The Effect of Claim Ratio, Operational Ratio and Retention Ratio on Profitability

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The development of the current economic system, allows consumers exposed to various kinds of risks. These risks can be inherent in businesses that are carried out up to personal consumers. But with the increasing application of science, these risks can be managed by consumers, the aim of which is to minimize future losses resulting from these risks. The application of this knowledge then gave birth to new business opportunities in the field of financial services namely financial risk management, this then gave birth to insurance companies.

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One non-bank financial institution is an insurance company, which is a company engaged in financial services where insurance companies provide benefits to consumers in dealing with risks that will occur in the future. Companies engaged in insurance have different characteristics when compared to other non-bank financial institution companies, the distinguishing characteristics include underwriting, claims and reinsurance activities. As a financial institution, insurance companies are required to have good financial health in accordance with applicable regulations (laws and government regulations) with the aim of consumers in this case the service user community is confident of the security of funds spent on insurance products, and is able to provide benefits in accordance with the product bought.

The need for risk management or insurance guarantees arises as a direct result of economic growth. The role of the national insurance industry is to provide protection / protection against the risks faced by the community so as to support the stability of development and as one of the institutions for raising public funds and providing funds for national economic development. The growing development of insurance companies in Indonesia will have an immediate economic impact on Indonesia.

Awareness of insurance in Indonesia is still considered low compared to other countries with only around 1.7% of the total population in 2018. Even insurance industry players must think of new strategies to increase interest and the number of insured is increasingly shrinking. This is inversely proportional to the potential of insurance companies in Indonesia. The gap indicates the magnitude of the possibility of a business that can be created. Indonesian society can play a dual role in this, namely as consumers or as investors in insurance companies.

In March 2019, the Financial Services Authority (OJK) as the regulator for insurance companies made a stop to the sale of savings plan products made by 3 (three) life insurance companies. The three life insurance companies are major insurance companies in Indonesia. OJK rate, the three companies are considered to have no capacity in terms of capital and in terms of risk management that is qualified in terms of marketing the product. Based on these problems, from the investor side good information is needed related to profitability, because the risk management mechanism by insurance companies will lead to increased profitability.

The good performance of insurance companies is generally reflected through the profitability generated from the company's financial statements. Profitability is generally defined as the ability of a business to utilize assets to generate revenue in an efficient manner. This is used to identify whether a company can be a valuable investment opportunity. Profitability is an important factor in financial management because one of the objectives of financial management is to maximize the welfare of shareholders. Profitability not only increases in the solvency conditions of insurance companies but also plays an important role in persuading policyholders and shareholders to supply funds to insurance companies. One measure of profitability for investors is returnon assets (ROA), this is in line with previous research opinions that indicate a key indicator of profitability for insurance companies is ROA.

Profitability of general insurance companies is influenced by internal and external factors. Internal factors focus on the specific characteristics of insurance companies, external factors concerning industry variables and macroeconomic variables. Based on research related to factors that affect the level of profitability of insurance companies in Zimbabwe, it is known that the 3 (three) highest factors affect the level of profitability which are sequentially those factors are claim ratio, operational expense ratio and retention ratio, with ROA as a reflection of profitability.

Claim ratio is considered as the ratio that most influences the level of profitability, this is in line with the case experienced today where Jiwasraya and AJB Bumiputera are insurance companies that are in trouble now and begin with the inability of the two companies in managing and fulfilling customer claims. Increasing the claim ratio in addition to worsening financial performance, failure to manage it will cause negative sentiment from consumers and cause more waves of claims in the future. As an example of poor claims management, which occurred at AJB Bumiputera, the wave of claims began with too long a claim process where the process took up to 6 months to process the claim . This news caused the worse performance of AJB Bumiputera. When compared to AJB Bumiputera, the saving plan product which was terminated by the OJK by overriding 3 (three) insurance companies before, due to indications of the products issued by the company has a large risk due to an indication of the company's inability to meet customer claims due to inefficiencies in managing bebano perasional and manage underwriting.

One of the causes of failure of AJB Bumiputera claims is due to internal problems related to the lack of systemic information systems in the company. This is actually reflected in the company's expences ratio (operating expenses) where it is known how the management of costs in the company against the net premium income received by insurance companies, and for the case of AJB Bumiputera it is known that the management of operational costs is not done properly where each branch of AJB Bumiputera has the authority to manage expenses its operations (Walfajri, 2019) and are not well reported to the center so that the arrangements and managerial related business operating expenses. Increased operating expenses or inefficient management of operating expenses will directly reduce company profits. Operational expenses are also expenses that can be controlled by management, so getting the target profit is the most considered.

The occurrence of premium management by the business branch of AJB Bumiputera and not known by the center, will cause errors in calculating how much the net premium actually obtained by the company. That is because managing premiums by conducting reinsurance activities will reduce the gross premium income received by the company. Errors in determining net premiums will directly affect total profits and affect the size of the insurance company's health ratio. One of the affected ratios is the retention ratio, where the retention ratio is a reflection of the ability of insurance companies to manage their business risks. The importance of retention itself is also reflected by OJK regulation No. 19 /POJK.05/2019 regarding own retention, where the retention limit itself must be based on a risk and loss profile (risk and loss profile) made in an orderly, orderly, relevant, and accurate manner.

Based on the previous elaboration regarding AJB Bumiputera and Jiwasraya's operational errors, further analysis is needed related to the effect of the operating expense ratio, the ratio of claims and retention ratio to profitability for insurance companies in Indonesia. Profitability is reflected by the ROA ratio, research is carried out mainly for insurance companies that have been listed on the Indonesia Stock Exchange. The results of this analysis are expected to be used as material for the analysis of the Indonesian people both as investors or as consumers of insurance products. Previous research provides information for insurance companies using a measure of profitability with ROA. Related to the factors that influence it, previous research suggests that the factors that have the most influence are the claim ratio then the operating expense ratio and then the retention ratio.

Reaserch gap to previous studies related to claims ratios, studies that produce negative and significant claims ratios on profitability, other studies mention the ratio of positive and significant claims to profitability, in contrast there are other studies that state the ratio of claims produce a negative and not significant effect on profitability. Reaserch gaps against previous research related to operating expense ratios (expences), studies that produce operating expense ratios produce a negative and significant effect on profitability , other studies which state the ratio of operating expenses produce a positive and significant effect on profitability , on the other hand there are other studies which state the ratio of operating expenses produce a positive and not significant effect on profitability. Reaserch gap to previous studies related to retention ratios, previous studies related to retention ratios produce a negative and significant effect on profitability, other studies that state retention load ratios produce positive and significant effects on profitability , other studies describe the effect of positive and insignificant retention ratios on profitability.

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