19766
______________________________________________________________
DOI: https://doi.org/10.33258/birci.v5i3.5994
Implementation of PSAK 71 and PSAK 74 in Minializing Failure of the Insurance Industry
Monica Priski Cahya Maulidya1, Elvia Rosantina Shauki2
1,2faculty of Economics and Business, Universitas Indonesia , Jakarta, Indonesia monicamaulidya@gmail.com, elvia.rosantina@ui.ac.id
I. Introduction
The Financial Services Authority (OJK) stated that from 2006-2019 there were 39 insurance and reinsurance companies that had been dissolved by the regulator for reasons of financial health or business mergers (Kontan, 2020). With so many defaults and insolvency cases today, the insurance industry will find it difficult because the basis of insurance contracts is trust. Bankruptcy and default in the insurance industry expose policyholders to unexpected and potentially systemic economic losses both to the lives of the policyholders themselves and to the industry. The American Academy of Actuaries (2010) states that periodic studies of the causes of insurance company bankruptcy should be conducted to provide insight into the causes of bankruptcy and how they develop over time. Financial statements are basically a source of information for investors as one of the basic considerations in making capital market investment decisions and also as a means of management responsibility for the resources entrusted to them (Prayoga and Afrizal 2021) . Financial performance is a measuring instrument to know the process of implementing the company's financial resources. It sees how much management of the company succeeds, and provides benefits to the community. Sharia banking is contained in the Law of the Republic of Indonesia No.21 of 2008 article 5, in which the Financial Services Authority is assigned to supervise and supervise banks. (Ichsan, R. et al. 2021)
As a body that has public accountability for collecting and managing public funds, insurance companies are required to apply financial accounting standards in their financial records. There are two new accounting standards that have a very large influence on the recording of financial statements in the insurance industry, namely PSAK 71 concerning Financial Instruments and PSAK 74 concerning Accounting for Loss Insurance Contracts.
PSAK 71 which was ratified by the Financial Accounting Standards Board of the Abstract
This study aims to analyze the causes of default and PSAK 71 and PSAK 74 implementation effect on the risk of default. The analysis is carried out by using Public Interest Regulation Theory. This is qualitative research with case study method. Research data are sourced from questionnaires and interviews. Data were analysed using content, thematic, and constant comparative analysis. The results indicates that defaults can occur due to: (1) fraud, (2) underreserved, (3) weak governance, (4) poor investment management and (5) insurance product portfolio, and (6) weak regulations and supervision carried out by regulators. PSAK 71 and PSAK 74 will affect insurance companies in terms of financial reporting. and more conservatives reserving process. That way, it will indirectly affect the risk management and governance of insurance companies. PSAK 71 and PSAK 74 are in accordance with Public Interest Regulation Theory because they can indirectly reduce the risk of default.
Keywords
default risks; PSAK 71; PSAK 74; public interest; risk management
Budapest International Research and Critics Institute-Journal (BIRCI-Journal) Volume 5, No 3, August 2022, Page: 19766-19775 e-ISSN: 2615-3076 (Online), p-ISSN: 2615-1715 (Print)
www.bircu-journal.com/index.php/birci email: birci.journal@gmail.com
19767
Indonesian Institute of Accountants (DSAK IAI) on July 26, 2017 is the adoption of IFRS 9 and is effective on January 1, 2020, while PSAK 74 which is the adoption of IFRS 17 was ratified on November 26, 2020 and will effective January 1, 2025.
