GLOBAL ECONOMIC PROSPECT AND THE ROLE OF INSURANCE INDUSTRY IN SUSTAINABLE ECONOMIC AND SOCIAL DEVELOPMENT

//GLOBAL ECONOMIC PROSPECT AND THE ROLE OF INSURANCE INDUSTRY IN SUSTAINABLE ECONOMIC AND SOCIAL DEVELOPMENT

GLOBAL ECONOMIC PROSPECT AND THE ROLE OF INSURANCE INDUSTRY IN SUSTAINABLE ECONOMIC AND SOCIAL DEVELOPMENT

D. S. Priyarsono

Faculty of Economics and Management

IPB University

First of all, I would like to congratulate the organizer (the Indonesia Life Insurance Association, AAJI) for hosting this very important conference. Thank you very much for inviting me to deliver my brief speech. I am very honored. I am very grateful.

In this session we will discuss two big topics. Firstly, global economic prospect. Secondly, the role of insurance industry. Please allow me to discuss the topics from the point of view of Indonesian context.

In preparing my speech, I read several reports published by prominent institutions like the World Bank, the International Monetary Fund, the Asian Development Bank, as well as private consulting companies like McKinsey, EY, PwC, Deloitte, and others. In general, they report very similar information and message on the prospect of the global economy, especially in the context of Indonesian economy. To summarize the reports, let me use the framework provided by the World Bank. 

In this diagram, it is perceived that a country economic performance is shaped by global as well as domestic situations. Two global phenomena, namely the COVID19 pandemic and the war in Ukraine, are significantly influencing the global economy. The WHO has not declared the end of the pandemic yet. But in most countries, including Indonesia, we have seen good signs of the ending of the pandemic. Naturally, this will be followed by an increase in the consumers’ confidence and in turn it will significantly increase the demand for commodities.

On the other hand, China, from which many East Asian countries, including Indonesia, import important commodities, has not been completely recovered from the pandemic. As a result, the countries experience supply shortage in several important commodities at least in the next few months. This situation has been worsened by the war in Ukraine that significantly creates supply disruptions. The prices of food and energy have increased and it will certainly trigger global inflation. Financial authorities of major countries respond the inflation by increasing interest rates. The combination of the phenomena will lead to a slower global economic growth.

Most, if not all, reports on global economic outlook mentioned that Indonesia rightfully responded the global economic situations with prudent economic and financial policies. Thank to these prudent public policies, the reports forecast that the Indonesian economic growth rate will reach 5.1% for this year and the coming year. The figure is even better than the growth rate in pre-pandemic year which was 5.0% in 2019. Therefore, it is safe enough to conclude, that despite the probable global recession in the coming few years, Indonesian economy is forecasted to be able to survive with a moderate growth rate.

Let me now proceed to our second topic which is about the role of insurance industry, again, in the context of Indonesian economy. I am very fortunate that last July I attended an international conference in Lombok in which Mr. Budi Tampubolon (the Chairman of Indonesia Life Insurance Association) delivered his speech on “Market Updates & Current Issues in Indonesia Life Insurance Industry”. What I need to do now is to cite the important points of his speech and add some comments and opinion of mine, based on my own observation.

I would like to use this table as an approach to discuss the role of insurance industry. I divide the topic into two parts, one is the social and economic development aspect and the other is the sustainable development aspect. Each aspect will be discussed in two perspectives, which are the current existing condition and the expectation toward the development of insurance industry.

My main point is that the insurance industry has been very instrumental as a catalyst to economic growth of this country just like the one in advanced developed economies. It provides protection so that households and firms can better manage their risks. This role is increasingly important in the world that is full of volatilities, uncertainties, complexities, and ambiguities. The insurance industry is a vital thread in the fabric of a strong Indonesian economy.

Absolutely, insurance industry creates employment and mobilizes fund for productive investments. However, as the case in many other industries in the financial sector, the relative contribution of insurance industry to the Indonesian economy is small. The penetration rate of life insurance industry is only 1.2% of the Indonesian GDP, whereas the density is only USD 54 per capita. These figures are much less than the figures in neighboring comparable countries like Malaysia, Thailand, India, or Vietnam.

Considering the fact that the Indonesian economy grows steadily, I can predict confidently that the penetration rate and the density of life insurance industry will soon increase significantly, under certain conditions such as the improvement of insurance literacy among Indonesian people and the capability of the industry in creating innovative products.

Recent news about corruption cases in some insurance firms in Indonesia do not help the efforts to increase the contribution of insurance industry to the economy. In my quick observation, several insurance firms still need to improve their governance, risk management, and compliance (GRC) initiatives.

My last point is related with the role of insurance industry in sustainable development. This issue is important and will become increasingly important in the years to come. The Government of Indonesia, including the Ministry of National Development Planning (Bappenas), Ministry of Finance, as well as the Financial Service Authority (OJK) have prepared and issued regulations to pursue the targets of Green Economy initiatives that have been internationally established. On the other hand, in my quick observation, the signs of relevant actions taken by insurance firms have not been widely seen in the media, except those from a very small number of big international players. I would like to stress one point regarding the contribution of the Insurance Industry to sustainable development, that is, the green economy initiative, anywhere in the world, need collaboration among all parties, the government, the private sector, the people or the households within the economy. The government must lead the initiative through creating and enforcing good regulations effectively. The government must be the leader in creating green economy. In other words, it is not rational to assume that private sector alone could autonomously execute efforts to create green economy. I should not talk much about this issue, because we will exclusively discuss this topic in the next session this afternoon.

It is not easy to draw conclusion or implication from my speech. One reason for that is the high diversity of membership of AAJI. Some members are big companies, while the others are medium or small companies. Some members have long experience, while the others have only short history. The corporate cultures and the organizational maturity levels are also very diverse. As a result, the problems they are facing are also very heterogeneous.

To end my presentation, I would like to express my optimism regarding the development of insurance industry in Indonesia. The size of the economy and the steady growth rates of the GDP will sufficiently guarantee the potential rapid development of insurance industry in Indonesia. I wish you all the best.  Thank you very much.

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Bogor, 8 October 2022

Artikel ini dipaparkan oleh penulis pada acara Insurance Forum 2022 di Bali tanggal 16-18 Oktober 2022.

Prepared for Insurance Forum, hosted by the Indonesia Life Insurance Association in Bali, 17-18 October 2022.

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