Insurance Companies in Indonesia Face Changing Regulatory Environment

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Insurance Companies in Indonesia Face Changing Regulatory Environment
23 January 2014

Indonesia's insurance industry has seen a number of important recent developments, and more are on the horizon. These include the enactment on October 3, 2012, of Minister of Finance Regulation No. 152/PMK.010/2012 regarding Good Corporate Governance for Insurance Companies ("MOF Regulation No. 152") and the long-awaited new insurance law that is being discussed at the House of Representatives ("DPR").

With regard to MOF Regulation No. 152, there has been confusion over some of the provisions in the regulation. The Indonesian Life Insurance Association (Asosiasi Asuransi Jiwa Indonesia or "AAJI"), on behalf of life insurance companies in Indonesia, requested clarification from the Financial Services Authority (Otoritas Jasa Keuangan or "OJK") on these points of confusion.

The first point concerns the restriction in MOF Regulation No. 152 on the Director of an insurance company holding a position at another company, except that of Commissioner in another insurance company. The OJK's position is to expand this restriction so that the Director of an insurance company is prohibited from holding a position in any other company, either inside or outside Indonesia, except that of Commissioner in another insurance company.

The second main point concerns the shareholder appointment of Directors or Commissioners of insurance companies before they pass a fit-and-proper test organized by the OJK. In the past, the Minister of Finance allowed such appointments, but they became official only after the candidates passed their fit-and-proper tests. The OJK takes the position that an insurance company shall submit an application for fit-and-proper tests for Director and Commissioner candidates, and only once the candidates have passed the test can shareholders appoint them as Directors and Commissioners.

In response to the consternation over some of the provisions of MOF Regulation No. 152, the OJK is now working on an amendment to the regulation.

New Insurance Law

These developments are small compared to the changes the insurance industry can expect to come. Since it was enacted in 1992, Indonesia's Insurance Law (Law No. 2 of 1992) has not been amended. But the bill now being discussed at the DPR would introduce several new provisions for insurance companies in Indonesia.

One of the biggest changes in the bill would be the introduction of details on the functions of the OJK to regulate and monitor the insurance industry in Indonesia, including the power to issue regulations to implement the bill upon its enactment.

Another substantial change would be to the very form of insurance companies. Unlike the current Insurance Law, which allows insurance companies in the form cooperatives or mutual businesses, the bill at the DPR provides that insurance companies must be in the form of a limited liability company ("PT"). Insurance companies formed as cooperatives or mutual businesses would have to be converted to PTs under the bill.

There is no easing of foreign ownership limits in insurance companies under the bill. Rather, the bill would add a new restriction that foreign citizens may only participate in the ownership of insurance companies in Indonesia through a capital market transaction. Insurance companies would be required under the bill to appoint a controller who would, directly or indirectly, have the ability to determine the company's management makeup and policies. The appointment and termination of the controller would require the approval of the OJK. The bill does not elaborate on the position of controller, which would be further regulated under a separate OJK regulation.

Insurance companies would also be required to establish a Security Fund, in a form and amount that would be stipulated by the OJK. This Security Fund would be for the benefit of policyholders if the insurance company were liquidated. Insurance companies would also be required to participate in a policyholder/insured/participant guarantee program to be organized by the Indonesian Deposit Insurance Corporation (Lembaga Penjaminan Sementara or "LPS") to provide security for policyholders/participants. The LPS would issue further regulations on this matter.

The use of third-party administrators to process insurance claims is a gray area under the current Insurance Law. The bill in front of the DPR provides that insurance companies are allowed to cooperate with outside parties to obtain business and can transfer certain business management functions to other parties. However, the types of management functions that can be transferred are not detailed in the bill. We would expect further provisions regarding cooperation with third parties to be stipulated in separate OJK regulations.

While the bill in its current form would introduce several new provisions for insurance companies in Indonesia, it is difficult to guess the true extent of changes for the industry under the regulatory purview of the OJK. The OJK was established in 2011 but only took over regulatory and supervisory authorities of the Capital Market and Financial Institution Supervisory Body ("Bapepam-LK") at the beginning of 2013. As such a young institution it has little policy track record, giving investors few hints on its future direction.

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