Reconsidering lowering the foreign shareholding limit in Indonesia's insurance sector

There is significant foreign participation in the Indonesian insurance sector, with two-thirds of life assets held by companies with some investment from overseas, according to figures from the Financial Services Authority (OJK). However, the openness of the insurance market is being reconsidered on an ongoing basis, and it remains unclear whether foreign shareholdings will need to be reduced or if full participation will be allowed.

Debating Limits

The new Insurance Law, passed in late 2014, did not explicitly address the foreign shareholding limit, leading to uncertainty in the sector. Earlier debates included calls to lower the cap to 49%, and it is possible that supplementary regulations will mandate a new limit. The government has 30 months to craft additional regulations, and there are some indications that the limit may be lowered. According to the OJK, although foreign ownership is currently allowed up to 80%, the new limit has yet to be determined, and will be regulated by future legislation.

Under the old law, foreign investors were able to raise their stakes above 80% if local partners were unable to match capital increases, according to Linklaters. The increase could be made under Government Regulation (GR) 63/1999 if the local partners maintain the number of shares held, if the new shares are acquired by the foreign party through a rights issue and if the local shareholder is given the opportunity to increase capital. GR63/1999 was implemented during the turmoil of the Asian financial crisis in the late 1990s, and its flexible design allowed insurance companies to be better capitalised by their foreign partners. While the OJK might not force foreign investors to minority stakes, they could require them to stay under 80%.

Foreign Ownership

According to the OJK, at end-2013, 20 insurers in the life sector were joint ventures with non-Indonesian firms, while 35 were national companies. The largest is Prudential Indonesia, which was formed in 1995 with Bank Bali and held Rp42trn ($3.47bn) in assets at the end of 2013. Next is Asuransi Jiwa Manulife Indonesia, with Rp31trn ($2.56bn) in assets, followed by AIA Financial with Rp26trn ($2.15bn). The first Indonesian company in the rankings is Asuransi Jiwa Bersama Bumiputera 1912 at Rp23trn ($1.9bn). In total, foreign life insurers have Rp190trn ($15.71bn) in assets while local companies have Rp91trn ($7.52bn).

A similar situation exists for general insurance. Some 20 companies have international participation, while 69 are purely local, including the sector’s largest firms. Panin Insurance has Rp8trn ($661m) in assets, Asuransi Astra Buana came in with Rp7.9trn ($653m) and Asuransi Central Asia had Rp7.8trn ($644m). The largest foreign general insurer is Asuransi MSIG, with Rp2.3trn ($190m) in assets. In total, local general insurance companies have Rp84trn ($6.9bn) in assets while those with foreign ownership have Rp14trn ($1.16bn).

Changing Landscape

Debates over a possible reduction of the foreign holding limit have been under way for years. Support for the measure can largely be attributed to a perceived lack of equal treatment in foreign markets, especially across the ASEAN Economic Community. For example, Malaysia maintains a cap of 70% on foreign investment in insurance while Thailand keeps one at 49%. In Indonesia, moves to limit foreign ownership have been seen in the banking and mining sectors, such as Law No. 4 of 2009 on Mineral and Coal Mining, which led to a ban on unprocessed ore.

Rhetoric around foreign investment heated up around the 2014 presidential elections in particular. With the rupiah falling and investor concern rising, presidential contenders courted populist sentiment to gain votes. The situation has cooled considerably since the inauguration of President Joko Widodo, however, who has made clear his interest in keeping a steady flow of foreign direct investment (FDI) into Indonesia. His electoral opponent was a proponent of strict reciprocity in finance, which would have meant a lower ownership cap for insurers. Even so, despite the government’s pragmatic statements, there remains a strong undercurrent of protectionism, linked in part to efforts to make corporate governance in Indonesia more transparent.

Other Rules & Restrictions

In addition to a possible cap on foreign ownership, a number of other rules and regulations have been put into place that could potentially affect the flow of FDI into the sector. The new Insurance Law stipulates that the Indonesian shareholder in an insurance company must ultimately be an Indonesian citizen. Workarounds that led to a second layer of foreign ownership behind Indonesian proxy investors have been banned. Under the old law, insurance companies could only operate as cooperatives or mutual companies, whereas the new law also allows insurers to be structured as limited liability entities.

Perhaps most significantly, the new law institutes a single presence policy, whereby a single shareholder will only be allowed to control one insurance company. Other stipulations under the new law include the requirement for sharia windows to become standalone entities, with a deadline of 10 years for separating out the business. However, if sharia is more than 50% of an insurance company's business, the spin-off must occur immediately. Proposals for the reinsurance sub-sector may also severely limit foreign participation in the market as well. The OJK is considering regulations that would require all motor, health, surety, credit, life and cargo business and 25% of other risk to be placed in the local market, making it more difficult for international insurers to gain exposure to the Indonesian market through the use of reinsurance agreements.

However, some insurers are concerned that more requirements could lead to a deterioration in the operating environment. For example, OJK Regulation No. 2 in 2014 requires that someone serve as compliance director, though this person is not permitted to engage in other key company roles such as underwriting, claims, marketing or finance. The company must have a minimum of three directors and three commissioners, and at least one commissioner must be independent.

The high cost of OJK fees also has the potential to affect the insurance sector. “New regulation is helpful in professionalising and structuring the insurance industry, but the regulators should not overburden the sector,” Franz Lathuillerie, the CFO of AXA Mandiri, told OBG. “We need to support the development of the OJK, but they must keep the costs in mind.”

Taking their Time

Enforcing an 80% foreign holding limit may be difficult, as local companies qualified to make the investment may not be able to commit the capital. Therefore, even if new regulations are passed in 2015, implementation may not happen immediately, opening the possibility that the country’s stance on foreign investment could soften over time. "It will take five years for 80%, maybe a decade for 49%,” according to Julian Noor, the executive director of the General Insurance Association of Indonesia. “The Indonesian government and the OJK should therefore do more research on local investors’ interest and ability in taking over the foreign holding.”

Indeed, Fitch’s outlook for the sector does not see the law as an immediate problem for the sector, arguing that international demand for Indonesian insurance assets will remain strong even if more restrictive regulations are passed. Furthermore, the law has increased the degree of clarity in the sector, given that the previous law dealt with the structure of the industry in general terms. Most importantly, the market had anticipated a new law to regulate the sector for several years. Now that one has been passed, foreign investors will be able to formulate their strategies with a higher degree of certainty. While lower limits may still be passed, Fitch believes that the adoption of the 80% limit should be seen as a positive for the time being.