. Before 2002, PAI developed the materials independently. After that, PAI has been working together with academics of Indonesian universities in developing more qualified examination materials. That might be the reason why there was a decrease on passing rate due to the increase of the examinations quality. By cooperating with the university academics, PAI hopes to gradually align its syllabus with IAA’s, which in turn will qualify PAI as a full member of IAA. Entrance examinations conducted by IAA are listed below:

IAA entrance examinations:

1. Financial Mathematics

2. Probability and Mathematical Statistics

3. Economics

4. Accounting

5. Modeling

6. Statistical Methods

7. Actuarial Mathematics

8. Investment and Asset Management

9. Principles of Actuarial Management

10. Professionalism


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Being oriented towards IAA syllabus, PAI has tried to widen and enhance its syllabus by making gradual adjustments to the current PAI examination materials.

PAI realized that increasing the quality of the examinations would cause decrease on number of applicants that leads to the deceleration of PAI membership growth. Consequently, PAI tried to come up with other ways to increase their number of members. One of them was finding a new entrance mechanism besides by examinations.

Other countries have adopted several forms of entrance mechanism. They are shown by list of qualifications or requirements of actuaries in selected countries in the table below:

Table 3. Qualification/Requirements of Actuaries in Selected Countries

Country Qualification/Requirements Argentina Examinations, University Courses Brazil University degree program Finland Examinations by industry bodies, government examinations Germany Examinations, University Courses Hungary University degree plus 18 months of practice India Examinations by industry bodies Japan Examinations by industry bodies Mexico University degree program

Singapore Examinations by industry bodies, University degree programs

Sweden University degree program

Switzerland University degree plus at least three years of qualified professional experience, in line with international guidelines of ASTIN (IAA)

United Kingdom Examinations, University Courses

United States Examinations by industry bodies

Malaysia Examinations, full recognition on other actuarial organization

South Africa Full recognition on other actuarial organization Spain University degree program Dutch University degree program

Canada Examinations, full recognition on other actuarial organization

Australia Examinations, full recognition on other actuarial organization

Britain Examinations, University Courses Source: International Actuarial Association (IAA)

Besides having cooperation with universities in developing examination materials; PAI has discussed a proposal of “sit-in student” program with some universities’ leaders. By this program, those who want to study actuarial sciences but are not registered as university students will be allowed to sit in the lectures. If they pass the examinations with satisfactory score, this will be recognized by PAI having passed a related PAI examination.

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5. The Present and Future Condition of Actuarial Profession

a) SWOT Analysis on actuarial profession in Indonesia

STRENGTHS WEAKNESS

Small numbers Small numbers

There are many qualified educational institutions Unpopular

Special skill in mathematics and statistic Lack of communication skills

Discipline and responsible Has a narrow point of view

Has a National Association recognized by government Concentrated in traditional business

Critical of details Work only in technical area

Capable in solving technical and complex problems No special institution for an actuary

Good in modeling Back-office employee

Has many potential students Less paid compared to other professions

OPPORTUNITIES THREATHS

Play a bigger role in traditional business The entry of foreign actuaries

Play a bigger role in non-traditional business

Another profession started to learn actuarial technical skills

The emerging of a long term investment instruments

Traditional business model are started to out of favor

Crisis and catastrophe has increased market demand on actuarial profession

Crisis and catastrophe has caused bankruptcy of companies

Internal Capabilities (Strengths and Weakness)

� The relatively small numbers in actuarial profession in Indonesia can be seen as the profession’s strength and weakness. It is considered strong because the competition among actuaries is not as competitive as other professions. Besides, it will be easier to self-regulate the small number of actuaries. It is considered weak because with the current number of actuaries they cannot meet the market demand and being unpopular;

� Even tough there is no special institution for actuarial education; there are a number of qualified institutions that are able to provide early actuarial education. Currently, four institutions have actuarial education program as a concentration. Those educational institutions are listed below:


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Table 4. Institutions that provide actuarial education

No Institutions Degree/Title Location Number of student (2003)

1 BPPK Certificated Jakarta 150

2 FISIP UI Certificated Depok 40

3 MM-UI* Master of Management Jakarta 10

4 ITB Master of Science Bandung 10 *No classes for year 2002, 2004, and 2005

� According to authors’ point of view, actuarial education program in MM-UI is not good in theory while ITB program is concentrated on theoretical aspect only. On the other hand, BPPK and FISIP-UI are considered not deep neither in actuarial science nor its application. Besides the four institutions, 38 private institutions have mathematical and statistical courses that are being the basic knowledge of actuarial profession. The list of those universities is shown in table below:

Table 5. Available seats in Private Institutions that have mathematical and statistical courses (year 2003)

No Location Number of universities Available Seats

1 Sumatera 9 455

2 Kalimantan 2 55

3 Jawa* 17 986

4 Bali 2 75

5 Sulawesi 6 230

6 Irian 2 25

Total 38 1,826 *There are three universities that have actuarial concentration

� Beside private universities that are listed in the table above, there are

many other educational institutions, which have potentials to develop actuarial education. Nevertheless, the number of the teachers or lecturers is not proportional to the number of potential students. Unfortunately, most of Indonesian actuaries are workers with tight schedule, so they have no time to be academics in universities.