The description of the problem that is trying to be solved through this paper is the factors causing the default, the impact of the application of PSAK 71 and PSAK 74 in reducing the risk of default, as well as the risk aspects that can be minimized by the application of PSAK 71 and PSAK 74. This study aims to determine the factors that cause failure. payment, knowing which of these factors will be affected by the implementation of PSAK 71 and PSAK 74, and knowing whether the risk of default can be reduced by the implementation of PSAK 71 and PSAK 74. Research on the causes of default has been carried out by several previous researchers with different jurisdictions and some of them only focus on a certain type of insurance (EIOPA, 2018; Risk and Regulatory Consulting LLP, 2017; American Academy of Actuaries, 2010; Leadbetter & Dibra, 2008; Wenck, 1987; Plantin & Rochet, 2007; Njeri, 2014). Other studies discuss early signs that can predict insurance failure (EIOPA, 2018; Risk and Regulatory Consulting LLP, 2017;
American Academy of Actuaries, 2010; Leadbetter & Dibra, 2008; Wenck, 1987; Plantin
& Rochet, 2007; Njeri, 2014). Ashby (2011) conducted research on the banking crisis and the lessons that can be drawn for the insurance industry.
So far, the authors have only found research by Chan et al. (2021) which discusses the impact of IFRS 9 and IFRS 17 on the regulation and management of the life insurance industry in Taiwan. From these various studies, there are 4 (four) studies that provide suggestions/solutions to the problem of default (Ashby, 2011; Wenck, 1987; Chen &
Wong, 2004; Tumbelaka et al., 2021). This research is different from previous research because this research has a different jurisdiction, a wider scope of discussion for all types of insurance, links defaults with the application of accounting standards, and tries to provide solutions to the problem of default both from the operational side of the company and from the regulator side Supervisor.
PSAK 71 is an accounting standard ratified by DSAK IAI to replace PSAK 55 on Financial Instruments: Recognition and Measurement (IAI, 2016). There are 3 (three) main focuses discussed in PSAK 71 which are different from PSAK 55, namely classification and measurement, allowance for impairment losses (CKPN), and hedging.
There are 3 (three) classifications of financial assets based on PSAK 71, namely Amortized Cost, Fair Value Through Other Comprehensive Income (FVOCI), and Fair Value Through Profit and Loss (FVTPL). The classification process in this accounting standard is based on 2 (two) basic tests, namely the business model test and the SPPI (Solely Payment of Principal and Interest). The Business Model Test refers to how entities manage their financial assets to generate cash flow and is determined at a level that reflects how the group of financial assets is managed rather than at the instrument level.
Meanwhile, the SPPI test or principal and interest payments refers to contractual cash flows that are solely principal and interest payments and are consistent with basic loan arrangements (BDO, 2017).
PSAK 74 regulates insurance contracts and offers 3 ways to measure the value of insurance contracts, namely Building Block Approach (BBA) or also known as General Measurement Model (GMM), Premium Allocation Approach (PAA), and Variable Fee Approach (VFA). BBA is the generally accepted and most widely used method. This method is able to describe the profit and cash flow fulfillment of an insurance contract, where profit is described by CSM, while cash flow fulfillment is described by best estimate liabilities (BEL), discount rate, and risk adjustment (Sensi, 2021). PSAK 74 uses a discount rate that reflects the characteristics of insurance liabilities and is no longer
19768
directly linked to assets as is the practice that has been widely practiced (IFRS Foundation, 2017). In addition, the presentation of financial statements in a new format in accordance with PSAK 74 is more detailed and more in line with other forms of financial reports in similar industries (IFRS Foundation, 2017).
The theory of public interest regulation states that in general a regulation is made to provide benefits and protection for the public at large (Hantke-Domas, 2003). This theory views financial statements as an economic commodity and accounting standards are a response to public demands to correct market failures and reduce information asymmetry (Hoesada, 2020). Regulators are assumed to side with the public interest and consider the costs of constituents in the preparation of accounting standards. This study uses public interest regulation theory to analyze whether PSAK 71 and PSAK 74 can help minimize the risk of default in the insurance industry.
II. Research Method
Descriptive qualitative research with case study method was conducted to obtain information regarding the factors causing default and its relationship with PSAK 71 and PSAK 74. The data used in this study were sourced from questionnaires and interviews. In collecting data, the questionnaire was distributed first via google form and directly to various insurance companies in Indonesia. There are 16 questions in the questionnaire consisting of 6 (six) questions regarding the respondent's profile, 1 (one) question in the form of closed questions, and 9 (nine) open questions. The questions asked about the causes of default, the relationship between PSAK 71 and PSAK 74 with default, and the application of public interest regulation theory. There were 72 respondents who answered this questionnaire, but as many as 5 respondents had to be excluded in the analysis process because they did not meet the criteria in this study.
