1. It has been almost two years since the Indonesian Insurance Law (“Insurance Law 2014”) was passed into law by the Indonesian House of Representatives (click here for our e-bulletin dated 2 October 2014 on the Insurance Law 2014).

2. The Insurance Law 2014 envisaged that the relevant implementing regulations, which will provide the detailed implementing rules, will be issued within two and a half years of the law being promulgated. To date, however, a number of key implementing regulations have yet to be issued by the Indonesian Financial Services Authority (locally known as the “OJK”). That said, in the period since the Insurance Law 2014 was passed into law, a number of important market and (often unwritten) regulatory practices have developed which impacts on the execution of insurance M&A transactions in Indonesia.

3. In this bulletin, we highlight in particular four key areas which are often carefully considered when implementing insurance M&A transactions in Indonesia:

  • Foreign ownership limit for Indonesian insurance companies;

  • Definition of “controller” of an Indonesian insurance company and applicability of “fit and proper” test;

  • OJK’s “single presence policy” in the Indonesian insurance sector; and

  • Bancassurance arrangements, in particular whether exclusive arrangements are permissible.

Foreign ownership limit for Indonesian insurance companies

4. As noted in our previous e-bulletin of 2 October 2014 (click here), the Insurance Law 2014 did not enshrine within the primary legislation passed by the Indonesian House of Representative (locally known as the “DPR”) the specific quantitative foreign ownership limit applicable to Indonesian insurance companies. Instead, the Insurance Law 2014 left open the possibility that the Indonesian government may still lower the foreign ownership limit via subsidiary government regulations in the future. This has not happened yet to date.

5. Hence, as things currently stand, the position remains that:

  • Establishment. Foreign share participation in an Indonesian insurance company is limited to 80% at the time of establishment, but foreign shareholders have in practice been able to subsequently increase their shareholdings beyond 80% by subscribing for new shares, provided that the total capital issued to the local party is maintained (in other words, the local party can be diluted by further issue of shares).
  • Secondary sale. In practice, OJK is currently still approving sale by local controllers to foreign buyers of up to 80% ownership in Indonesian insurance companies, provided that the foreign buyers can satisfy OJK’s requirements, including the required fit and proper test and (where relevant) the single presence policy requirements (see below).

6. There remains a possibility that the Indonesian government may in the future seek to reduce the foreign ownership limit for Indonesian insurance companies, but the timing of any such change currently remains uncertain.

Definition of “controller” of an Indonesian insurance company and applicability of “fit and proper” test

7. As explained in our previous e-bulletin of 2 October 2014 (click here), the Insurance Law 2014 provides that an insurance company must specify at least one “controller” in relation to the insurance company. A “controller” is defined under the Insurance Law 2014 as a party which directly or indirectly has the ability to determine the directors or commissioners and/or influence the actions of the directors or commissioners. No further details are provided under the Insurance Law 2014 but the 2014 law provides that further details regarding the criteria of a “controller” will be provided in further OJK regulations.

8. On 27 July 2016, OJK issued OJK Regulation No. 27/POJK.03/2016 regarding Fit and Proper Test for Main Parties of Financial Services Institutions (“OJK Regulation No.27 of 2016”), which seeks to regulate the implementation of OJK’s “fit and proper” test requirements for all financial institutions under OJK’s regulatory remit, including for insurance companies. OJK Regulation No. 27 of 2016 defines a “controller of insurance company” as a party who directly or indirectly has the ability to determine the Board of Directors (“BOD”) and the Board of Commissioner (“BOC”), and/or influence the actions of the BOD and the BOC of an insurance company. A prospective controller of an insurance company must obtain OJK’s prior approval before performing its function as a controlling shareholder. Before obtaining the “fit and proper” approval from OJK, a controller of an insurance company is prohibited from performing any actions as the controller of an insurance company, even if it has by that time owned shares in the insurance company.

9. OJK Regulation No.27 of 2016 does not, however, provide a quantitative threshold of what constitutes a “controller” of an insurance company. In practice (as a general rule of thumb) an acquisition of a shareholding of, or exceeding, 25% (which is the threshold for a “controller” in the bank sector) is likely to require OJK approval. A case-by-case analysis remains advisable at this stage, given the lack of a quantitative threshold in the regulation itself, and hence an acquisition of a stake which is less than 25% – but where the acquirer has the ability to influence the actions of the BOD/BOC of the insurance company – can, in theory, fall under the existing definition of a controller of an insurance company, and hence require OJK approval.

OJK’s “single presence policy” in the Indonesian insurance sector

10. As noted in our previous e-bulletin of 2 October 2014 (click here), the Insurance Law 2014 introduced for the first time a “single presence policy” to the insurance sector in Indonesia. In particular, the Insurance Law 2014 provides that each party can only be the “controlling shareholder” of one of each of the following categories of insurance companies:

  •  Life insurance company

  •  General insurance company

  •  Re-insurance company

  •  Syariah life insurance company

  •  Syariah general insurance company

  •  Syariah re-insurance company

11. The Insurance Law 2014 provides that the single presence requirement must be complied with within three years of the Insurance Law 2014 being promulgated (i.e. latest by 16 October 2017). OJK has in recent months indicated that it will be asking insurance companies which are currently non-compliant to provide OJK with plans on how they will comply with this policy. Certainly, in practice, compliance with this policy is becoming a pre-requisite in obtaining OJK approval for the acquisition of insurance companies, in situations where the new controller is already controlling another insurance company in Indonesia in the same line of business as the proposed target insurance company.

