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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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P. JONATAN

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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ROLES OF ACTUARIES AND ACTUARIAL ASSOCIATION IN INDONESIA

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

4Actuaries 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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ROLES OF ACTUARIES AND ACTUARIAL ASSOCIATION IN INDONESIA

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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P. JONATAN

• 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:

200

180

160

140

120

100

80

60

40

20

0
1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

year

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
FSAI 21 21 22 24 25 29 33 36 41 53 59 71 84 96 106 114 118 124
8 8 8 9 11
ASAI Source: PAI14 16 16 18 28 40 74 112 133 149 180 183 185

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

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:

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P. JONATAN

Figure 4. ASAI Distribution

P e ns io n F und
R e ins ura nc e
G o v e rnm e nt Univ e rs itie s
B a nk O the rs
P ublic
A c c o unt a nt

C o ns ult a nt
Life Ins ura nc e

G e ne ra l
Ins ura nc e

Figure 5. FSAI Distribution


R e ins ura nc e Source: PAI

P e ns io n F und
G o v e rnm e nt
B a nk O t he rs

C o ns ult a nt

Lif e Ins ura nc e

G e ne ra l
Ins ura nc e

Despite their small number of members, PAI has been consistently developing
Source: PAI
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

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ROLES OF ACTUARIES AND ACTUARIAL ASSOCIATION IN INDONESIA

Figure 6. PAI organization chart (2002-2004)


Source: PAI

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)

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P. JONATAN

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:

110
Success Failed
100
90
80
70
Applicants

60
50
40
30
20
10
0
AAI-1
AAI-2
AAI-3
AAI-4
AAI-5
AAI-1
AAI-2
AAI-3
AAI-4
AAI-5
AAI-1
AAI-2
AAI-3
AAI-4
AAI-5
AAI-1
AAI-2
AAI-3
AAI-4
AAI-5
AAI-1
AAI-2
AAI-3
AAI-4
AAI-5

2000 2001 2002 2003 2004

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

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ROLES OF ACTUARIES AND ACTUARIAL ASSOCIATION IN INDONESIA

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

No. of Success 4 2 7 2 1 16

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

No. of Success 4 2 7 7 6 26

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:

Success Failed
30
28
26
24
22
20
Applicants

18
16
14
12
10
8
6
4
2
0
AI-1
AI-2
AI-3
AI-4
AI-5
AI-1
AI-2
AI-3
AI-4
AI-5
AI-1
AI-2
AI-3
AI-4
AI-5
AI-1
AI-2
AI-3
AI-4
AI-5
AI-1
AI-2
AI-3
AI-4
AI-5
2000 2001 2002 2003 2004

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
Examinations by industry bodies, University degree
Singapore
programs
Sweden University degree program
University degree plus at least three years of qualified
Switzerland professional experience, in line with international guidelines
of ASTIN (IAA)
United
Examinations, University Courses
Kingdom
United States Examinations by industry bodies
Examinations, full recognition on other actuarial
Malaysia
organization
South Africa Full recognition on other actuarial organization
Spain University degree program
Dutch University degree program
Examinations, full recognition on other actuarial
Canada
organization
Examinations, full recognition on other actuarial
Australia
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
Unpopular
educational institutions
Special skill in mathematics and
Lack of communication skills
statistic
Discipline and responsible Has a narrow point of view
Has a National Association
Concentrated in traditional business
recognized by government
Critical of details Work only in technical area
Capable in solving technical and
No special institution for an actuary
complex problems
Good in modeling Back-office employee
Less paid compared to other
Has many potential students
professions

OPPORTUNITIES THREATHS
Play a bigger role in traditional
The entry of foreign actuaries
business
Play a bigger role in non-traditional Another profession started to learn
business actuarial technical skills
The emerging of a long term Traditional business model are started
investment instruments to out of favor
Crisis and catastrophe has
Crisis and catastrophe has caused
increased market demand on
bankruptcy of companies
actuarial profession

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


Number of
No Institutions Degree/Title Location
student (2003)
1 BPPK Certificated Jakarta 150
2 FISIP UI Certificated Depok 40
Master of
3 MM-UI* Jakarta 10
Management
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)
Number of
No Location Available Seats
universities
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


1999 2000 2001 2002 2003
DEVELOPMENT DATA
1 National Income Aggregate
Gross Domestic Product
At Current Market Price (Rp
1.099.800 1.264.900 1.449.400 1.610.016 2.086.758
Billion)
Annual Change (%) 16,14 16,28 15,52 11,08 29,61
At 1993 Market Price (Rp
379.558 397.934 411.7 426.741 1.572.159
Billion)*
Annual Change (%) 0,85 4,84 3,32 3,65 2,684
Inflation rate (annual
2 4,18 9,35 12,55 10,02 5,06
change of CPI)
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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ROLES OF ACTUARIES AND ACTUARIAL ASSOCIATION IN INDONESIA

ECONOMICS AND INSURANCE


1999 2000 2001 2002 2003
DEVELOPMENT DATA
Labor Force 94.847 95.651 98.812 100.8 100.3
Number of Employed (Formal
88.817 89.838 90.807 91.647 90.785
Sector)
Number of Employed by
101 110 108 NA NA
Insurance Industry
6 Market Structure
Number of Registered
178 178 175 173 173
Insurers:
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
83 78 91 118 141
Brokers
Loss Adjuster 23 23 23 25 25
Actuarial Consultants 18 18 18 19 20
7 Insurance Development:
Per Capita Expenditure
69.099 81.914 112.246 65.645 67.3
(Rp)***
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
0,57 0,56 0,01 0,86 0,69
Gross Premium
- Life Asset 1,50 1,45 0,02 1,63 0,00
- Non-Life and Reinsurance
1,01 0,98 0,01 0,98 0,82
Asset

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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P. JONATAN

FigurePenetration of Life andof


9. Penetration Non-Life Insurance
Life and Non-Life Insurance
14

12

10

0
South Africa
United Kingdom
Switzerland
Korea, Republic of
Japan
OECD *)
Israel
Malaysia
Chile
Czech Republic
Poland
Moroco
Hungary
Argentina

Thailand

Greece

Brazil

India

Mexico

China

Indonesia

Philippines

Turkey

Nigeria

Egypt
Country

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,

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ROLES OF ACTUARIES AND ACTUARIAL ASSOCIATION IN INDONESIA

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:

359
P. JONATAN

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:

360
ROLES OF ACTUARIES AND ACTUARIAL ASSOCIATION IN INDONESIA

& '

!
"

(
#
!
, ) *

+
,

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.

361
P. JONATAN

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
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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.
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Actuarial Conference II, Jawa Barat, 1993.

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ROLES OF ACTUARIES AND ACTUARIAL ASSOCIATION IN INDONESIA

[7] Fleisher, Craig S., Strategic and Competitive Analysis, Prentice Hall, USA,
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[18] The Actuary Volume 1 Issue I, October 2004.
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