From January 2020, there has been a relaxation to the existing restrictions on foreign equity ownership of an Indonesian insurer, which will “grandfather” existing foreign ownership interests in excess of the 80% threshold and permit capital increases and spin-offs of Sharia units by insurers without strict adherence to the 80:20 rule.

Key developments under the Foreign Ownership of Insurance Companies Regulation

The Indonesian government enacted Government Regulation No. 3 of 2020 on 20 January 2020 (GR 3/2020), which amends Government Regulation No. 14 of 2018 on Foreign Ownership of Insurance Companies (GR 14/2018).

GR 14/2018 had previously confirmed the maximum threshold for foreign equity ownership of an Indonesian insurance company to be 80%. GR 14/2018 further provided that insurance companies with existing foreign ownership levels in excess of the 80% limit would be exempt from this requirement, provided that the relevant foreign ownership percentages in place as at the date of the new regulation would amount to the maximum individual cap on foreign ownership of the relevant insurer. However, Article 6(2) of GR 14/2018 also provided that any further capital increases or injections in an insurance company would need to be made in a ratio of at least 80:20 between foreign and domestic shareholders. We had understood that this provision had been read by the OJK in practice to mean that where an insurer had foreign ownership in excess of 80%, that any future capital increases would also trigger an obligation on the company to comply with the 80% foreign investment threshold.

GR 3/2020 attempts to relax the above rules and adds clarity regarding the ability of insurers to conduct capital increases and manage their Sharia spin-offs. The new regulation provides the following two key changes:

  1. No obligation for capital increases to be made in a ratio of 80:20 - The obligation under Article 6(2) of GR 14/2018 for an Indonesian shareholder to make a corresponding 20% capital injection in the event of a capital increase is now deleted. The new Article 6(2) in GR 3/2020 goes further to emphasise expressly that a company’s existing foreign ownership percentage (which may exceed the 80% threshold) will still be respected if the company increases its capital (and no sell down will be required). That said, Article 6(2a) of GR 3/2020 provides that if the local shareholder does not also inject equity in a capital increase, then the company must carry out an IPO in Indonesia to obtain the co-injection from another source. This is tied to the general rule that publicly listed insurers are exempt from the statutory foreign ownership cap.
  2. Sharia Spin-Offs may be subject to the existing foreign ownership cap, rather than the ratio of 80:20 - If an existing insurer conducts a spin-off of its Sharia unit, GR 3/2020 provides that the new Sharia insurer will be subject to the same individual foreign ownership cap that is applicable to the parent insurance company and it is exempt from the statutory 80% foreign ownership cap. The rules noted above will then be applicable to the Sharia company, i.e. its existing foreign ownership cap will be respected in future capital increases subject to the IPO requirement if the local shareholder does not make a corresponding equity injection.

GR 3/2020 accordingly allows insurers with a large existing foreign ownership proportion to benefit from the “strong grandfathering” principles inherent in the new regulations. The new regulations will also ease the Sharia business spin-offs that insurers are mandated to carry out by the end of July 2023, which had caused a number of insurers difficulties if they had been required to adhere to the 80:20 shareholding ratio requirement for the Sharia unit where the foreign shareholder holds in excess of the 80% threshold.