� Indonesian actuaries have a conservative way of thinking in applying theory or models and in using the available tools. Usually they are “back-office-employee” who has less communication skills compared to other professions. On the other hand, they usually work with high discipline and responsibility. As an actuary usually is, Indonesian actuary has technical skills that are formed as a unique combination of mathematical and statistical knowledge. They are critical of details and very good in modeling. Unfortunately, even though they are scarce in labor market, they receive less salary than some other professions.

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� Indonesian actuaries play a major role in traditional business (life insurance and pension fund). They work with their quantitative technical skill mostly in calculating liability and solvency.

External Possibilities (Opportunities and Threats)

� Ever since the monetary crisis, competencies in risk management are much needed in markets. Because of the unpopularity of Indonesian actuaries, the huge opportunities for actuarial profession are taken over by other professions, which are more popular in Indonesia. In fact, other professions started to develop actuarial technical skills, especially in risk management area. The booming of new investment instruments such as mutual fund (Reksadana) and government bond (SUN) which need actuarial technical skills to calculate the value are some of the reasons for other professions to study actuarial aspects.

� The abandonment of a traditional business model opens a new variety of non-traditional businesses that can be explored by Indonesian actuaries.

� Monetary crisis and catastrophes such tsunami and other natural disasters that have happened recently increase market demand on insurance. Beside that, the significant growth of Indonesian Gross Domestic Product (GDP) indicates that insurance demand will be increasing in the future. Unfortunately, the number of insurance companies and the number of actuarial profession are not enough to fulfill market demand on insurance.

The following table showed us the Indonesian economic development since year 1999 to 2003 Table 6. Indonesian Economic and Insurance Development Data

ECONOMICS AND INSURANCE

DEVELOPMENT DATA 1999 2000 2001 2002 2003

1 National Income Aggregate

Gross Domestic Product

At Current Market Price (Rp Billion) 1.099.800 1.264.900 1.449.400 1.610.016 2.086.758

Annual Change (%) 16,14 16,28 15,52 11,08 29,61

At 1993 Market Price (Rp Billion)* 379.558 397.934 411.7 426.741 1.572.159

Annual Change (%) 0,85 4,84 3,32 3,65 2,684

2 Inflation rate (annual change of CPI) 4,18 9,35 12,55 10,02 5,06

3 Exchange Rate (Per US$1) 7.1 9.595 10.4 8.94 8.578

4 Population (Million) 200,3 203,5 208,9 211,10 215

5 Employment (in 000)**


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ECONOMICS AND INSURANCE DEVELOPMENT DATA 1999 2000 2001 2002 2003

Labor Force 94.847 95.651 98.812 100.8 100.3

Number of Employed (Formal Sector) 88.817 89.838 90.807 91.647 90.785

Number of Employed by Insurance Industry 101 110 108 NA NA

6 Market Structure

Number of Registered Insurers: 178 178 175 173 173

Life Insurers 62 62 61 60 60

General Insurers 107 107 104 104 104

Professional Reinsures 4 4 4 4 4

Social Insurer & Jamsostek 2 2 2 2 2

Civil Servant & Armed Forces 3 3 3 3 3

Insurance and Reinsurance Brokers 83 78 91 118 141

Loss Adjuster 23 23 23 25 25

Actuarial Consultants 18 18 18 19 20

7 Insurance Development:

Per Capita Expenditure (Rp)*** 69.099 81.914 112.246 65.645 67.3

Total Industry Asset (Million) 38.160.700 41.611.660 64.825.992 77.589.087 94.094.000

As % of GDP

- Life Sum Insured 16,3 19,3 18,90 7,22 9,30

- Life Premium 0,49 0,57 0,01 1,04 0,98

- Non-life and Reinsurance Gross Premium 0,57 0,56 0,01 0,86 0,69

- Life Asset 1,50 1,45 0,02 1,63 0,00

- Non-Life and Reinsurance Asset 1,01 0,98 0,01 0,98 0,82

Source: DAI Directory year 2003

* The constant price is based on 1993 price ** Source: Central Statistic Bureau (BPS) *** Total Gross Premium/ Number of Population

� Penetration of Life and Non-Life Insurance among countries in the world is shown in the following figure:

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Sou

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frica

Uni

ted

Kin

gdom

Sw

itzer

land

Kor

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epub

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and

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Arg

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Gre

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0

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4

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10

12

14

Country

Penetration of Life and Non-Life Insurance

Non-Life Life

*) Organization for Economic Cooperation and Development Source: Swiss Re (2000: table IX, p.33)

We can see in the figure above that the penetration of insurance in Indonesia is far behind many other countries. Still, there are many foreign investors who saw a huge opportunity to run insurance businesses in Indonesia.