The data obtained from the questionnaire was then deepened using semi-structured interviews, with questions about the causes of default, the relationship between PSAK 71 and PSAK 74 with defaults, the application of public interest theory, and solutions to overcome defaults. Interviews were conducted with two units of analysis, namely DSAK as standard setters/regulators and insurance companies as preparers. The interview was attended by 5 (five) resource persons, of which 2 (two) were DSAK members and 3 (three) were from insurance companies. Resource 1 is the chairman of DSAK IAI and an audit partner. Resource persons 2 are members of DSAK IAI as well as researchers and lecturers. Resource Person 3 is an IFRS Manager at Insurance company A. Resource Person 4 is an Accounting Supervisor at insurance company B. Finally, Resource Person 5 is an Internal Audit Manager at Insurance company C. The data were analyzed using data analysis methods in the form of content, thematic, and constant comparative analysis using the NVivo 12 Pro application. Content analysis is used to obtain the most frequently spoken words and describe what the sources are interested in. Thematic analysis is one way to analyze data that aims to identify patterns and find themes through data that has been collected by researchers (Heriyanto, 2018). Finally, comparative analysis is an analysis that focuses on the similarities and differences in the values of variables, the form of relationships between variables, and the occurrence of events or patterns of events (Pickvance, 2001). This analysis is used to compare opinions between units of analysis and also between sources.
19769
III. Result and Discussion
The questionnaire was followed by 72 respondents, but after validation only 67 questionnaires (93%) were answered completely. From Table 1. it can be seen that most of the respondents served as staff with a total of 24 respondents (36%). This was followed by director positions with 17 respondents (25%), manager positions with 13 respondents (19%), assistant managers with 11 respondents (16%) and internships with 2 respondents (3%). As for the length of service, most of the respondents have worked for more than 10 years (37%). Respondents with 6 (six) to 10 (ten) years of service were in second place with 23 respondents (34%), 15 respondents (22%) had worked for 2 (two) to 5 (five) years, and 4 (four) respondents (6%) have worked less than 1 (one) year.
All respondents were given the same questions. Closed questions were asked to discuss the factors causing the default, the results of which can be seen in Figure 1. From the data, the factors most rated by respondents as the cause of default are fraud, insufficient reserves, weak governance, and poor investment management. More than 50 respondents agreed that the four factors above were the cause of default. In Table 2, it can be seen that these four factors were also mentioned as factors causing default by the informants.
However, the questionnaire only describes the company's internal default risk factors. The factor of weak regulation and supervision by the regulator is not reflected in the questionnaire.
Furthermore, the difference between PSAK 71 and the previous PSAK lies in determining the classification of financial assets. Previously, management intentions were used to classify financial assets. This raises a measurement problem where the same financial instrument can be measured in different ways simply because of different management intentions. This problem was solved by PSAK 71 by conducting SPPI and business model tests to determine the classification of financial assets.
"This is corrected in PSAK 71 so that intention does not become a determining factor in determining whether this is at cost or is at fair value, intentions are easy to change and difficult to prove. When we talk about the business model, then someone has to supervise, business That model shouldn't change often, a company when the business model changes every year doesn't make sense, right?" (Narasumber 1, 2022).
The differences between PSAK 74 and the previous PSAK include the inconsistency of revenue recognition with accounting treatment in other industries. With the implementation of PSAK 74, the losing contracts will have to be recognized at the outset, meanwhile the non-loss contracts will go into liabilities and be amortized every period.
PSAK 74 also changes the reserve process for insurance companies.
" As a result, because it is not strictly regulated in the previous standard, when you receive the premium it is already recognized as income. This is inconsistent with the accounting treatment for the others." (Narasumber 1, 2022).
