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MAIPARK: Saving you from catastrophe

Interview - June 17, 2014
Natural catastrophes cause numerous human lives and significant property damage each year, while the scale of economic losses is constantly increasing due to population growth and value concentration of sensitive technology in potentially risk exposed areas. In a region particularly prone to such disasters, Maipark Indonesia is a leader in catastrophe reinsurance in ASEAN, President Director of the company, Dr. Frans Y. Sahusilawane, talks to United World

What were the series of events that led to the establishment of MAIPARK?

In 1999 there were a series of large earthquakes across Asia. Our regulator at the time, Firdaus Djaelani (now a commissioner of the Financial Services Authority of Indonesia) was worried about what would happen if a similar earthquake struck Indonesia. At that time he was not sure that the insurance industry would survive a catastrophe of similar scale.

As a result, Dr. Firdaus approached the Insurance Council of Indonesia and created a working committee to study the impacts of an earthquake on Indonesia’s insurance portfolio. I was appointed as the chairman of that working committee and we conducted a year-long study, from 2000 to early 2001. The findings were terrifying. Firstly, we found that insurance companies in Indonesia did not have adequate protection for their earthquake exposure. Secondly, they did not have adequate protection because they did not charge proper premiums for earthquake protection. For example, most insurers bundled earthquake insurance with fire insurance at no extra cost to the customer. Thirdly, many insurance companies did not understand the risk of earthquakes. This is a serious issue as they were exposing entire companies, billions of dollars, to the risks associated with earthquakes.

By the middle of 2001 we had concluded that something needed to be done. The following year, we attended the East Asian Insurance Congress (EAIC), the largest gathering of Asian insurers in the region, which was held in Tokyo. We wanted to learn from the Japanese who have extensive experience with earthquake insurance. We saw that they have extremely high premiums on earthquake insurance whereas Indonesia was giving it away for free. We realised we had to do something urgently. As of early 2003 we set up an insurance pool to help mitigate the risks of an earthquake. We wanted the government to be involved in financing but the government declared that they did not have the money to invest in the program. We convinced them that at least they would need to regulate the industry. Subsequently, the Director General of Financial Institutions issued directives that made contributions to the earthquake insurance pool compulsory for insurers. Customers did not have to purchase earthquake insurance but if they did then the insurer was obligated to cede part of the risk and premium from the insurance policy to the Earthquake Re-Insurance Pool of Indonesia. We operated that pool for one year, in 2003.

Operation of a re-insurance pool has problem of joint and several liabilities, which we tried to avoid. We worked together with the Insurance Supervisory Authority and prepared to set up a company, a legal entity, to deal with the pool for earthquake insurance. There was a very old and inactive insurance company that we acquired a license from and with that we transformed the reinsurance pool into MAIPARK. It started operations in 2004.

Just last week I was in Singapore attending the 5th Institute of Catastrophe Risk Management (ICRM) with various regional insurers. A key question in our discussion was: “What was the game-changer for disaster insurance?”. Of all the major special-risk insurance companies around the world, what makes them special? We found that they all started after a major disaster. The only special-risk company set up without a major catastrophe trigger was MAIPARK.

MAIPARK was set up in the same year as the tsunami that devastated Aceh and Northern Sumatra, was that not a catalyst within Indonesia?

Not particularly. The tsunami did not happen until late 2004.
MAIPARK had begun operating the insurance pool nearly two years prior and we were present for the disaster. Contrary to many people in Malaysia or Thailand, for example, who deny living in catastrophe-prone areas, we accept the fact that we are living with the risk and prepare ourselves for it. We’ve had the initiative, and still do.

Is Indonesia implementing its own catastrophe modelling?

Yes. We have our own catastrophe modelling (cat modelling). In 2009 we completed the first phase of our modelling, and in 2010 we revised the Indonesian earthquake zone. Now, we are running a third series earthquake model. It is called the MAIPARK Cat Model (MCM). As of two years ago, we have started to develop flood models for Jakarta too. The first phase was finished last January but it is being reviewed because some phenomena of the big flood earlier this year were not yet captured in the modelling.

How has MAIPARK developed in terms of human resources since 2004?

MAIPARK, being a specialist company, needs specialists. For example, we employ geologists, hydrologists and meteorologists and other professionals from the core earth sciences essentially. We have an emeritus professor who founded the Geophysics Faculty of the Bandung Institute of Technology. MAIPARK has specialist recruitment at the same institute, employing another 6 young specialists. They are involved in a range of research and cooperate with government institutions and research bodies to elevate our knowledge and understanding of disasters in Indonesia.

It is difficult to attract the right people for two reasons. Firstly, bright young people do not see insurance as an attractive industry to work in. The industry does not have a great image and that is something we want to change. Secondly, some of our young specialists believe that the salaries in the insurance industries are not competitive. We promise growth and development, but cannot guarantee a generous starting salary. None of our young specialists have left and we believe it is because we have been honest with them. We appreciate our employees and show them the future of the sector. We want them to feel comfortable in the company.

How many people does MAIPARK employ?

When I started here five years ago we had about 35 personnel. Now we have 62, almost double. The people who have joined since this time include 2 new earth scientists, one of which is in Japan finishing a PhD in hydrology. One has finished an MBA and another one is currently completing his. We work to further our employees’ knowledge base at MAIPARK. Our strategic plan is such that besides the extra earth scientists we have recruited about 6 IT specialists. Actually, IT is a very important enabler. More than half of the extra 25 new recruits are specialists from finance, IT or earth science.

How does MAIPARK give back to the community?

In 2008 MAIPARK ran a campaign for catastrophe risk awareness in 292 villages in Bantul District, Yogyakarta Province. Last year we ran tsunami drills in some areas as well. We urged the local district disaster management agency to do drills too. With our assistance some have built tsunami early warning towers with loudspeakers so that they can communicate with the public in the event of a disaster. We genuinely want to educate people and help protect them from the impacts of earthquakes. We take fellow insurers out to important geological sites and teach them about risk and the importance of the environment. We are working to elevate Indonesia’s overall knowledge of earthquake risks.

What message would you like to convey to our readers?

Our message is that we have to realise that we are living in a catastrophe-prone area and we need to embrace that fact and adapt ourselves. We have been talking to government for 7 years and advocating for the creation of a national insurance scheme. In Aceh, we have faced $4 billion USD worth of rehabilitation and reconstruction. The national budget only provides for $300 million USD annually. There’s a big gap in risk protection that needs to be borne by state budgets. Disaster relief often undercuts development and that creates uncertainty.

Back in 2009 we made a presentation in the office of the Coordinating Minister for Social Welfare and the Ministry of Finance was also in attendance. Disaster management officials were there as well. All the stakeholders and representatives were there. We told them, based on our research, which areas they needed to focus their disaster prevention and mitigation on. We suggested that areas such as West Sumatra be made into pilot projects for disaster protection. We told them how much it would cost and they said they had the money for it. Six months after that nothing had happened and then on the 30th of September 2009 an earthquake struck West Sumatra. The government didn’t have the insurance and had to dig into the state budget to find the money for relief and rehabilitation. This is something we would like to prevent in the future.