The Effect of Claim Ratio, Volatility of Premium Income, and

Average Premium Per Insured of Health Insurance Line of

Business on Liquidity Ratio and Investment Adequacy Ratio of
Life Insurance Company

by
Ira Dewi Elfini, S.Si, M.B.A, FSAI, AAIJ, AIIS, QCRO

Yogyakarta, February 2024

 Abstract

Health insurance is line of business of life insurance who are facing challenge to
maintain their claim ratio and premium income stability until today. During 2017
– 2023, claim ratio of commercial health insurance sold by life insurance in
Indonesia are above 100 percent in overall, meaning that there is small room for
the companies to increase their assets due to their obligation to pay claim liability
within short time. Meanwhile, insurance company must have sufficient liquidity
and solvability required by regulator to continue its operations. Liquidity Ratio
and Investment Adequacy Ratio became insurance company’s financial soundness
that OJK focus aside of solvability ratio according to Road Map of Indonesia
Insurance Development and Strengthening for 2023 – 2027, released in November
2023. The objective of this thesis is to analysis the effect of health insurance
performance i.e. claim ratio, premium volatility and average premium per insured
on liquidity ratio and investment adequacy ratio. The statistic test was done to 26
life insurance companies that sell health insurance during period 2018 Q1 until
2023 Q2 using Regression Analysis method. Based on the result of the statistical
tests of the observation, the conclusion is that the volatility of premium income
has negative effect on both liquidity ratio and investment adequacy ratio, while
claim ratio and average premium per insured have no effect on both liquidity ratio
nor investment adequacy ratio.

Key words: health insurance, claim ratio, liquidity ratio, investment adequacy
ratio

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 CHAPTER I INTRODUCTION

1.1. Background
The growth of health insurance marketed by life insurance companies over
the period 2017 – 2022 is circa 9.8% to 2.4%, or in average 13.2%. Unfortunately,
the growth of commercial health insurance had not been supported by satisfying
performance. From the report from Indonesia Life Insurance Association (AAJI)
for the period 2017 – 2022, the claim ratio of health insurance business are above
100 percent and it is considered as high.

Table 1.1 Claim Ratio of Health Insurance marketed by Life Insurance

Companies in Indonesia

Year Claim (Rp million) Premium (Rp million) Claim / Premium

2017 8,138,573 6,569,180 124%
2018 9,265,099 8,144,925 114%
2019 10,550,733 9,625,708 110%
2020 9,171,989 10,566,644 87%
2021 10,579,546 10,244,682 103%
2022 14,540,898 11,988,011 121%
Source: AAJI (Indonesia Life Insurance Association)

Some of the drivers of the increase of health insurance claims are medical
inflation that is always higher than the aggregate inflation itself (Poongavanam et
al. 2023, Arredondo, 2019), decrease of health quality, aging population, change
of life style like smoking habit, lack of exercise, and obesity that are accelerate the
risk of chronic diseases like cardiovascular, stroke and diabetic (Tabish, 2017),
and other life style changes as the result of the increase of income that could
reduce health quality and increase the risk of chronic and degenerative diseases
could lead to higher claim cost to insurance company (Hong et al, 2023). The
increase of health risk had become challenges to health insurance operations
today.
In November 2023, Financial Service Authority (OJK) issued the Road
map for Development and Strengthening of Indonesia Insurance 2023-2027,

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stated that the monitoring of insurance companies will focus on Risk-Based
Capital (RBC) ratio and Investment Adequacy Ratio (Rasio Kecukupan
Investasi/RKI)

1.2. Problem Formulation

Referring the condition of health insurance elaborated above, the writer

identified risks and challenges before life insurance companies who operates
health insurance business are as follows:
1. High claim ratio provides small room for life insurance companies to
increase their assets because most of their income are immediately used to
pay the claims.
2. Health insurance coverage period is one year, lead to uncertainty on the
continuity of inforce policies.
3. The stagnant number of insureds for years reflected the low penetration
and may lead to high competition since the market share is small.