"PSAK 74 we have to take into account the CSM and take into account the actual loss of this product or not at the beginning of the books... onerous or not. If onerous he goes to P&L, if not he goes to CSM... it goes into the balance sheet, goes to liability."
(Narasumber 4, 2022).
" PSAK 74 we have to take into account CSM and take into account this product is actually a loss or not at the beginning of the books... onerous or not. If onerous he goes to P&L, if not he goes to CSM ... it goes into the balance sheet, goes to liability. (Narasumber 5, 2022).
Based on the explanation above, it can be said that the application of PSAK 71 and PSAK 74 answers the problems faced by the insurance industry in terms of impairment,
19770
provision, and inconsistency in measuring financial assets and accounting treatment with other industries. As a result, with the implementation of PSAK 71 and PSAK 74 financial statements will improve in quality because they are more conservative, more comparable to other industries or companies, and more transparently show the actual financial condition of insurance companies. The implementation of this PSAK will also indirectly contribute to oversight and governance.
"In the past, revenue recognition was not comparable to other industries because deposits were recognized as income, these things have actually been corrected with the new standard.." (Narasumber 1, 2022).
" In this case, it's 100% better in terms of governance transparency if they implement it properly and are audited by a true and understanding auditor." (Narasumber 2, 2022).
" Outside of reporting how to manage the backup. It should be with IFRS 17 to be more conservative, it will go up from assessment so far." (Narasumber 3, 2022).
"'It's true that I agree that it will be added, but the addition is in the direction of how the actuary manages data. It will only be realized later on, what is the actual way to manage the risk " (Narasumber 4, 2022).
" In terms of accountability, later if you become an auditor, it will be seen. See the main financial statements are clean, right?." (Narasumber 5, 2022).
With the implementation of PSAK 71 and PSAK 74 at the same time, volatility will also decrease due to the implementation of matching concept as well as asset-liability management (ALM), unless the insurance company has a business profile that volatile.
" When these two standards are applied together, it will more or less reduce the volatility. Because actually the idea is that the insurance company has insurance liabilities, so that he will have sufficient funds and liquidity to pay the claims that arise, he must invest. Now the strategy is matching, right, the period, maturity, later if he manages the performance, it means looking for instruments that are suitable matching," (Narasumber 3, 2022).
Figure 2. shows that most of the respondents or as many as 39 respondents (58%) stated that they believed that PSAK 71 and PSAK 74 could mitigate defaults, 15 respondents (22%) stated that PSAK had no correlation with defaults, and as many as 13 respondents (19%) admitted that they did not know about the material or that they were still in the assessment stage.
Public interest regulation theory states that in general a regulation is made to provide benefits and protection for the public at large (Hantke-Domas, 2003). If it is related to theory, it can be concluded that PSAK 71 and PSAK 74 were made in accordance with public needs because these PSAKs can reduce the risk of default. In addition, Hoesada (2020) states that accounting standards are a response to public demands to reduce information asymmetry which as can be seen in section 4.2 of the application of PSAK 71 and PSAK 74 can increase the transparency of financial statements and make them more comparable so that it is in accordance with this theory as well.
Finally, public interest regulation theory also discusses the constituent costs of implementing a regulation which must be lower than the benefits. The results of the questionnaire as can be seen in Figure 3 show that 49% of respondents stated that the constituent costs of implementing these two accounting standards were lower than the benefits. This is also supported by Resource Person 5 who agrees with this opinion and Resource Person 1 who provides suggestions to reduce constituent costs by communicating with stakeholders. So it can be concluded that PSAK 71 and PSAK 74 provide more benefits compared to the costs incurred for their implementation
19771
"If I think it's called a cost for a change for the better in terms of PSAK 71 and PSAK 74, this cost can't be compared straight on that year, right... It can't be charged directly just for 2022. We have to look at the long term later . Because this is a long-term investment... What is certain is that if it is withdrawn in the long term, this investment is certain or the cost will not be too large. Because the first, the value of the company will increase more than the accountability of its financial statements, because it increases the company's electability." (Narasumber 5, 2022).
