SSEK Indonesian Legal Consultants founding partner Ira A. Eddymurthy and Maria Y.E. Dewi, an associate at the firm, have contributed the Indonesia chapter of the new Practical Law global guide to insurance and reinsurance. SSEK Legal Consultants has one of the leading insurance law practices in Indonesia and has been involved in numerous high-profile cross-border transactions in the sector. The following is an extract from the Indonesia chapter of the Practical Law global guide to insurance and reinsurance written by SSEK Legal Consultants.
Market trends and regulatory framework
The main trend in the insurance and reinsurance business over the last 12 months has been the acquisition of existing Indonesian insurance and reinsurance companies, rather than the establishment of new insurance/reinsurance companies (greenfield projects). The 2014 report of the Financial Services Authority (Otoritas Jasa Keuangan) (OJK), the authority that oversees the Indonesian insurance industry, shows a 40% increase in insurance claims in 2014. In the authors' view, this was due to the numerous natural disasters that occurred in Indonesia in 2014 including floods, earthquakes and air disasters.
Regarding underwriting, there has been an emphasis on implementing the know your customer (KYC) principle as a tool to prevent insurance and reinsurance companies being used to launder money. The KYC principle is mainly applied to perceived high-risk persons (such as civil servants and public officials) and high-risk companies (such as property agents and automotive dealers).
The main legislation for insurance and reinsurance business is the newly enacted Insurance Law, issued on 17 October 2014. The new Insurance Law revoked Insurance Law No. 2 of 1992. Implementing regulations under the old insurance law still prevail to the extent that they do not contradict provisions of the new Insurance Law.
The new Insurance Law introduced significant changes to the sector, as follows:
- Local shareholding requirements. Insurance and reinsurance companies, sharia insurance and reinsurance companies, insurance and reinsurance brokerage companies and loss adjuster companies (insurance business companies) can only be owned by:
- Indonesian individuals and/or Indonesian legal entities that are directly or indirectly wholly owned by Indonesian individuals; or
- Indonesian individuals and/or Indonesian legal entities referred to in the point above together with foreign individuals or legal entities engaged in the same insurance business or a holding company whose one subsidiary engages in the same insurance business.
The requirement in the first bullet point means that the local shareholder in an insurance business company must be ultimately owned by Indonesian individuals. This differs significantly from the previous regulation, under which the local shareholder could be ultimately owned by a foreign party. Insurance business companies have five years from the enactment of the Insurance Law to comply with this requirement.
- Single presence policy. A party can only be a controlling shareholder in one of each of the following categories of insurance companies:
- life insurance company;
- general insurance company;
- reinsurance company;
- sharia life insurance company;
- sharia general company; or
- sharia reinsurance company.
A shareholder who controls more than one entity in any one of the above categories must comply with this requirement within three years from the enactment of the Insurance Law.
- Controller provision. Insurance and reinsurance companies must appoint one controller who will be responsible for any losses of the insurance/reinsurance company under its control. A controller is a party who, directly or indirectly, has the ability to appoint the board of directors (BOD) and board of commissioners (BOC) and/or can influence the actions taken by the BOD or BOC.
- Sharia unit separation. Sharia units of insurance and reinsurance companies must be separated into standalone entities within ten years of the enactment of the Insurance Law.
- Statutory management. The Financial Services Authority (Otoritas Jasa Keuangan) (OJK) can appoint a party to take over the management of an insurance or reinsurance company if it:
- is the subject of restrictions on its business activities;
- is in an unsound condition and cannot meet its obligations, based on either the company's or the OJK's view; and
- was used to facilitate/conduct financial crimes such as money laundering.
As a result of the above requirements, an increase in restructurings of insurance and reinsurance companies is expected, particularly to meet the requirements on local shareholding, single presence policy, controller and separation of sharia units.
The Insurance Law divides the insurance sector into two categories:
- Insurance business. This includes:
- insurance and reinsurance companies;
- sharia insurance and reinsurance companies;
- insurance and reinsurance brokerage companies; and
- insurance loss adjuster companies.
- Insurance/reinsurance-related activities. These include:
- actuary consultants;
- public accountants;
- appraisers; and
- other professions as stipulated by the OJK.
As of the first quarter of 2014, the OJK has implemented levies on the industries it supervises, including the insurance business, in the form of annual and incidental levies for any licensing, approval, registration, authorisation and review of corporate action plans. Other key areas that are regulated by the Insurance Law and its implementing regulations are:
- Solvency requirements.
- Foreign investment limitations.
- Reporting requirements.
- Fit and proper test for members of the BOD, BOC, sharia supervisory board, actuaries, internal auditors and controllers.
- Good corporate governance.
- Capital and equity requirements.
Regulatory bodies The main body overseeing the insurance business in Indonesia is the OJK. The authority of the OJK is limited to financial service providers in Indonesia and does not have extraterritorial effect on foreign insurance companies in the same group as the local insurance company. The OJK cannot therefore sanction the foreign sister company of a local insurance company if it violates the Indonesian Insurance Law. However, in practice, violations by a sister company could jeopardize the relationship between the local insurance company and the OJK (for example, leading to practical difficulties in obtaining OJK approvals).
This publication is intended for informational purposes only and does not constitute legal advice. Any reliance on the material contained herein is at the user’s own risk. You should contact a lawyer in your jurisdiction if you require legal advice. All SSEK publications are copyrighted and may not be reproduced without the express written consent of SSEK.