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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
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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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