� Thus, the emerging of many foreign insurance companies was followed by the entry of foreign actuaries. Currently, there are more than twenty foreign actuaries in Indonesia. About five of them have proposed to get recommendation from PAI therefore they will be fully acknowledged by government when acting as an appointed actuary in their company. Indonesian preferences for “imported” goods make foreign actuaries more favorable than local actuaries. However, on the optimistic side, the entry of foreign actuaries will motivate Indonesian actuaries to develop their professionalism. Foreign actuaries hopefully will share their knowledge to Indonesian actuaries so they could widen their knowledge, develop methodologies and tools they have and improve their point of views.

b) PAI roles in Developing Actuarial Profession in Indonesia

Based on current conditions, many things can be done by PAI in order to develop actuarial profession in Indonesia in quality and quantity as follows:

1. Add resource of fund: maintain member contributions by maintaining membership database, conduct examinations in other cities to get addition exam’s fee payment, get sponsorship, conduct actuarial seminars,

Figure 9. Penetration of Life and Non-Life Insurance


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workshops, or trainings for all members and public, develop bulletin, actuarial books, or study manual to sell, etc.

2. Increase the quantity: review examinations and entrance system; promote actuarial profession throughout universities by conducting actuarial seminars, etc.

3. Get recognition/accountability: develop mailing list and website for public, send writing paper to public newspaper and other publication media, become a public speaker in current issues, be involved in regulation development, reward those who contribute to actuarial profession development, set-up good governance framework, etc.

4. Develop professionalism: develop continuing professional development process scheme, code of conduct, disciplinary system, and professional standard, and then socialize them to all members, build public library, write actuarial books, supervise all members’ professionalism by credit point system, conduct seminars, workshop, training, conference, discussion forum, especially for members, facilitate internship possibility and chance to study more about actuarial science and its applications.

6. Support from Government on Actuarial

Profession Development In addressing good governance especially in Insurance companies and pension fund, Indonesian government has established Minister of Finance Decree No. 426/KMK/2003 about business permit and legitimacy of Insurance and Reinsurance Companies. Based on the regulation, an actuary has a legitimated role as an appointed actuary in insurance companies and pension fund (excluding reinsurance companies). Based on article 16 of the decree, a Life insurance company must appoint an actuary as the company’s actuary and the appointed actuary must be having following qualifications:

� A member of PAI or any overseas actuarial associations that has been registered as a full member of IAA and has a recommendation to work from PAI;

� Having a work experiences in life insurance at least for three years;

� And based on article 18, a life insurance company must appoint an actuarial consulting firm that does not have any affiliations with the company to calculate the company’s liability for at least once in three years.

� The existence of the ministry regulation should be a trigger to actuarial profession development and good governance in Indonesia. In fact, even every life insurance companies has an appointed actuary only recently, it has not proven yet that the bigger role of actuaries has resulted the better financial condition of insurance companies in Indonesia.

� Article 16 was created some issues about foreign appointed actuaries. To diminish the issues, PAI came up with a mechanism of giving recommendation to the foreign actuaries. In order to get the recommendation, they should:

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� Develop a research paper and present it to PAI members; and

� Conduct a sharing knowledge to PAI members. The recommendation will be valid for a certain period of time. Therefore, PAI could conduct surveillances to these foreign actuaries. According to the author’s opinion, to ensure that a recommendation is only given to competent actuaries, a foreign actuary must also take the entrance examination just as other Indonesian actuaries and should be given the rights to become PAI members with no possibility to be positioned in PAI management board. By this way, Indonesian actuaries shall be forced to develop their professionalism without the fear of loosing authorities in this country. According to the articles 29 verse (1), insurance and reinsurance companies must allocate fund at least 5% of their employee, director, and commissioner costs for their employee’s education and training costs in insurance knowledge. The regulation opens opportunities to the actuaries and students to improve their skills. But once again, it depends on each individual, whether he or she has the willingness to study or to step ahead. Code of Conduct and Disciplinary Procedure

Article 17 verse (2) in the Ministry of Finance Decree No. 426/KMK/2003 specifically regulates that a company’s actuary should be working according to current standard of practices and professional code of conduct. PAI has developed code of conduct or ethics and disciplinary procedure for all members. The ethical code is meant to maintain professionalism in providing services to the public and in interaction among actuaries, as shown in figure 10.

