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Research Accepted 17 February, 2019 Paper SAFA1= 0.63 International Journal of Business and Management Science Chief Editor: Mohammad Safa 23 www.safaworld.org/ijbms Submission: ijbms.submission@safaworld.org Effect of Micro and Macro Economic Factors on the Financial Health of General Insurance Companies in Indonesia a b c Toto Sugiharto, Novita Sulistiowati, Rina Nofiyanti acFaculty of Economics, Gunadarma University, Indonesia bFaculty of Information and Communication Technology, Gunadarma University, Indonesia *Corresponding author: tsharto@staff.gunadarma.ac.id Abstract: The objective of the study is to analyze the effect of macro and micro economic factors on the financial health of general insurance companies in Indonesia. Macroeconomic factors include economic growth rate, inflation rate, and interest rate; microeconomic factors include company size, investment performance, loss ratio, and current ratio. Financial health is represented by risk- based capital. Automatic linear modeling was performed to test the proposed hypotheses. It is revealed that the financial health of general insurance companies is significantly influenced by, respectively, current ratio, reference interest rate, inflation rate, and company size in different directions and magnitudes. Keywords: General Insurance Companies; Risk Based Capital; Economic Growth; Inflation Rate; Interest Rate; Company Size; Investment Performance; Current Ratio 1 SAFA stands for Standardized Acceptance Factor Average which is calculated based on the review scores. If the obtained SAFA lies between 0.5 and 1 tends to be accepted for publication with the recommended level of revision, if other requirements are satisfied. 2 Copyright @ 2025, Mohammad Safa: Unless otherwise noted, copyrights for the texts which comprise all issues of the International Journal of Business and Management Science (IJBMS) are held by the copyright owner. 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Published by the Society for Alliance, Fidelity and Advancement (SAFA) 47 Effects of Macro and Micro Economic Factors on Insurance companies ISSN 1985-692X INTRODUCTION In the economic system, financial institutions function as economic support through the provision of facilities that encourage capital outflows and capital inflows or capital turnover. As one of the sectors in the financial industry, insurance companies serve a special role in supporting monetary and investment activities by providing long-term funds, while increasing risk-taking capabilities. Additionally, the insurance sector is an integral part of a country's financial industry whose role cannot be underestimated. Accordingly, if the performance of this important sector is not encouraging and does not experience substantial growth, it will influence the economic system in a very unfavorable way. Insurance companies play an important role for both businesses and individuals where they compensate for any losses and place them in the same position as before the loss occurred. The level of the financial health of an insurance company determines its position within the market, which, in turn, increases market growth. The diversity in numbers and size of insurance companies, which are closely related with both internal (microeconomic) factors and external (macroeconomic) factors, provide an important contribution in determining the financial health as well as financial performance of insurance companies. Ghimire (2104) defines insurance as a means of financial protection from events that result in loss of property (wealth or assets), loss of family head as the backbone of family breadwinners, and loss of income due to accident, prolonged illness, and disability permanent. Meanwhile, from a legal point of view, according to Article 246 of the Commercial Code, insurance or coverage is defined as an agreement where the insurers bind themselves to the insured by obtaining a premium, to give him compensation due to a loss, damage, or not expected benefit, which may be suffered due to an uncertain event. In addition, the Financial Services Authority of Indonesia (OJK) defines insurance as the agreement between the insurer and the insured requires the insured to pay a premium to provide compensation for the risk of loss, damage, death, or loss of expected profits, which may occur for unexpected events. In the last decade, insurance companies in Indonesia experienced substantial growth, particularly in total assets, premium growth rates and the ratio between the rates of growth of premiums and gross domestic product. Data on these three attributes over the past five years is presented in Table 1 below. Table 1: Premium growth rate, premium growth rate to gross domestic product ratio and assets of insurance companies 2012-2016 Attribute Year 2012 2013 2014 2015 2016 PGR1 (%) 14.90 9.80 28.10 19.50 15.36 PGR/GDP2 (%) 2.13 2.13 2.35 2.56 2.00 Asset (trilion IDR3) 584.02 659.73 807.68 853.42 984.53 Source: Financial Service Authority of Indonesia (Insurance Statistics 2016) Note: 1Premium Growth Rate (Laju Pertumbuhan Premi); 2Gross Domestic Product (Produk Domestik Bruto), 3Indonesian Rupiah 48 International Journal of Business and Management Science, 9(1): 47-65, 2019 Effects of Macro and Micro Economic Factors on Insurance companies ISSN 1985-692X In has been predicted by Rahim (2013) that the insurance industry in Indonesia in the next five years has the potential to grow quite rapidly. However, there are three important agendas that must be accomplished to realize these optimistic projections. Firstly, internal consolidation that includes the consistent implementation of the principle of risk-based capital (RBC), the implementation of risk-based pricing (RBP) and the implementation of the principles of good corporate governance (GCG) in a comprehensive manner. Secondly, the increase and expansion of business activities through the application of the transfer of risk concept that is to bear the risk of