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Indonesia – New Insurance Law.

5 March, 2015

 


Indonesia’s House of Representatives passed the longawaited revised Insurance Law on 23 September 2014 (the New Law). The New Law serves to provide a more comprehensive regulatory framework for Indonesia’s insurance industry under the supervision of the Financial Services Authority (Otoritas Jasa Keuangan or OJK).

The New Law replaces Law No. 2 of 1992 on Insurance Business (Existing Law).

The main changes in the New Law relate to:

  • types, legal forms and ownership of insurance companies;
  • sharia-based and conventional insurance companies;
  • introduction of a policy guarantee programme;
  • introduction of a single presence policy;
  • new designations applicable to insurance companies;
  • the OJK’s position as the supervisory body; and
  • more comprehensive administrative and criminal sanctions.

The changes became effective on 23 October 2014.

Categories Of Insurance Companies

The New Law separates insurance companies into four types, with overlapping services prohibited:

  • general insurance companies;
  • life insurance companies;
  • reinsurance companies; and
  • sharia insurance companies, which includes sharia general insurance companies, sharia life insurance companies and sharia reinsurance companies.

Form And Ownership Of insurance Companies

Insurance companies must be in the form of: (i) a limited liability company (Perseroan Terbatas); (ii) a co-operative; or (iii) an existing mutual business (which presently only applies to AJB Bumiputera 1912, an Indonesian life insurance company).

The New Law provides that insurance companies may only be owned by either: (i) Indonesian citizens and/or Indonesian legal entities directly or indirectly wholly owned by Indonesian citizens; or (ii) an Indonesian citizen and/or Indonesian legal entity, together with a foreign counterparty engaged in the same industry. Additionally, foreign individuals may only acquire shares in insurance companies through acquiring the shares of exchange listed insurance companies. If an insurance company does not satisfy the more stringent local shareholder rules, then compliance is prescribed through the requirement to transfer ownership of shares to Indonesian nationals or to conduct an initial public offering no later than five years after the New Law was passed.

The New Law does not make any changes with respect to foreign ownership restrictions (despite some speculation it would lower the permitted percentage) which remain controlled under a separate government regulation, No. 39 of 2008 (Second Amendment to Government Regulation No. 73 of 1992 on Implementation of Insurance Business Activity), which limits foreign ownership to 80 per cent (although a foreign shareholder remains able to increase its shareholding beyond 80 per cent by dilution of the minority by subscribing for new shares so long as the existing capital issued to the local shareholder is maintained).

Sharia-Based And Conventional Insurance Companies

The New Law now distinguishes between a sharia-based insurance company and a conventional insurance company. A conventional insurance company may not provide shariabased services and vice versa.

Policy Guarantee Programme

The New Law introduces statutory protection for policyholders (hitherto not specifically regulated) by requiring insurance companies to participate in a policy guarantee programme (program penjaminan polis). This programme (intended to reflect the deposit protection guarantee scheme in the banking sector) requires further primary legislation in order to be implemented, which must be issued within three years of the New Law coming into force, however, the key takeaways of the programme based on the New Law are as follows:

  • the policy guarantee programme aims to secure reimbursement of all or part of an insurance company’s policyholders’ or customers’ rights in the scenario where the insurance company is in the process of being liquidated or where its business license has been revoked by the OJK; and
  • upon the effectiveness of the policy guarantee programme (in parallel with the effectiveness of its primary legislation as discussed above), those provisions in the New Law relating to the provision of security funds (or DanaJaminan, being the amount of assets of an insurance company statutorily prescribed by the OJK to be set aside as security for policyholders) will fall away.

Single Presence Policy

A major new development (which largely mirrors the policy applying to the Indonesian banking sector) is that a party may only become a controlling shareholder in one life insurance company, one general insurance company, one reinsurance company, one sharia-based life insurance company, one sharia-based general insurance company and one shariabased reinsurance company. Any party which is currently controlling more than one type of insurance company must adjust to the single presence rule within three years of the New Law coming into force.

New Designations In Insurance Companies

The New Law introduces and regulates two new designations which apply to insurance companies.

The first designation is that of a Controller, which is the party considered by the OJK as having the authority, either directly or indirectly, to influence the Board of Directors (BOD) or the Board of Commissioners (BOC) of an insurance company. The New Law states that the change of the Controller must be reported to the OJK and, more significantly, that a Controller must also be responsible for the loss of the insurance company which is caused by a party through its control. The OJK’s intention is to determine the identity of the Controller(s) in order to decide who is responsible if the insurance company fails to fulfil its obligations to policyholders or insured persons, as a result of the influence of the relevant party on the management of the insurance company.

The second designation is that of a Statutory Manager, which is a party appointed by the OJK to take over the management of an insurance company upon the occurrence of the following events:

  • the OJK suspends the insurance company’s business license;
  • the insurance company notifies the OJK that it is unable to fulfil its obligations, or will discontinue its repayment obligations which have become due;
  • based on the OJK’s view, the insurance company is unable to fulfil its obligations, or will discontinue its repayment obligations which have fallen due;
  • based on the OJK’s view, the insurance company fails to comply with applicable insurance laws and regulations, or is deemed to be financially unsound; or
  • based on the OJK’s view, the insurance company facilitates, or is involved in, criminal actions.