Figure 10 PAI Ethical Codes

Based on articles 22 verse (1), insurance or reinsurance companies must fire the company’s actuary that has made violation against insurance regulations. Furthermore, as written in article 26, the registration of appointed actuary can be cancelled if the actuary’s membership has revoked by PAI in case of violation on regulation or discipline procedure, or if he/she failed to pass fit and proper assessment because of integrity factors. PAI has a disciplinary procedure to support both regulations explained before by investigating all complaints about the work or attitude of actuaries in Indonesia. The disciplinary system is shown in figure 11:


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Figure 11. PAI Discipline Procedure

The ethical code and discipline procedure is a “rule of games” that must be kept by the entire PAI members. If every member obeys the rule, then the association will be in the right track towards its vision and mission. PAI is a community where all members must apply their skills within the boundary of ethical code. Furthermore, PAI as an actuarial association must be fair in implementing the agreement. Everyone who breaks the rule will be punished according to his/her fault.

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7. Conclusion i. Good Governance intends to provide higher customer satisfaction, to increase

the moral and commitment of the employees, to increase the value of company and to provide contributions in solving public issues. In other words, good governance is not only for the sake of the shareholder but also the stakeholder.

ii. The government has developed appointed actuary concept in order to address good governance in insurance companies and pension fund. Moreover, actuaries along with actuarial association must be developing actuarial profession either by quantity or quality to get the recognition or accountability in playing the major role.

iii. There are three ideas involved in a profession; they are continuous learning, organization, and a spirit of public service.

iv. Actuary as a profession that works in financial institutions market has a major role in addressing either good corporate governance or good pension fund governance

v. The actuarial professionalism keys:

1. Good Governance;

2. Good Education system and Appropriate Entrance Requirements;

3. Professional conduct of members;

4. Research and Standard Process;

5. Continuing Professional Development;

6. Good Communications.

vi. The ethical code and discipline procedure is a ‘rule of games’ that must be kept by the entire PAI members. If every member obeys the rule, then the association will be in the right track towards its vision an mission.

References [1] Actuaries Bulletin, 2nd Edition, January 2000.

[2] Carmichael, Jeffrey and Pomerleano, Michael. The Development and Regulation of Non-Bank Financial Institutions, The World Bank, USA, 2002.

[3] Chengfang, Shen, Development of the Chinese Actuarial Profession: Addressing Good Governance, 12th East Asian Actuarial Conference, Philippines, 2003.

[4] Contingencies March/April 2005.

[5] Djohanputro, Bramantyo, MBA, Ph.D, Manajemen Risiko Korporat Terintegrasi, memastikan Keamanan & Kelanggengan Perusahaan Anda, PPM, Jakarta, 2004.

[6] Dafras, ASAI and A.M., Tugendar, Drs.,Msc,FSAI. Profesi Aktuaris, Indonesian Actuarial Conference II, Jawa Barat, 1993.


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[7] Fleisher, Craig S., Strategic and Competitive Analysis, Prentice Hall, USA, 2002.

[8] Guerard, Yves. IAA Wider Fields, 11th Asian Actuarial Conference, Hong-Kong, 2001.

[9] Nagasawa, Takayuki. The Activities of Actuaries in Japanese Trust Banks for Good Governance, 12th East Asian Actuarial Conference, Philippines, 2003.

[10] Minister of Finance Decree No 426/KMK.06/2003 Business Permit and Legitimacy of Insurance and Reinsurance Companies.

[11] Rachmatarwata, Isa. MM-UI courses: Actuarial Professionalism, Jakarta, 2005.

[12] Prime, Catherine. Actuary’s Viewpoint, 12th East Asian Actuarial Conference, Philippines, 2003.

[13] Ethical Code of Society of Actuaries of Indonesia, Jakarta, 2005.

[14] Discipline Procedure of Society of Actuaries of Indonesia, Jakarta, 2005.

[15] Rachmatarwata, Isa and Guererd, Yves, Pension Governance in Indonesia, 12th East Asian Actuarial Conference, Philippines, 2003.

[16] Sinaga, H. Hotbonar, Membangun Asuransi Membangun Indonesia, Jakarta, 2004.

[17] Siamat, Dahlan, Manjemen Lembaga Keuangan. Jakarta, 2004.

[18] The Actuary Volume 1 Issue I, October 2004.

[19] The Actuary Volume 1 Issue II, December 2004.

[20] Siauw, Eduard Simon, Actuaries and Accountability, 6th Actuarial Congress of Society of Actuaries of Indonesia, Jakarta 2005.

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