Background

On 30th August 2016, the Financial Services Authority (Otoritas Jasa Keuangan or OJK) issued Circular Letter No. 32/SEOJK.05/2016 on the distribution channel of insurance products in cooperation with banks (bancassurance) ("SE 32"). SE 32 came into effect on 1st September 2016. 

Previously, bancassurance arrangements were only subject to Circular Letter of Bank Indonesia No. 12/35/DPNP on Risk Management Implementation for Banks Conducting Bancassurance Activities (“Circular 12/35”).

Before the issuance of SE 32, there was no specific insurance regulation that governed bancassurance activities from the perspective of insurance companies. However, insurance companies that have been engaging in bancassurance activities were also subject to Circular 12/35.

SE 32 mirrors many of the provisions of Circular 12/35, except it is more definitive and comprehensive. SE 32 does not revoke Circular 12/35.

According to the OJK a new bancassurance regulation for banks will be issued to replace Circular 12/35 and will be implemented in conjunction with SE 32. 

Implications

SE 32 does not apply to existing arrangements. This means there is no direct impact to bancassurance agreements that insurers and banks may already have in place. 

1. the parties' obligations to prevent terrorism funding and to implement anti-money laundering activities;
2. the commission from the insurance companies to the banks;
3. the underwriting procedure and settling and paying claims and insurance closing;
4. the non-exclusivity for the referral business model (linked with a bank's products); and
5. consumer protection issues.

Noteworthy Provisions

1. Business Models

   Like Circular 12/35, SE 32 also stipulates 3 types of business models for bancassurance activities: namely (i) product referral (in relation to or notiation to a bank's products), (ii) distribution, and (iii) bundled products.
   
   However, SE 32 clearly explains that a cooperation between a bank and an insurance company will not be categorised as bancassurance if (i) the bank is the insured party or the participant and (ii) the insured object is the bank's assets or employees.
   
   SE 32 further specifies that, for:
   
   
1. product referrals under a bank's product business model; and
2. bundled products business models,
   
   are not permitted to sell investment-linked insurance products.
   
   Investment-linked insurance products can only be sold through a distribution business model if the sales are limited to money market investment portfolios and/or fixed income investment portfolios.

2. Requirements for Insurance Companies

   To distribute products through a bancassurance channel, an insurance company must:
   
   
1. comply with the minimum financial soundness level;
2. not be under an administrative sanction;
3. include the proposed bancassurance plan in the insurance company's business plan for the year in which the bancassurance is to be implemented; and
4. secure the relevant insurance product approval/registration from the OJK.

3. Minimum Provisions Under Bancassurance Provisions

   A bancassurance agreement must contain at least the following:
   
   
1. The parties' specific rights and obligations (e.g. there must be clauses that specifically state the extent of a party's liability; that is, banks are not liable for insurance products that they distribute).
2. The insurance company's obligation to record specifically and maintain assets and liabilities from the investment of insurance products with investment benefits.
3. The type of business model covered by the agreement.
4. The term of the agreement.
5. The insurance company's authority to determine underwriting and claims.
6. The procedure for closing insurance policies and determining premium payments or contributions.
7. The procedure for claim settlements and payments.
8. The commission provisions payable by the insurance company to the bank.
9. Provisions on each party's responsibility with regard to the prevention of anti-money laundering activities and terrorism funding.
10. Termination provisions (including a provision to terminate the agreement if the insurance company or bank's license is revoked by the OJK).
11. General provisions on the parties' rights and obligations.
12. Provisions on the parties' rights and obligations in respect of the insurance products.
13. Provisions on maintaining customer data confidentiality.

4. Exclusivity

   Under Circular 12/35, when implementing the product referral model for a bank's products, the bank must provide its customers with at least 3 insurance companies to choose from.
   
   SE 32 also reaffirms that there can be no exclusivity between an insurance company and a bank under the product referral model linked with a bank's products.
   

5. Insurance Sellers

   When implementing the distribution and bundled products business models, insurance companies are required to retain all evidence proving that the bank's employees are licensed and registered insurance agents and have received proper product training.
   
   However, the bank's employees are not required to be licensed and registered as insurance agents if they are only selling micro-insurance products.

6. Termination of Bancassurance Agreement

   An insurance company must terminate or refuse to renew a bancassurance agreement:
   
   
1. if the bank fails to fulfill its obligations under the bancassurance agreement; and/or
2. if the OJK orders the termination of the bancassurance agreement, where the OJK considers that the bancassurance activities being carried out:
1. are not in line with the provisions of the bancassurance agreement;
2. are in violation of any laws and regulations;
3. have a negative impact on the insurance company's financial condition.

7. Customers' Statement on Sufficient Product Information

   Specifically for the (i) distribution and (ii) bundled product business models, an insurance company is obliged to ensure that each customer receives sufficient and clear information on the insurance products (i.e., benefits, fees, commissions and risks if investment-linked) from the bank's sales people before he/she purchases the product.
   
   If the sales are made directly (face-to-face approach), the relevant customer must provide a hard copy statement letter (with Bahasa or bilingual format and a wet signature) acknowledging that he/she has obtained sufficient information on the offered products before making the purchase.
   
   If the sales are made by telemarketing (e.g., phone call), the above customer's statement can be evidenced by a voice recording.

Hadiputranto, Hadinoto & Partners, Member of Baker & McKenzie International - 9th September 2016

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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.

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Useful Documents

OJK Circular Letter No. 32/SEOJK.05/2016 (Indonesian)

Bank Indonesia Circular 12/35 (Indonesian)