PSAK 74, transforming insurance practices in Indonesia for the better

The new method of presenting financial reports boosts transparency and market confidence in the insurance industry.

As the insurance industry in Indonesia continues to improve, a more reliable financial reporting for insurance companies has been established. This provides transparency in reflecting a company’s performance and boosts market confidence.

The Financial Services Authority (OJK), the regulatory body overseeing the non-bank financial sector, has mandated that the insurance industry adopts Statement of Financial Accounting Standards (PSAK) 74, effective from 1 January 2025.
The implementation of PSAK 74 states that financial business sector actors are required to submit and compile financial reports in accordance with financial reporting standards set by the Reporting Standards Committee.

The OJK hopes that the implementation of PSAK 74, adopted from International Financial Reporting System (IFRS 17), can address the issue of asymmetric information which makes it difficult for stakeholders, including consumers, investors and regulators, to get a good picture of the financial condition and operational performance of insurance companies.

The implementation of PSAK 74 is important because the insurance sector plays a role in driving national economic growth both as a provider of community risk management services and as an institutional investor that fulfills long-term funding needs.

This can also be a remedy for the problems experienced by some insurance industry players which, in recent years, have shown the potential to erode public confidence.

The OJK said that there were 11 insurance companies that already received their special supervision. Two of them had their licenses revoked.

At present, four companies have submitted their Financial Restructuring Plans for the OJK’s review.

Meanwhile, the five other firms are under monitoring, with the OJK having issued warnings to them.

At the beginning of the year, President Joko Widodo also expressed the need for increased supervision of insurance companies, online loans and investments in response to numerous public complaints about losses incurred.

Read more: Indonesian president Jokowi urges regulator to step up monitoring insurers

The President’s resolve is buoyed by complaints from the public, including in the insurance sector. He alluded to cases of misuse of customer funds by insurance companies.

The President was particularly concerned with PT Asabri Persero, which incurred losses of up to IDR23 trillion (US$1.49b), and PT Jiwasraya Persero, which caused losses to customers of up to IDR17 trillion (US$1.1b). He said these should not happen again.

Impact of PSAK 74

Insurance analyst and Kupasi board member, Wahju Rohmanti, believes that administrative regulation through the presence of PSAK 74 can be one of the answers to the problem.

She assessed that the troubles faced by problematic insurance companies stem from inadequate asset management skills and its infrastructure to meet obligations.

She stressed that the primary role of insurance companies is protection in the future, so proficient methods of recording and managing financial reports are an inherent part of its duty.

“With the introduction of PSAK 74, insurance companies can no longer recognise premium income as their assets but premiums become the assets of policyholders so that (insurance companies) cannot invest arbitrarily in high risk instruments,” Wahju told Insurance Asia.

“That [PSAK 74] helps insurance companies become fairer and transparent in managing premiums entrusted from policyholders. As time goes by, this could enhance public trust," she added.

PSAK 74 replaces the previous regulation, PSAK 62, regarding Insurance Contracts. PSAK 62 was deemed inadequate in providing information about insurance company reserves and income due to outdated assumptions, using investment return estimates with technical interest rates and insufficiently considering the time value of money.

PSAK 74 necessitates a more rigorous revaluation of liabilities. “Previously, insurance companies evaluated liabilities only once a year,” said Wahju, noting that PSAK 74 requires that the valuation of liabilities per insurance contract be made periodic.

“Under the previous regulation, all premium income could be recognised as company income, but now (through PSAK 74) only the contractual margin can be recognised as income,” added Wahju, who is also part of a team of experts in sharia securities crowdfunding.

PSAK 74 mandates insurance companies to recalculate reserves, update assumptions and calculate using the contractual service margin method. This means insurance revenue is calculated based on the contract value or premium surplus after the risk value and potential future claims.

PSAK 74 also regulates insurance companies to disclose detailed insurance product features, interest rates, risks and service margins in periodic reports. “This makes insurance products very transparent contracts,” Wahju noted.

Industry response

Industry players from both the Indonesian General Industry Insurance Association (AAUI) and the Indonesian Life Industry Association (AAJI) also actively engaged in various programmes to support the implementation of PSAK 74.

They are also part of the steering committee for the implementation of PSAK 74, chaired by a member of the OJK Board of Commissioners, to address challenges in executing new regulations on the technical level.

AAUI Executive Director Bern Dwiyanto said their organisation is assisting in the readiness of 82 member-insurance companies. So far, AAUI has taken the initiative to conduct awareness campaigns and training on the readiness of systems and information technology that are essential for the successful implementation of PSAK 74.

This, he said, would go a long way in aiding sufficient preparation of necessary data and documents for insurance and reinsurance companies in accordance with updated regulations.

“Additionally, we are preparing a skilled workforce well-versed in implementing PSAK 74 involving crucial functions like actuarial, accounting and IT,” Bern told Insurance Asia.

Wahju said the readiness of infrastructure, human resources, and process automation are key preparatory steps for insurance companies to implement PSAK 74 successfully.

“This requires substantial funding, necessitating shareholders and owners to be prepared for capital augmentation. Whilst large insurance companies might not face issues with increasing capital, but for (small insurance companies) may need to consider potential mergers or acquisitions by larger investors,” she said.