1.3. The Research Objective

1. To test the effect of claim ratio on liquidity ratio.

2. To test the effect of claim ratio on investment adequacy ratio.
3. To test the effect of volatility of premium income on liquidity ratio.
4. To test the effect of volatility of premium income on investment
adequacy ratio.
5. To test the effect of average premium per insured on liquidity ratio.
6. To test the effect of average premium per insured on investment
adequacy ratio.

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 BAB 2 THEORETICAL BASIS

2.1. Theoretical Basis

2.1.1. The Insurance Principles

The insurance contract must comply with some principles, they are:
Insurable Interest, Utmost Good Faith, Proximate Cause, Indemnity, Subrogation,
Contribution, Loss Minimization.

2.1.2. Health Insurance

Health Insurance is insurance that provide coverage on medical cost

reimbursement of health expenses for inpatient, outpatient, maternity, dental care
and optical glasses, and other additional health covers like haemodialysis,
chemotheraphy and more, if any.

2.1.3. Asymmetric Information

The asymmetric information situation is when only one party who has
sufficient information and knowledge about the level of risks to be insured. The
imbalanced knowledge between insurance company and the policyholders/
insureds could lead to adverse selection and moral hazard, that make the company
loss.

2.1.4. Adverse Selection

Adverse selection in insurance is the situation where someone with higher

risk level tends to need insurance and will buy insurance policy compared to
someone who has low risk level.

2.1.5. Moral hazard

Moral hazard in insurance is a condition where the behavior of the

policyholders/ insureds could lead to increase the risk level or any neglect action
which could lead to loss or events.

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2.1.6. Claim Ratio

Claim Ratio or Loss Ratio describes how the claims paid compared to the
premium income or describes ratio of the loss occured from the claim payment
proportionally with the premium collected.

2.1.7. Asset and Liabilities Management of Health Insurance

Asset and Liabilities management of health insurance is based on the

health insurance characteristics as follows: claims are not determined in the
beginning of policy contract but determined the medical cost occured, frequency
of health insurance claim is higher than life insurance that pay claim one time, and
lastly the short insurance term (usually one year) could lead to the risk of
discontinue of the policies.

2.1.8. Insurance Premium

Insurance premium is the price of insurance in the amount of monetary

where two parties agree to trade the risk and uncertainty (Leaven et al, 2011). The
insurance premium determination must be based on the risk to be covered.
Insurance premium can change according to the change of claim risk (Harrington,
2013)

2.1.9. Health Insurance Consumption

Align with the increase of wealthiness, someone will appreciate his/her

life and put more attention on his health to have long life, then any expenses that
are related with the medical treatment will increase as well (Hall and Jones, 2007)
(Chen et al, 2023)

2.1.10. Volatility of Premium Income

Fluctuated premium income made the insurance company difficult to do

optimize their investment operations, and could lead to slow asset growth. The

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instability of asset growth and claim payment could impact to low performance
and incompliance with insurance health indicators.

2.1.11. Average Premium Per Insured

Average premium per Insured is the premium amount charged to the

insured. The calculation is used by the writer as approach to premium charges.

2.1.12. Liquidity Ratio

Liquidity Ratio is the comparison of liquid assets and the liabilities that
describe the ability of the insurance company to fulfil its immediate claims.

2.1.13. Investment Adequacy Ratio / Rasio Kecukupan Investasi (RKI)

This is the ratio to measure the asset investment of insurance’s ability to

pay the claims under it’s own retention.

2.1.14. Investment Asset Growth

Investment Assets is one component to measure Investment Adequacy

Ratio (RKI), so that the growth of investment assets could impact to financial
strength of insurance to cover company’s obligation to policyholders.

2.2. Hipotesis

H1: Claim ratio effects negatively on the Liquidity Ratio.

