In order to maintain sound financial management, insurance companies in Indonesia are currently obliged to maintain a minimum solvency level of at least 100% of their risk-based minimum capital. Beyond this, insurance companies are also expected to reach the “target” solvency level of 120%, below which the Minister of Finance can require an insurance company to change its business plan to in order to meet the target level.
In light of the uncertain economic climate currently prevailing in Indonesia, the OJK is soon expected to issue a circular letter that will do away with the imposition of sanctions on insurance companies that fail to meet minimum solvency level requirements. This is expected to include a reduction of the minimum solvency level from 100% to 50% of RBC. These changes reflect the volatility of the Indonesian capital markets and the dramatic effect such volatility can have on the value of insurance companies’ investment assets. The OJK recognises that the maintenance of solvency levels by Indonesian insurers is not always reflective of internal financial management policies. This leniency is expected to be temporary.
Insurance companies in Indonesia may want to take advantage of the leniency programme whilst doing their best to maintain capital adequacy in order to be prepared for limits and attendant sanctions to be re-imposed.