Ibrahim Kholilul Rohman is acting head of IFG Progress, where Rosi Melati serves as a research associate. The views expressed are personal.
Doubling the equity limit for insurers and pension funds to 20 percent from currently 8 percent can be either a bold boost for market stability or a dangerous gamble with institutional solvency. However, "flexibility" might be a double-edged sword that threatens to undermine asset-liability matching and trigger a capital-requirement crisis.he recent turbulence in Indonesia’s capital market has prompted the government to reconsider its stabilization strategy. One policy option is an increase in the equity investment limit for pension funds and insurance companies from roughly 8 percent to up to 20 percent per eligible issuer, as per an announcement by Office of the Coordinating Economy Minister Airlangga Hartarto during a press briefing on regulatory reform at the Indonesia Stock Exchange. Under the existing framework, equity investment is governed by Financial Services Authority Regulation (POJK) No. 26/2025, particularly Article 15(1)(h), which caps equity exposure at 10 percent per issuer and 40 percent of total invested assets. The proposed reform would raise the per-issuer ceiling to 20 percent for selected stocks, notably large-cap and liquid equities such as those included in the LQ45 index. Yet flexibility comes at the cost of higher concentration risk. A 20 percent exposure to a single issuer implies that a sharp price correction or corporate distress could materially weaken an institution’s financial position. Equally important is the consistency of this policy with the liability structure of each institution. The primary objective of investment management for insurers and pension funds is not to maximize returns per se, but to ensure that assets remain sufficient and well-matched to liabilities. Liability profiles vary widely across institutions, implying that a uniform investment approach would be inappropriate. For general insurers, liabilities tend to be short-term and require high liquidity to meet claims. Accordingly, portfolios are typically concentrated in low-risk, liquid instruments. As of November 2025, OJK data indicate that equity allocations for general insurers remain below 5 percent, reflecting a conservative, liquidity-driven strategy. In this context, a higher equity limit should be seen case-by-case depending on various factors. By contrast, life insurers and pension funds hold long-term liabilities, allowing for greater use of equities as a source of asset growth. Even so, asset-liability matching remains the cornerstone of prudential management. Ideally, allocations to higher-risk assets such as equities should occur only after policyholder and beneficiary obligations are fully secured by stable and predictable income streams, primarily derived from fixed-income instruments.As of November 2025, life insurers have allocated roughly 22 percent of their total investment portfolios to equities, whereas pension funds, mandatory and social insurance schemes, and reinsurers each maintained equity exposures of below 10 percent. Sharia (takaful) insurers, in aggregate, exhibited a higher equity share, at approximately 19 percent. Moreover, this policy also reflects insurance products differently. Endowment and whole-life products, with long maturities and savings components, are relatively compatible with increased equity exposure. For unit-linked products, however, market risk is in principle borne by policyholders. Any relaxation of per-issuer limits must therefore be accompanied by stronger disclosure and improved financial literacy to ensure that risks are fully understood. International experience underscores the importance of capital considerations. Insurance Europe, for example, highlights that equities exert a disproportionate impact on risk-based capital because, under prudential regimes such as Solvency II, equities are classified as highly volatile assets and therefore attract higher capital charges than bonds. The rationale is straightforward: Short-term price fluctuations translate directly into balance-sheet volatility. In Indonesia, the same principle applies. Higher investment risk translates directly into higher capital requirements. Under the Minimum Risk-Based Capital framework stipulated in OJK Circular Letter No. 24/SEOJK.05/2017, equity investments are assigned comparatively elevated risk weights. Shares listed on the Indonesia Stock Exchange and included in the IDX30 or Jakarta Islamic Index are subject to a 15 percent risk factor, while other listed equities, covering both domestic stocks and selected foreign equities in major Asia-Pacific and European markets, carry a 20 percent risk factor. Equities classified as higher risk are assigned an even more stringent capital charge of 30 percent, reinforcing the regulatory disincentive to hold volatile assets on insurers’ balance sheets. Thus, the larger the equity share in an insurer’s portfolio, the greater the capital buffer needed to absorb potential losses. As a result, risk-based capital ratios deteriorate more quickly when funds are shifted into equities than when they are allocated to long-term bonds, which offer more stable cash flows and better alignment with insurance liabilities. A BIS report in 2011 carries the same message. It indicates that insurance company investment strategy should be liability-driven and capital-efficient, not return-maximizing. Portfolios should primarily match long-term liabilities using high-quality fixed income assets such as government and investment-grade bonds, supported by interest rate and inflation hedging. Equities therefore have only a limited and conditional role. Stock investments are suitable mainly as a small return-enhancement layer or shifted to policyholders through unit-linked products, not as core assets backing guaranteed liabilities. Large equity exposure increases capital charges, volatility, and pro-cyclicality, weakening the insurer’s role as a stable long-term investor. Hence, insurers should remain bond-centric and liability-matched, with equities used selectively and only when capital buffers allow. According to IFG Progress Insurance Quarterly Report (Q3 2025), Indonesia’s insurance industry remains well capitalized in aggregate, with RBC ratios far above the OJK minimum threshold of 120 percent: approximately 487 percent for life insurers and 377 percent for general insurers. From a solvency standpoint, the industry appears robust. However, this strength coexists with operational pressures, particularly among life insurers, where combined ratios remain above 100 percent, and among general insurers, where claims ratios have been rising. While this underscores the stability of core solvency indicators, it also calls for heightened vigilance in health and credit insurance segments, where persistently high combined ratios could weaken solvency over time. In conclusion, raising the equity investment limit to 20 percent per issuer should be approached with caution. The policy must be embedded within a prudential framework that reinforces governance, supervisory discipline, and strict alignment with institutional liability profiles. Without rigorous asset–liability management and effective oversight, flexibility can quickly transform into a new source of risk for the industry at large.This article was published in thejakartapost.com with the title "". Click to read: https://www.thejakartapost.com/opinion/2026/02/06/deepening-markets-or-deepening-risk-rethinking-the-20-equity-rule.