Further details regarding the Controller and Statutory Manager will be regulated under separate OJK regulations.

Local Insurance And Reinsurance Prioritisation

The New Law further restricts the situations where insurance of an Indonesian “insured object” can be obtained by a non-OJK licensed insurer, namely:

  • no insurance company, whether alone or with others, has the ability to cover or manage the insurance risk relating to the insured object; or
  • no insurance company is prepared to provide insurance in relation to the insured object.

Significantly, this appears to remove the prior exception whereby an insured object in Indonesia owned by a foreign citizen or legal entity could obtain insurance from a non-OJK licensed insurer.

The New Law (arguably more proactively than its predecessor) requires the insurance companies to optimise utilisation of local insurance, sharia insurance, re-insurance and sharia reinsurance capabilities.

The objective is to further encourage insurance companies to optimise their functions as insurers and/or reinsurer companies by having as much reinsurance as possible placed with local insurance companies, with due observation of risk management principles.

OJK’s Authority

The OJK, as the insurance industry’s supervisory body, is granted a wide range of authorities and duties under the New Law to:

  • approve, reject, and revoke insurance business licenses;
  • approve, reject, and revoke the registration statement of an actuary consultant, public accountant, appraiser, or any other party providing services to an insurance company;
  • request a quarterly report from an insurance company;
  • examine or supervise insurance companies and other parties, whether formerly or otherwise affiliated, or any other party providing services to an insurance company;
  • approve or revoke the Controller of an insurance company;
  • conduct fit and proper testing of the BOD, BOC, Sharia Supervisory Boards, company actuaries, internal auditor and Controllers;
  • terminate the aforementioned parties, except for the company’s actuary, internal auditor, or Controller, and to appoint Statutory Managers, Members of the BOD, BOC and Sharia Supervisory Boards may be replaced by the OJK with a Statutory Manager if the relevant insurance company is subject to any written warning or limitation of business activities, however, we understand that the exact details for this to occur will be contained in a subsequent implementing regulation;
  • provide written instructions to insurance companies; and
  • impose sanctions on insurance companies, including its shareholders, BOD, BOC, Sharia Supervisory Boards, company actuaries, and internal auditor. With respect to shareholders, the New Law only provides for administrative sanctions if a shareholder fails to comply with its obligation to provide any information deemed necessary by a liquidation team during an insurance company’s liquidation process. Further details in relation to these sorts of sanctions will be contained in a subsequent implementing regulation.

Administrative And Criminal Sanctions

Administrative and criminal sanctions have been aggregated and deepened in several areas. With respect to administrative sanctions, in our experience, the OJK will apply these in an escalating manner and only take more serious action if the insurance company fails to adequately address the breach or issue identified for remedy.

Administrative Sanctions:

  • written warnings;
  • limitation of business activities, either entirely or partially;
  • prohibition of the marketing of insurance products;
  • revocation of business license;
  • annulment of the statement of registration of an insurance broker, reinsurance broker or insurance agent;
  • annulment of the statement of registration of an actuary consultant, public accountant, appraiser or other party who provides services to an insurance company;
  • annulment of approval for a mediation or association institution;
  • monetary fines; and
  • prohibition on a party from becoming a shareholder, a member of the BOD, BOC, or of the Sharia Supervisory Board, or from holding an executive position on the BOD in an insurance company.

The OJK may also request the following actions from an insurance company under a written warning, or subject to a limitation on its business activities that it:

  • undertakes a capital injection;
  • replaces (members of) its BOD, BOC, Sharia Supervisory Board or its actuary or internal auditor;
  • transfers (entirely or partially) its insurance portfolio;
  • transfers its authority to a Statutory Manager; or
  • carries out the necessary actions to overcome its situation, or that it does not do anything to further aggravate the company’s condition.

Criminal Sanctions

The New Law provides for more comprehensive criminal sanctions. For example, it introduces criminal charges specifically for members of the BOC, BOD, Sharia Supervisory Board, Controllers, internal auditors, or other employees of an insurance company for criminal activities.

The New Law also provides that any person appointed or mandated by the OJK who uses or discloses any confidential information to other parties, except for the purposes of carrying out its duties and authorities by virtue of an OJK decree or prevailing laws, may be subject to up to five years’ imprisonment and fined up to IDR 20 billion.

Implementing Regulations

A regulation implementing the New Law must be issued no more than two years and six months from the date of the New Law coming into force.

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For further information, please contact:

Keith McGuire, Partner, Ashurst
keith.mcguire@ashurst.com

Rehana Box, Partner, Ashurst
ehana.box@ashurst.com

James Perry, Partner, Ashurst 
james.perry@ashurst.com

Adam Levitt, Partner, Ashurst 
adam.levitt@ashurst.com

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