Regulations deliver transparency for Indonesia's new insurance law

Indonesia’s insurance sector underwent substantial changes in 2016 and the first half of 2017, with the implementation of the latest insurance law – passed in 2014 – and the reorganisation of regulatory bodies. In 2013 the Financial Services Authority (OJK) replaced the Capital Markets and Financial Institutions Supervisory Board (Bapepam-LK) as the supervisor and regulator for banks and other financial institutions, including insurance and reinsurance companies. The OJK, now responsible for all licensing and operational activity within the insurance sector, has since implemented a series of policy reforms ranging from minimum capital requirements to foreign ownership regulation.

In implementing Law No. 40 of 2014, the New Insurance Law, a raft of additional regulations have been issued, covering areas including the single-presence policy, commission limits, domestic reinsurance requirements, tariffs and capital requirements. Throughout 2016 and into the first quarter of 2017 the OJK passed seven new regulations to facilitate the implementation of the law, along with a range of additional regulations that may prove to affect the insurance industry.

REGULATION 67: One of the most significant of these additional rules is Regulation No. 67 of 2016, which stipulates important changes to the guiding framework of the insurance industry. Article No. 74 of the regulation requires that any change in the ownership of an insurance company must receive prior approval from the OJK, including even minor changes to shareholder composition.

Foreign shareholding requirements were also tightened through Article No. 4 of the regulation, with various measures mandating insurance companies prepare plans to comply with Indonesian shareholding requirements by June 28, 2017. These compliance plans must provide details of the means of adjustment and the stages of implementation, as well as the timeframe of how the relevant ownership of shares – if not yet in compliance – will be transferred to Indonesian nationals or to a legal entity owned by an Indonesian citizen, or put up for sale through an initial public offering.

Full compliance with the Indonesian shareholding requirements must be achieved by October 17, 2019. In addition, the business’s compliance action plan must be approved by the general meeting of shareholders of the insurance company prior to being submitted to the OJK.

Minimum paid-up capital requirements for different types of insurance companies are stipulated by Article No. 6. Life and general insurance companies must have Rp150bn ($11.3m) in paid-up capital and reinsurance companies must have Rp300bn ($22.6m); whereas the minimum paid-up capital requirement for sharia insurance companies and sharia reinsurance businesses was set at Rp100bn ($7.5m) and Rp175bn ($13.2m), respectively.

Corresponding capital requirement figures are outlined in Article No. 6 of Regulation No. 68 of 2016, which stipulates the minimum paid-up capital requirement for insurance loss assessment companies as Rp500m ($37,700), Rp5bn ($377,000) for reinsurance brokerage companies and Rp3bn ($226,000) for insurance brokerage companies.

Furthermore, Regulation No. 67 provides clarification to enable compliance with the single-presence policy introduced by the 2014 insurance law. The measure states that each party can only be the controlling shareholder of one insurance company. Compliance may be achieved through divesting shares, a merger or consolidation, and has been mandatory since October 2017.

SHARIA & EMPLOYMENT: Article No. 17 of the regulation lays out the conditions in addition to providing a timeframe for the divestment of sharia business units – which are typically managed as a business unit within a conventional insurance or reinsurance company – into a separate sharia insurance or reinsurance company.

An action plan outlining the separation of sharia business units from the parent company should be submitted no later than October 17, 2020, while full compliance with the regulation itself must be achieved no later than October 17, 2024.

The employment of expatriates within the insurance industry is also addressed through a number of different articles in the regulation.

The insurance-related occupations that can be held by foreign nationals are limited to that of actuary, consultant and expert, with their responsibilities restricted to that of actuarial work, underwriting, marketing and/or information systems.

In addition to this, the regulation limits the period in which a foreign national can be employed by an insurance company to a maximum of five years and requires the insurance company to hire one Indonesian employee for every foreign national hired.

The regulation furthermore requires that the board of directors, board of commissioners and officers one level below the directors in all insurance companies be certified in risk management.

OTHER NOTABLE GUIDELINES: While Regulation No. 67 is the most wide-ranging in terms of its implications for the broader insurance industry, other relevant regulations were passed at the same time. Regulation No. 69 of 2016, for example, regulates the marketing of insurance firms, the outsourcing of functions and the holding of data.

Regulation No. 71 and 72 provide rules on the financial health of insurance and reinsurance companies, including increased minimum solvency ratios. Regulation No. 71 deals with general practice and Regulation No. 72 pertains to units following sharia principles. In addition, Regulation No. 12 of 2017 provides a framework to help identify high-risk customers who may be using the financial services system to carry out criminal activity in the country.

FOREIGN OWNERSHIP: One key area of the New Insurance Law that remained unclear at the time of publication – and therefore is subject to change – is the maximum foreign ownership restrictions within the insurance sector. Currently, foreign ownership of insurers is capped at 80%. There are exceptions to this 80% limit, however, which can be employed through the capital markets.

The limit may be exceeded by the subscription of new shares by a foreign shareholder that result in the dilution of the minority holders as long as certain criteria are met, namely that the total amount of paid-up capital by Indonesian shareholders can still be maintained regardless of the dilution in the percentage, and that foreign ownership in the relevant company has reached 80% prior to the issue of new shares to the foreign shareholder.

These exceptions to the 80% foreign ownership cap can become particularly important in times of economic stress if conditions should arise where the financial stability of insurance companies is under pressure and domestic investors are reticent to shore up these companies financially.

At this point, an inflow of foreign capital could help stabilise the companies and the sector as a whole. This was the case during the 1997-98 Asian financial crisis, in which the Indonesian insurance sector was paralysed until foreign shareholders stepped in, diluting local shareholders’ holdings below the 20% threshold in the process.

The debate within the House of Representatives – which has carried on past the intended April 2017 deadline – is whether to reduce the maximum foreign shareholding requirements.

Proposals mounted in 2016 called for a dramatic reduction from 80% to 30%, while lawmakers in 2017 have been calling for a 51% cap. By April 2017, 14 life insurance companies and five general insurance companies had seen more than 80% of their shares held by foreign shareholders at some point in time, according to data from the Ministry of Finance.