12. From our recent discussions with OJK, it is unsurprising that the merger of two insurance companies with the same line of business (similar to that of bank mergers to comply with OJK’s bank single presence policy) has been considered as a method of achieving compliance with the insurance single presence policy. Under this method, by operation of law, the merging entity will be dissolved and the surviving entity will absorb the assets and liabilities of the merging entity.

13. More interestingly, however, is the possibility of using the portfolio transfer scheme as a method of achieving compliance with the insurance single presence policy. Under this method, in broad terms, the insurance portfolio of the transferor insurance company is transferred to that of the transferee insurance company with the same line of business, resulting in the assets and liabilities relating to that portfolio being transferred from transferor to the transferee, and the business licence of the transferor being revoked by OJK once the required procedural steps are fully complied with. This process is now possible with the introduction of OJK Regulation No.28/POJK.05/2015 regarding Dissolution, Liquidation and Bankruptcy of Insurance Companies, Syariah Insurance Companies, Re-insurance Companies and Syariah Re-insurance Companies (“OJK Regulation No.28 of 2015”), although the implementation of the required practical steps to achieve such portfolio transfer and the related risks remain currently in the process of being tested in practice. It is worth observing at this stage that the portfolio transfer mechanism under OJK Regulation No.28 of 2015 – unlike similar portfolio transfer mechanisms in common law countries – does not involve obtaining the sanction of a Court, and is instead a process solely administered by the OJK.

Are exclusive bancassurance arrangements permissible?

14. The Indonesian Competition Supervisory Commission (locally known as “KPPU”) ruled in October 2014 that, an exclusive bancassurance agreement entered into between the state owned bank PT Bank Rakyat Indonesia Tbk (“BRI”), PT Asuransi Jiwa Bringin Jiwa Sejahtera (“Bringin Life”) and PT Heksa Eka Life (“Eka Life”), was contrary to Article 19(a) of Law No.5 of 1999 regarding Prohibition of Monopolistic Practices and Unfair Business Competition (“Competition Law”). KPPU concluded in that case that the exclusive arrangement disallows and/or prevents other life insurance companies from offering BRI’s home loan customers similar life insurance products, and hence the arrangement results in monopolistic practices and/or unfair business competition. KPPU’s 2014 ruling was, however, subsequently overturned on appeal by the Indonesian Supreme Court on 26 January 2016 on the basis that BRI had in fact provided the opportunity for other insurance companies (other than Bringin Life and Eka Life) to offer their products to BRI’s home loan customers, but those insurance products do not meet the standards and requirements determined by BRI, and hence Article 19(a) of the Competition Law has not been breached.

15. OJK has sought to clarify its position regarding exclusive arrangements in bancassurance arrangement in two of its recent circular letters, in particular:

  • OJK Circular Letter No. 32/SEOJK.05/2016 (“OJK Circular Letter No.32 of 2016”), which was issued by OJK on 30 August 2016 (in OJK’s capacity as the regulator of insurance companies). This circular letter is addressed to insurance companies; and

  • OJK Circular Letter No. 33/SEOJK.03/2016 (“OJK Circular Letter No.33 of 2016”), which was issued by OJK on 1 September 2016 (in OJK’s capacity as the regulator of banks). This circular letter is addressed to banks.

16. Under OJK Circular Letter No. 32 of 2016, in the scenario where a bank enters into a bancassurance arrangement with an insurance company under the “reference model” in which the bank’s role is limited to referring, or recommending, the insurance product to the bank’s customer where the provision of the bank’s products to such customer is conditional upon the customer taking up the related insurance product (e.g. a home loan products which requires the customer to take up a fire insurance policy with respect to the house) (“Reference Model”), the relevant bancassurance agreement must not include any provisions which may be interpreted to mean that the insurance company will only distribute its insurance products to the bank on an exclusive basis.

17. Under OJK Circular Letter No. 33 of 2016, if a bank enters into a bancassurance arrangement with an insurance company under the Reference Model – in order to accommodate the bank customer’s freedom of choice in relation to insurance product – the bank must offer the customer a choice of insurance products from at least three insurance companies, one of which may be a “related party” of the bank (as defined in the relevant regulation).

18. Apart from the requirements referred to in points 16 and 17 above, current OJK regulations do not further prohibit exclusive bancassurance arrangements. That said, in practice, this issue will need to be handled carefully as this remains an evolving area where, in practice, any arrangement which overtly purports to unduly limit the customer’s freedom of choice in relation to insurance products is likely to attract regulatory scrutiny.

This article was co-authored by Viska Kharisma Fajarwati, Senior associate at Hiswara Bunjamin & Tandjung.