Unit Link Turmoil, Continuing to Grow Amid the Disappointment of Customers

by Karnoto Mohamad

 

UNIT links have created a commotion in the national insurance industry. Thousands of life insurance customers feel cheated by the unit link products and have closed their policies. In fact, there are 350 unit link customers who demand that their premiums be returned, without the yields promised by insurance product marketing agents. “I closed the policy in June 2020, then my complaints were not heard, we (my friends and I) conducted demonstrations in front of three insurance offices, we also had demonstrations in front of the OJK office. Then, in April 2021, we collectively started this forum,” said Maria Trihartati, one of the unit link customers to Infobank on December 18, 2021.

Maria together with hundreds of unit link customers of AIA Insurance, AXA Mandiri, and Prudential Life Assurance, created a forum to voice their demands to the police office and to the People’s Representative Council (DPR). In addition to ask the premiums that have been deposited to be returned, they also asked the Government and the Financial Services Authority (OJK) to stop the selling of unit link products. Some members of Commission XI of the House of Representatives (DPR) who have received many complaints from consumers in the insurance sector have also proposed a moratorium or temporary suspension of the sale of insurance products which are linked to investment (PAYDI). “We can do a moratorium, because we have had an experience on the similar case: there were problematic financial products, and, then, we stopped the selling of them,” said Vera Febyanthy, Member of Commission XI DPR RI, in a meeting (RDP) with unit link victims and OJK on December 6, 2021.

However, Fathan Subchi, Deputy Chairman of Commission XI DPR, said that any steps and decisions made by OJK must go through a comprehensive study because lots of stakeholders have interests. “If a moratorium is implemented, the impact must be assessed first. The most important thing at this time is that there must be improvements starting from the business process, cost structure, and ways to sell unit link products. OJK should not only encourage the insurance industry to grow, but it should also—together with the industry—educate people. It is because by merely asking the industry to grow will result in the insurance companies that will justify any means they do in order to create products and sell them.” he told Infobank last December.

Currently, OJK and the insurance industry are conducting a study to respond to various problems that have emerged and suggestions that have been submitted by the public, including the moratorium on the selling of unit-linked products. “If you make a wrong decision, it is feared that there will be shocks in the industry, so at this time, we and the association are conducting a comprehensive study, including im-proving the unit-linked products’ regulations,” M. Ihsanuddin, OJK Deputy Commissioner, told Infobank last month. In addition to unit link products, OJK will also revise regulations related to insurance brokerage and insurance technology activities.

Some life insurance companies will certainly be in trouble if the regulator decides to stop the selling of unit-linked products. This is because the products have become the engine of growth in life insurance premiums for the last 15 years. More than half of life insurance premium’s income come from unit-linked products sold by 31 life insurance companies. According to data from Infobank Research Bureau, unit link products support 68.48% of gross life insurance premium income which is amounted to Rp 136.26 trillion per September 2021.

It means that unit link products are still in demand by the public despite the disappointment of a number of customers. According to OJK data, the number of conventional unit-linked customers in 2019 was 6.6 million, then decreased to 6.2 million in 2020 and then increased to 6.8 million in 2021. From new unit-linked premium sales, it grew 16.30% to Rp 54.41 trillion, while continued premiums were stagnant, only increasing by 0.3% to Rp 38.90 trillion. This means, in the midst of bad news about some customers that have closed their policies, unit link premium sales are still growing.

The competition is very tight. Although it was coloured by a high-tension competition among the insurance companies, some unit link products managed to record premium growth in 2020. Asuransi Simas Jiwa managed to overtake Prudential Life Assurance, which had been the largest life insurance company for more than a decade.

According to Infobank Institute, there are three factors that have caused unit link products to develop rapidly, which was then accompanied by the disappointment of a number of their customers. One, the intense competition in the life insurance industry, so insurance companies must look for product innovations and marketing strategies to achieve growth.

Because unit-linked products are proven to be effective in making people want insurance. Therefore, life insurance companies are competing to sell insurance products wrapped in investment. Life insurance companies are keen to offer unit links because the investment risk from unit links lies with the customers, so the companies do not need to prepare any technical reserves.

Even if the stock market crashes, it will not affect the admitted assets and eat up risk-based capital (RBC). Hence, when insurance companies have to go through a storm of crisis, but, because their premium production is supported by unit linked products, their RBC is relatively safe. However, because the competition is very tight, life insurance companies that find themselves difficult to penetrate the unit-linked market try to make other innovations in the form of insurance products with fixed yields such as saving plans until they get problems of inability to pay the coverage to the customers.

Two, how insurance agents sell the products. They lure customers with the benefits of returns plus insu-rance protection without providing an under-standing of the costs incurred and the investment risks that are in the hands of the policyholder. As a result, lots of unit-linked customers are just looking for their own understanding after the investment results are felt to be inconsistent with what was conveyed by insurance agents. The occurrence of mis-selling cases of insurance products is supported by a culture where transactions between insurance agents and consumers are more deter-mined by emotional closeness, both family and friends.

Three, people’s financial literacy is very low, plus a mindset that prioritizes investment over prudence in anticipating risk. According to OJK survey, people’s literacy index in the insurance sector is only 19.40% in 2019, even in the capital market sector, it was only 4.92%. Therefore, it is natural that many people are easily entangled in fraudulent investment cases and unit link customers generally do not understand the risks involved in these products.

OJK has the authority to fix the three problems. Unit link products actually have no problem because a lot of life insurance companies have been proven to be able to market them well. If there is a marketing cost structure that is quite big, the company and marketers must inform potential customers openly. Therefore, there is a need for improvements in marketing communications and the companies must take responsibility for the ways and behaviours of their agents in selling the products.

OJK and the financial industry have to educate and increase public financial literacy. OJK must increase programs of consumers’ financial education and knowledge on consumers’ protection. In the report to Commission XI of DPR (the House of Representatives) last December, OJK said that from the total budget ceiling of Rp 6.21 trillion in 2021, only 78.28% that had been put into action per November. Meanwhile, the relatively small budget allocation for the consumers’ financial education and protection of Rp 43.43 billion, which was later adjusted to Rp 40.29 billion, was only put into action at 64% in the end of November.

In fact, the widespread ease of access to various financial products and services that are not matched by adequate financial literacy often creates problems because people are provoked to buy products that are not necessarily in accordance with their needs or abilities. For example, online loan providers (pinjol) which ignore whether their consumers have disposable income to pay the instalments or not. The most important thing for them is in distributing loans. The same condition happens in life insurance companies whose marketers are not open in explaining their products and risks; what they care about is that they are able to sell the products.

Unit links and saving plans grow at the meeting line between market demands and business innovations of life insurance companies. Insurance companies do have a market oriented nature. Because people’s financial literacy is still low, it is necessary for the Regulator to intervene so that people do not merely become objects of the market. In addition to being more active in educating the public, OJK must supervise and strengthen so that insurance companies have the ability to compete in a healthy way, especially since the market is still very large.

Statistically, it is true that investment-based insurance products have been the engine of premium income growth for the last 15 years. If the unit link moratorium is implemented, it could create market shocks and affect the interest of investors who have been injecting capital when many financial companies in Indonesia have difficulty in meeting their capital needs. What is urgently needed is how to fix the life insurance industry, starting from the ability to manage investments, the integrity, the ethics of the people working in the industry, and ways in selling the products. The life insurance industry must be encouraged to earn income and profits according to the insurance standard, namely by offering more insurance protection products and printing underwriting income. (*)