H2: Claim ratio effects negatively on the RKI
H3: Volatility of premium income effects negatively on the Liquidity Ratio.
H4: Volatility of premium income effects negatively on the RKI
H5: Average premium per insured effects negatively on the Liquidity Ratio.
H6: Average premium per insured effects negatively on the RKI

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 BAB 3 RESEARCH METHOD

3.1. Data Collection Method

This research uses secondary data taken from quarterly report on insurance
performance issued by Indonesia Life Insurance Association (AAJI) and financial
report of each sample of companies.

3.2. Variables

Variable Variable Definition and Formula Scale

Type Name
Dependent Liquidity Ability of insurance company to fulfil its Ratio
Ratio (RL) liabilities occurred within one year ahead.

RL = 100% (Liquid Assets / Short term

Liabilities)
Dependent Investment Ability of insurance company to cover its Ratio
Adequacy liabilities to policyholders on its own retention.
Ratio
(RKI) RKI = 100% (Investment Assets + Cash Bank) /
(Liabilities Own Retention + Claims Payables
Own Retention)

Independent Claim Claim expense proportionally with premium Ratio

Ratio (CR) income

CR = 100% (Net Claim Expenses / Net Premium

Income)
Independent Volatilitas Volatility of premium income from time to time. Nominal
Pendapatan (in
Premi VPR = STDEV (Premium of the last 4 quarters) billion
(VPR) Rp)

Independent Average Average premium on one insured. Nominal

Premium (in
Per Insured APR = Gross premium / Number of Insureds million
(APR) Rp)
Control Investment The growth of investment assets compared to Ratio
Asset previous period
Growth
(AST) AST = (Investment Asset of current quarter –
Investment Asset of last quarter) / Investment
asset of last quarter

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3.3. Data dan Sample

The choose of sample of life insurance companies is based on the

following criteria’s:
a. The insurance company sells health insurance products of both
individual and group during observation period.
b. The insurance company submit complete report to every quarterly
report on life insurance performance issued by AAJI.
c. The insurance company is still active in business during observation
period.
There are 26 life insurance companies meet the above criterias.

3.4. Data Analysis Method

The data analysis method used are statistics analysis, model regression
panel, statistics tests.

3.4.1. Regression Panel Model

LIQit = β0 + β1 CRit + β2 VPRit + β3 APRit + β4 ASTit + e

Where,
β0 = Constanta
β1, β2, β3, β4 = Coeffisien Regression
CR = Rasio Klaim (persen)
VPR = Volatility of Premium Income (milyar Rupiah)
APR = Average Premium per Insured (juta Rupiah)
AST = Investment Asset Growth (persen)
LIQit = Variabel Dependent, RL and RKI (percent)
e = error
i = Company
t = time (quarterly)

3.4.2. Regression Panel Model chosen

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 Following are statistic test to determine appropriate regression model:
a. Chow test, to choose between the Common Effect or Fixed Effect model.
b. Hausman test, to choose between the Random Effect or Fixed Effect model.
c. Lagrange Multiplier (LM), to choose between the Common Effect or Random
Effect model.

3.4.3. Classic Assumption Test

a. Multicolinearitas test, this the test to identify whether any multikolinearitas

among independent and dependen.
b. Heteroskedastisitas test, to identify whether regression panel model has non-
similarity varianfrom residual of one research to another research.
c. Autocorrelasi test, to identify whether any correlation occurred for regression
panel model. Method used is Durbin-Watson test.

3.4.4. Hipotesis Tests

a. T test, to determine the level of significancy of independent variables to

dependent variable.

b. F test, to see the impact of all independent variables simultaneously to

dependent variables.

c. Coefficient Determination (R2), to identify how is the ability of the regression

model to interpret dependent variables.