"The company has investor relations, it's their job to communicate it... In fact, that's what the company has to manage to communicate about what the impact will be so as not to be surprised. We often need to sit down who we are talking about? Are sophisticated investors or unsophisticated investors? If a sophisticated investor already understands things like this, he might not be surprised, instead he will get more useful information. But if we talk about unsophisticated investors who don't understand, it's only profit, the profit is increasing, maybe they will be surprised." (Narasumber 1, 2022).
Table 1. Composition of Questionnaire Respondents
No. position Total Percentage
1 Director 17 25%
2 Manager 13 19%
3 Assistant Manager 11 16%
4 Staff 24 36%
5 Internal 2 3%
Total 67 100%
Total Percentage No. Length of Service
1 ≤ 1 Year 4 6%
2 2-5 Year 15 22%
3 6-10 Year 23 34%
4 > 10 Year 25 37%
Total 67 100%
Source: Questionnaire Data that has been processed by the author (2022)
Table 2. Factors Causing Failure to Pay Based on Interview
Source person Total
Source person 1 Underpriced
Weaknesses of governance & culture
Weakness of supervision by regulator
Poor investment management
Fraud
Source person 2 Poor investment management
Products promise too high returns to customers
Weaknesses in regulations and oversight by regulators
Source person 3 Underpriced
Underreserved
Poor investment management
Concentration of insurance portfolio
Source person 4 Poor investment management
19772
Source person 5 Fraud
Internal control weaknesses Source: Interview Data that has been prepared by the author (2022)
Figure 1. Factors Causing Default Based on Questionnaire. Questionnaire data processed by the author (2022)
Table 3. Relationship between PSAK 71 and PSAK 74 with Default Based on Interview
Narasumber Total
Source person 1 The risk of default decreases
Source person 2 Don't know
Source person 3 No connection
Source person 4 No connection
Source person 5 The risk of default decreases Source: Interview Data that has been processed by the author (2022)
19773
Figure 2. Relationship between PSAK 71 and PSAK 74 with Default Based on Questionnaire. Questionnaire data processed by the author (2022)
Figure 3. Constituent Costs for the Application of PSAK 71 and PSAK 74 Based on the Questionnaire. Questionnaire data processed by the author (2022)
IV. Conclusion
Factors causing default can occur both from internal and external parties. If viewed internally, defaults can occur due to: (1) fraud, (2) underreserved, (3) weak governance or internal control, (4) poor investment management, and (5) insurance product portfolio.
Meanwhile, from the external side, defaults can occur due to weak regulations and supervision carried out by regulators.
19774
PSAK 71 and PSAK 74 will affect insurance companies in terms of financial reporting to be more conservative, transparent, comparable and accountable. The previous PSAK had problems with asset measurement, provisioning and financial reporting, where assets were measured based on intentions that could vary, the reserve process was not specifically regulated so that the practice was different for each insurance company, and financial statements did not adequately describe the financial problems that arise. happens to the entity. However, all of these problems can be answered by the implementation of PSAK 71 and PSAK 74. In addition, the application of these accounting standards can also indirectly improve risk management and governance of insurance companies.
PSAK 71 and PSAK 74 can reduce the risk of default so that they are in accordance with the public interest regulation theory which states that a regulation is made to provide protection for the public (Hantke-Domas, 2003). PSAK 71 and PSAK 74 can also increase the transparency of financial statements and make them more comparable so as to reduce information asymmetry. Finally, the constituent costs of implementing this PSAK are indeed high, but these costs are lower than the benefits.
References
American Academy of Actuaries. (2010). Property/Casualty InsuranceCompany Insolvencies. Washington D.C: American Academy of Actuaries.
Ashby, S. (2011). Risk Management and the Global Banking Crisis: Lessons for Insurance Solvency Regulation. The Geneva Papers, 330-347.
Bandt, O. d., & Overton, G. (2020). Why do insurers fail? A comparison of life and non- life insolvencies using a new international database. 90th International Atlantic Economic Virtual Conference. IAES.
