New Insurance Law

A comprehensive new insurance law just passed by Indonesia’s parliament could have major consequences for joint venture companies operating in this rapidly growing insurance market.

On 23 September 2014, the Indonesian Parliament passed a new law on insurance (New Insurance Law). The New Insurance Law comes into effect in 30 days (on 23 October 2014) and replaces Law No. 2 of 1992 on Insurance Business (Old Insurance Law).

The New Insurance Law sets out a comprehensive regulatory framework for Indonesia’s insurance sector. It applies to all insurance business companies (IBCs), whether insurers, reinsurers, brokers, agents or loss adjusters.

In addition to providing greater regulation of the insurance business, the new law also has an underlying nationalistic sentiment, evidenced by the approach to foreign ownership. Whilst any change to maximum foreign ownership levels (currently 80%) has been held over until an implementing Government Regulation is issued, which will happen within 30 months, the New Insurance Law does introduce several fundamental changes that foreign investors need to consider carefully.

Indonesian shareholders of IBCs must be fully owned by Indonesian citizens

Under both the old law and the New Insurance Law, Indonesian shareholders must hold at least 20 per cent of the issued capital of any joint venture IBC, while foreign shareholders can hold up to 80 per cent.

Under the Old Insurance Law, the Indonesian shareholders of an IBC could be Indonesian citizens and/or Indonesian legal entities fully owned by Indonesian citizens and/or Indonesian legal entities. The New Insurance Law has removed the italicized words meaning that an Indonesian corporate IBC shareholder must now ultimately be fully owned by Indonesian citizens in order to qualify as Indonesian. This now makes unlawful the use of the dual-layer PMA structure  which foreign entities have utilized to ultimately own 100% of an IBC.

Insurance companies have five years in which to either:

  1. ensure that the shares that must be held by Indonesian shareholders are all directly or indirectly held by Indonesian citizens; or
  2. conduct an initial public offering, we presume with a minimum free float of 20%.

Since many joint venture insurance companies operating in Indonesia are currently fully controlled by foreign investors through utilizing a dual-layer PMA structure to own shares in excess of the FDI limit of 80%, this change in law could have a major impact.

Single presence policy

The new law also introduces a single presence policy for the insurance sector. Under the new regime, a person or other legal entity can, at any time, only be a controlling shareholder in one life insurance company, one general insurance company, one reinsurance company, one syariah life insurance company, one syariah general insurance company and/or one syariah reinsurance company. Such restriction will not apply to the Indonesian Government.

Shareholders with controlling interests in more than one such insurance company have three years to comply. It follows that several prominent global insurers presently operating in Indonesia will need to sell or merge their Indonesian operations in order to comply with this requirement.

Other noteworthy developments flowing from the New Law

  • Insurance and reinsurance companies must separate into a stand alone entity all syariah divisionswithin 10 years from the enactment of the New Law, or when the syariah component exceeds 50 per cent of the total insurance portfolio, whichever is the earlier.
  • The insurance for any asset or risk located in Indonesia must be placed with a local insurer, irrespective of ownership of that asset or responsibility for a risk, unless no local insurer is able or willing to underwrite the risk. This removes the previous concession that allowed foreign entities to purchase insurance from offshore insurers.
  • new policy assurance program replaces the existing mandatory guarantee fund, with the aim of providing protection to policyholders in case their insurer is liquidated or has its license revoked.
  • Insurance and reinsurance companies must optimize domestic capacity. In other words, domestic insurers and reinsurers must provide local reinsurance coverage “as far as possible”. The intention is to encourage all insurers and reinsurers (both conventional and syariah) to assist with the expansion of the local market.