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 BAB IV RESEARCH RESULT AND DISCUSSION

4.1. Analysis Statistik Deskriptif

Tabel 4.1 Table of Hasil Analisis Statistik Dekriptif

RL RKI CR VPR APR AST
Mean 2,590767 2,294986 1,051106 42,26799 2,910783 0,014022
Maximum 6,606400 13,06770 3,046034 380,9813 29,38885 0,411767
Minimum 0,611800 1,053195 0,123104 0,022002 0,003415 -0,220067
Std. Dev. 1,425303 1,596920 0,693212 61,31507 4,018257 0,070929
Observations 528 528 528 528 528 528
Notes:
RL : Rasio Likuiditas (persen)
RKI : Rasio Kecukupan Investasi (persen)
CR : Rasio Klaim (persen)
VPR : Volatilitas Pendapatan Premi (milyar Rupiah)
APR : Rerata Premi Per Tertanggung (juta Rupiah)
AST : Pertumbuhan Aset Investasi

According to descriptive statistics analysis, it is showed that the mean

of,liquidity ratio (RL) and investment adequacy ratio (RKI) are quite high even
though the average claim ratio is high above 100 percent. The standard deviation
of RL and RKI is high, meaning the gap among the insurance company are also
wide. Average CPR is high, showed there are fluctuated premium income among
the companies and concentrated premium income in a few companies. Average
premium per insured (APR) are still within rational price and not too expensive.
Investment Asset growth (AST) varied with the fair gap between small companies
and big companies. The growth of AST is quite high where some companies
managed to increase their investment assets significantly because of low claim
ratio during pandemic years.

4.2. Regression Linear Data Panel Model

Based on Chow test, Hausman test and Lagrange Multiplier test on sample
companies, the model chosen for model regression linear data panel is Random
Effect.

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4.3. Classic Assumption Test

Model regression data panel in this research have passed the

Multicolinearity test, Heteroskedasticity test and Autocorrelation test. Due to this,
the research continues to next step i.e. hipotesis test.

4.4. Result of Hipotesis Test

Result of t-test on Regression Panel 1:

Table 4.2 Result of t-test – Regression Panel 1

Variable Coefficient t-stat Prob.
C 3.458797 11.96894 0
CR -0.149009 -1.690165 0.0916
VPR* -0.269723 -6.659362 0
APR -0.021491 -1.213544 0.2255
AST 0.074058 0.451626 0.6517
*Variable VPR was transformed using log

Analysis on the effect of independent variables on dependent variable RL:

 H1 is rejected, meaning that CR does not effect on RL
 H3 is accepted, meaning that VPR effect negatively on RL.
 H5 is rejected, meaning that APR does not effect on RL.

Result of t-test on Regression Panel 2:

Tabel 4.3 Result of t-test – Regression Panel 2

Variable Coefficient t-stat Prob.
C 2.67662 7.998548 0
CR -0.143081 -1.78797 0.0744
VPR* -0.104193 -2.797912 0.0053
APR 0.006227 0.385091 0.7003
AST 0.078153 0.530907 0.5957
*Variable VPR was transformed using log

Analysis on the effect of independent variables on dependent variable RKI:

 H2 is rejected, meaning that CR does not effect on RKI
 H4 is accepted, meaning that VPR effect negatively on RKI.
 H6 is rejected, meaning that APR does not effect on RKI.

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 BAB V CONCLUSION AND RECOMMENDATION

5.1. Conclusion
Based on the problem formulation, the objective of research, result of
statistic tests, below is the conclusion of the research:
1. Claim ratio of health insurance does not effect the liquidity ratio of insurance
company.
2. Claim ratio of health insurance does not effect the investment adequacy ratio
of insurance company.
3. Volatility of premium income of health insurance effect negatively the
liquidity ratio of insurance company.
4. Volatility of premium income of health insurance effect negatively the
investment adequacy ratio of insurance company.
5. Average premium per insured of health insurance does not effect the liquidity
ratio of insurance company.
6. Average premium per insured of health insurance does not effect the
investment adequacy ratio of insurance company.

5.2. Recommendation

Following are recommendation for future improvement on the research:

1. To apply more details data categorization to get deeper understanding on the
behavior of each claim, for example, inpatient claim may have different
behavior compared to outpatient claims.
2. Extend the research by introducing other factors that are considered impact
health insurance performance, like age distribution, product design,
distribution channel and provider network (hospital, clinic)
3. To study ALM of each insurance company.

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