economic actors in other sectors through professional asset management practices. Thirdly, improving human resources (HR) quality, service quality, and the efficiency of corporate management through, among others, the application of information and communication technology (ICT) including information systems (Rahim, 2013). Based on the above-mentioned background to the recent study, this research— which aims to analyze the influence of macroeconomic and microeconomic (company specific) factors on the financial health of Indonesian general insurance companies—is of importance and, therefore, needs to be accomplished. Results of the study are expected to provide managers or practitioners of insurance industry, particularly general insurance companies, with information regarding macroeconomic and microeconomic factors that potentially affect the financial health of general insurance companies. The paper is organized as follows. The second section describes the literature review which consists of the financial health of insurance companies, the determining factors of the financial health of insurance companies, the macroeconomic determinants of the financial health of insurance company and research hypotheses. The third section explains the methods of the study which covers research model and variables, methods of analysis and sampling procedures. The fourth section consists of results and discussions which include the descriptive statistical analysis of research variables, the results of the automatic data preparation and the inferential statistical analysis of research variables. Finally, we present our conclusions. LITERATURE REVIEW Financial Health of Insurance Companies Similar with other types of business organizations, insurance companies are established and operate their business activities with the aim of maximizing the wealth of their shareholders by, among others, maximizing the company's market value (Necas, 2016). In addition, Dahnel et al. (2005) in Necas (2016) explained that the relationship between shareholders, insurance companies, and policyholders (clients) can be illustrated as follows. Shareholders provide capital—along with its related risks—for insurance companies with the hope of obtaining revenue along with other requirements, namely the increase in market value of the funds invested. On the other hand, policyholders (clients) divert risk to insurance companies with the hope that in the future all obligations contained in insurance policies are met by the insurance companies. In return, insurance International Journal of Business and Management Science, 9(1): 47-65, 2019 49 Effects of Macro and Micro Economic Factors on Insurance companies ISSN 1985-692X companies demand premiums in accordance with the risks faced by clients taken over by insurance companies. Shareholders demand high returns - in this case return on assets (ROA) with low risk. Policy holders (clients) want the maximum guarantee that the insurance company in the future fulfills all its obligations in accordance with the insurance policy (insurance policy) agreed upon by both parties. The extent to which the insurance company is able to fulfill all of its obligations depends very much on what is referred to as capital endowment or capital support or capital availability. Meanwhile, the higher the level of capital support — the greater the capital support that needs to be provided - it will be increasingly difficult for shareholders to obtain the required or desired income. In uniting or harmonizing the desires of both parties namely shareholders - who demand high returns (ROA) - and policyholders (clients), who demand definitive and comprehensive guarantees, insurance companies can use financial stability as an intermediary or the bridging aspect between shareholders and policyholders. Chen and Wong (2004) use the term financial stability and financial health insurance companies alternately or interchangeably, meaning that they have the same meaning. Financial stability or financial health of an insurance company acts as a prerequisite for insurance companies in fulfilling the wishes of shareholders and policyholders (Necas, 2016). This is in line with Vaughan and Vaughan (2008) who states that the financial stability or financial health of insurance companies is a very important factor that must be considered in choosing an insurance company. Chen and Wong (2004) and Necas (2016) in their study found that financial stability and financial health are closely related to the solvency or solvency of insurance or reinsurance companies to guarantee fulfillment of obligations permanently following insurance or reinsurance activities from their own resources , liquidity — the ability to fulfill its financial obligations at the right time, without affecting normal operations, and profitability — the ability of insurance companies to make profits. In Indonesia, based on the Financial Services Authority (2016), compulsory insurance companies at all times meet financial health level requirements where the level of financial health company includes: (a) solvency level; (b) technical reserves; (c) sufficient investment; (d) equity; (e) guarantee funds; and (f) other provisions relating to financial health. Determining Factors of the Financial Health of Insurance Companies Chen and Wong (2004) state that the financial health of insurance company which is represented by insolvency of the company are influenced by a number of factors. In general, these factors are classified into two major groups, i.e. micro- determinants or micro-economic indicators or company-specific determinants and macro determinants or macro-economic indicators (Chen and Wong, 2004; Caporale et al., 2017). Micro-economic indicators that have the potential to affect the health level of insurance companies, both life insurance and general insurance, are presented in Table 2. 50 International Journal of Business and Management Science, 9(1): 47-65, 2019
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