BDO in United Kingdom. (2017). IFRS 9 Explained – Solely Payments of Principal and Interest. [Online] Retrieved April 2, 2019, from https://www.bdo.co.uk/en- gb/insights/business-edge/business-edge-2017/ifrs-9-explained-solely-payments Chan, L. F.-S., Peng, J.-L., & Tsai, C.-H. (2021). The Impact of IFRS 9 and IFRS 17 on
the Regulation and Management of the Taiwan Life
Chen, R., & Wong, K. A. (2004). The Determinants of Finncial Health of Asian Insurance Companies. The Journal of Risk and Insurance, 469-499.
EIOPA. (2018). Failures and Near Misses in Insurance. Luxembourg: Publications Office of the European Union.
Hantke-Domas, M. (2003). The Public Interest Theory of Regulation: Non-Existence or Misinterpretation? European Journal of Law and Economics, 15, 165-194.
Heriyanto. (2018). Thematic Analysis sebagai Metode Menganalisa Data untuk Penelitian Kualitatif. Anuva: Jurnal Kajian Budaya, Perpustakaan dan Informasi, 317-324.
Hoesada, D. J. (2020, November 1). Politik Standar Akuntansi. Retrieved from Komite Standar Akuntansi Pemerintahan: http://www.ksap.org/sap/wp- content/uploads/2020/10/MAJALAH- MAYA-KSAP-1-NOVEMBER-2020.pdf Ikatan Akuntan Indonesia. (2016). PSAK 71. In: Standar Akuntansi Keuangan. Jakarta:
Dewan Standar Akuntansi Keuangan, Ikatan Akuntan Indonesia, pp.1-66IFRS Foundation. (2017). IFRS 17 Insurance Contracts: Effects Analysis.
Njeri, W. M. (2014). 7. DETERMINANTS OF INSOLVENCY IN SELECTED INSURANCE COMPANIES IN KENYA. Nairobi: University of Nairobi.
Pickvance, C. G. (2001). Four varieties of comparative analysis. Journal of Housing and the Built Environment, 7-28.
19775
Plantin, G., & Rochet, J.-C. (2007). When Insurers Go Bust. New Jersey: Princeton University Press.
Posner, R. A. (1974). Theories of Economic Regulation. The Bell Journal of Economics and Management Science, 5(2), 335-358.
Risk and Regulatory Consulting LLP. (2017). Actuarial Review of Insurer Insolvencies and Future Preventions. Canada: Canadian Institute of Actuaries, Casualty Actuarial Society, Society of Actuaries.
Sensi, L. (2021, May 27). IFRS 17 Implementation Issues in Insurance Industry.
Retrieved from https://drive.google.com/file/d/1CykqVE k2f5xopic_ZiuUueiMakG2PkaN/view
Sharpe, I. G., & Stadnik, A. (2007). FINANCIAL DISTRESS IN AUSTRALIAN GENERAL INSURERS. The Journal of Risk and Insurance, 377-399.
Ichsan, R. et al. (2021). Determinant of Sharia Bank's Financial Performance during the Covid-19 Pandemic. Budapest International Research and Critics Institute-Journal (BIRCI-Journal). P. 298-309.
Tumbelaka, I., Dimasqy, D., Yusgiantoro, I. B., & Mardiyyah, M. M. (2021, November 26). Does Investment Portfolio Affect Insurance Failure? Evidence from Indonesia.
OJK Research Seminar.
Walfajri, M. (2020, September 27). Tak sehat, OJK cabut izin usaha 39 perusahaan
asuransi dan reasuransi. Retrieved from Kontan:
https://keuangan.kontan.co.id/news/tak- sehat-ojk-cabut-izin-usaha-39- perusahaan- asuransi-dan-reasuransi
Wenck, T. L. (1987). INSURER INSOLVENCY: CAUSES, EFFECTS AND SOLUTIONS. The Journal of Insurance Issues and Practices, 35-48.
