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Legal Updates | Indonesian Regulatory Framework for Insurance Businesses

The main legislation for insurance and reinsurance businesses in Indonesia is the newly enacted Insurance Law, issued on 17th October 2014. The new Insurance Law revoked Insurance Law No. 2 of 1992. Implementing regulations under the old insurance law still prevail to the extent that they do not contradict provisions of the new Insurance Law.

The new Insurance Law introduced significant changes to the sector, as follows:

  • Local shareholding requirements. Insurance and reinsurance companies, Shariah insurance and reinsurance companies, insurance and reinsurance brokerage companies and loss adjuster companies (insurance business companies) can only be owned by:
    • Indonesian individuals and/or Indonesian legal entities that are directly or indirectly wholly owned by Indonesian individuals; or
    • Indonesian individuals and/or Indonesian legal entities referred to in the point above together with foreign individuals or legal entities engaged in the same insurance business or a holding company whose one subsidiary engages in the same insurance business.

The requirement in the first point above means that the local shareholder in an insurance business company must be ultimately owned by Indonesian individuals. This differs significantly from the previous regulation, under which the local shareholder could be ultimately owned by a foreign party. Insurance business companies have five years from the enactment of the Insurance Law to comply with this requirement.

  • Single presence policy. A party can only be a controlling shareholder in one of each of the following categories of insurance companies:
    • life insurance company;
    • general insurance company;
    • reinsurance company;
    • Shariah life insurance company;
    • Shariah general company; or
    • Shariah reinsurance company.

A shareholder who controls more than one entity in any one of the above categories must comply with this requirement within three years from the enactment of the Insurance Law.

  • Controller provision. Insurance and reinsurance companies must appoint one controller who will be responsible for any losses of the insurance/reinsurance company under its control. A controller is a party who, directly or indirectly, has the ability to appoint the board of directors (BOD) and board of commissioners (BOC) and/or can influence the actions taken by the BOD or BOC.
  • Shariah unit separation. Shariah units of insurance and reinsurance companies must be separated into stand-alone entities within ten years of the enactment of the Insurance Law.
  • Statutory management. The Financial Services Authority (Otoritas Jasa Keuangan or OJK) can appoint a party to take over the management of an insurance or reinsurance company if it:
    • is the subject of restrictions on its business activities;
    • is in an unsound condition and cannot meet its obligations, based on either the company's or the OJK's view; and
    • was used to facilitate/conduct financial crimes such as money laundering.

The Insurance Law divides the insurance sector into two categories:

  • Insurance businesses. This includes:
    • insurance and reinsurance companies;
    • Shariah insurance and reinsurance companies;
    • insurance and reinsurance brokerage companies; and
    • insurance loss adjuster companies.
  • Insurance/reinsurance-related activities. These include:
    • actuary consultants;
    • public accountants;
    • appraisers; and
    • other professions as stipulated by the OJK.

Other key areas that are regulated by the Insurance Law and its implementing regulations are:

  • Solvency requirements.
  • Foreign investment limitations.
  • Reporting requirements.
  • Fit and proper test for members of the BOD, BOC, Shariah supervisory board, actuaries, internal auditors and controllers.
  • Good corporate governance.
  • Capital and equity requirements.

The main body overseeing insurance businesses in Indonesia is the OJK. The authority of the OJK is limited to financial service providers in Indonesia and does not have extraterritorial effects on foreign insurance companies in the same group as local insurance companies. The OJK cannot therefore sanction the foreign sister company of a local insurance company if it violates the Indonesian Insurance Law. However, in practice, violations by a sister company could jeopardize the relationship between the local insurance company and the OJK (for example, leading to practical difficulties in obtaining OJK approvals).

SSEK - 28th july 2015

icone share

Indonesia Finance Snapshot - Insurance

Total Assets: 853 trillion IDR (2015)
Life Insurance Growth: 17% (Q2 015)
General Insurance Growth: 10% (2015)
Number of Life Insurance Companies: 50
Number of General Insurance Companies: 81 (2015)
Conventional Insurance Penetration : 2.51% (2015)
Islamic Insurance Penetration: 0.08% (2015)
Government Bodies: Bank Indonesia, Ministry of Finance, Financial Services Authority (OJK).
Relevant Law: Presidential Regulation No. 39 of 2014 on the Negative Investment List permits foreign ownership up to 80% in the sector, excluding pensions, and the 2014 Insurance Law introduced increased protection for policyholders.