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On 23rd December 2016, the Financial Services Authority ("OJK") issued Regulation No. 67/POJK.05/2016 on Licensing and Institution of Insurance Companies, Syariah Insurance Companies, Reinsurance Companies and Syariah Reinsurance Companies ("Regulation 67"). Regulation 67, which became effective on 28th December 2016, provides more comprehensive provisions on licenses and requirements for insurance and reinsurance companies.
Before the issuance of Regulation 67, many provisions were stipulated under Government Regulation (“GR”) No. 73 of 1992 ("GR 73") on Implementation of Insurance Business, as amended by GR No. 63 of 1999, GR No. 39 of 2008, GR No. 81 of 2008 and Minister of Finance Decree No. 426/KMK.06/2003 on the Licensing and Institution of Insurance and Reinsurance Companies (“Decree 426”).
Regulation 67 does not clearly revoke the provisions of GR 73 and Decree 426. Based on Law No. 21 of 2011 on the Financial Services Authority, regulations are still valid to the extent that the provisions do not contradict the OJK regulations, and the OJK has not issued a new OJK regulation to replace the existing regulations.
Regulation 67, among other things:
Below are some of the noteworthy provisions of Regulation 67.
Under Regulation 67, the OJK has increased capital requirements for insurance and reinsurance companies, as follows:
An existing company must comply with the minimum paid-up capital requirement if there is any change of ownership in the form of a statutory acquisition (usually through a capital injection) and/or upon a transfer of shares to a new shareholder. On an establishment of a company, the payment of paid-up capital must be made into a term deposit or a checking account.
The OJK has increased working capital requirements for shariah units, as follows:
For the process of obtaining a business license and the process of notifying the OJK on the increase of paid-up capital proportionally done by the existing shareholders, the shareholders are required to submit a statement letter to explain that the source of funds are not from a loan.
On a change of ownership (e.g. a transfer of shares and/or a capital injection by a new shareholder), Regulation 67 does not require that a new shareholder submit a statement letter to explain the source of funds.
On a change of ownership (e.g. a transfer of shares and/or a capital injection by a new shareholder), Regulation 67 does not require that a new shareholder submit a statement letter to explain the source of funds.
However, the OJK has stated to us that the OJK may also require a similar statement letter as a matter of policy.
Regulation 67 does not clearly explain whether the loan prohibition will also apply to loans obtained at a higher corporate level (e.g. to the shareholders of the entities investing in an insurance company (as occurs with securities companies also regulated by the OJK)).
The OJK has stated to us that the prohibition is applicable for direct and indirect loans used to fund the acquisition of shares in an insurance company.
This prohibition clearly restricts a foreign shareholder funding an Indonesian shareholder to subscribe for shares in an insurance company (thereby prohibiting loans to friendly Indonesian shareholders under local shareholder arrangements).
Regulation 67 provides that, for an Indonesian company, the maximum direct investment is the amount of the shareholders' equity in that Indonesian legal entity. So Indonesian companies cannot invest more than their own shareholder equity in an insurance company (to ensure that the Indonesian shareholders themselves are adequately capitalised, and re-enforces the loan prohibition).
Under Regulation 67, on the establishment of a company, the security funds that need to be held are calculated based on 20% of the minimum paid-up capital.
Regulation 67 provides that an insurance company that has obtained a business license and has not appointed a controller must appoint a controller and notify the OJK within six months after the effective date of Regulation 67 (i.e. by 28th June 2017).
Regulation 67 explains that a controller of an insurance company can be a controller and a controlling shareholder (as defined under other regulation). Under Circular Letter No.31/SEOJK.05/2016 on Fit and Proper Test for Financial Services Institutions and Primary Parties, a controller is subject to a fit and proper test.
Regulation 67 provides that insurance companies must establish an organisation structure that covers several functions, i.e., risk management, financial management and services.
A company must also establish working units that cover several functions, i.e., underwriting, actuary matters, claim administration settlement, marketing, finance (including investment management), risk management, internal audit (with at least one expert and an actuary), administration and accounting, compliance, anti-money laundering and anti-terrorism funding, and services and settlement of complaints.
Effectively, the OJK has mandated that Indonesian insurance companies operate on a stand-alone basis and these functions are not centralised regionally or outsourced. This has always been the OJK's policy and Regulation 67 reduces this policy clearly into regulation.
Directors and commissioners and any employee, whose position is one level below the BOD, must obtain risk management certifications (details as yet unknown). The OJK will issue circular letters on the risk management certification process.
Regulation 67 provides strict requirements on engaging foreign employees, including limits on the positions that foreign employees may hold. Under Regulation 67 a foreign employee can hold a position one level below the BOD and would be appointed as an actuary or as a consultant. In addition, an insurance company can only use a foreign employee to attend to limited functions, i.e., underwriting, actuary, marketing and/or information systems.
If a company, before the effective date of Regulation 67, employs any foreign employees outside of the functions that have been specified under Regulation 67, the employee can hold his position until his employment agreement ends.
Regulation 67 requires an insurance company that uses foreign employees to notify the OJK within 20 working days before the employees are hired.
These restrictions likewise seek to localise positions and decisions, and to ensure that technical skills are developed locally.
A general or life insurance company or reinsurance company (conventional and shariah) must employ at least one expert and an actuary and must establish an internal audit working unit. The appointment (or termination) of any auditor, actuary or member of an internal audit working unit must be notified to the OJK within 20 working days after the date of appointment (or termination).
A company cannot appoint an actuary who is also a member of the BOD, board of commissioners ("BOC") or shariah supervisory board.
We set out below the transition provisions related to the appointment of experts, actuaries and internal auditors:
Any change of ownership must be approved by the OJK. However a proportionate increase in paid-up capital by existing shareholders is not considered as a change of ownership and therefore does not need to be approved by the OJK.
Regulation 67 provides that a change of ownership by way of an increase in paid-up capital can only be done only through a cash injection, profit reinvestment, loan conversions and/or share dividends. The OJK has explained that to maintain its financial liquidity, the insurance company cannot receive a capital injection in a form of non-liquid assets, e.g. land and building (as has been offered recently by Indonesian shareholders who have not wanted to inject cash).
The OJK will issue its approval (or comments) within 20 working days after the application is received.
A company must notify the OJK on the implementation of the change of ownership within 15 working days after the issuance of approval or acknowledgment receipt from the authorised agency (usually the Ministry of Law and Human Rights). The following documents must be submitted together with the notification:
Any changes of the following corporate information must be notified to the OJK within 15 working days after the issuance of approval or acknowledgment receipt from the authorised agency:
Any change in members of the BOD, BOC and shariah supervisory board must be notified to the OJK within 15 working days after the registration of change of members in the company's register at the Ministry of Law and Human Rights, the approval of a members' meeting for a cooperation or date of appointment to the shariah supervisory board.
Hadiputranto, Hadinoto & Partners, Member of Baker & McKenzie International - 26th january 2017
Capital: Jakarta
Population: 259 million (2016)
Currency: Indonesian Rupiah
Nominal GDP: $936 billion USD (IMF, 2016)
GDP Per Capita: $3,620 USD at Current Prices (IMF, 2016)
GDP Growth: 5.0% (2016)
External Debt: 36.80% of GDP (BI, Q2 2016)
Ease of Doing Business: 91/190 (WB, 2017)
Corruption Index: 90/176 (TI, 2016)
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