Issuance of OJK Circular Letter No. 5/SEOJK.05/2022
In brief
On 14 March 2022, OJK issued Circular Letter No. 5/SEOJK.05/2022 on Investment-Linked Insurance Products (Produk Investasi Yang Dikaitkan Dengan Investasi or "PAYDI") ("OJK Circular Letter 5"). PAYDI, which are also known as "unit-linked products", account for a large proportion of the total premiums of the life insurance industry in Indonesia, and therefore this regulation has become one of the key regulations for life insurance industry players in Indonesia. Insurance companies must observe the requirements introduced by this regulation, which focuses on three main aspects on the provision of PAYDI, namely asset management, marketing practices and information transparency. We set out below the key takeaways and a brief summary from OJK Circular Letter 5 in relation to these main aspects.
Key takeaways
- Asset management. OJK Circular Letter 5 introduces certain requirements applicable for asset management. Some of the key requirements are on (i) the placement of investments for the purpose of PAYDI by insurance companies, (ii) the collection of funds specifically created and managed by such insurance companies (which are called "Sub-funds"), and (iii) the imposition of limitations of placement of investments with related parties and non-related parties. Other general requirements also apply, including in respect of recording the assets and liabilities of each Sub-fund.
- Marketing practice and information transparency. Insurance companies must ensure the suitability of PAYDI and relevant Sub-funds for the needs, capabilities, and risk profile of the prospective policy holder, insured or participant. The insurance company must also ensure the prospective policy holder's understanding of PAYDI by implementing certain measures as stipulated under OJK Circular Letter 5.
Please refer to the below for further details on the above matters. Please note that this is a summary only and not a full description of the requirements under OJK Circular Letter 5. Please contact us if you would like a detailed analysis of OJK Circular Letter 5.
In more detail
- Requirements applicable to insurance companies
Insurance companies offering PAYDI must have: (i) an actuary; (ii) investment management personnel; (iii) an adequate information system to support the management of PAYDI; and (iv) sufficient resources to support the management of PAYDI. In addition, an insurance company offering PAYDI for the first time must also fulfil the following capital requirements: (i) at least IDR 250 billion for a conventional insurance company; or (ii) at least IDR 150 billion for a sharia insurance company.
- PAYDI product design
PAYDI is an insurance product that at least provides protection against the risk of death and provides benefits that are linked with the investment results from the Sub-funds. PAYDI must fulfill the following criteria: (i) have a proportion of protection against the risk of death and benefits linked to certain investments; (ii) have a specific policy coverage period; and (iii) have a specific conventional or sharia investment strategy (which can be in the form of money market investment strategy, fixed income investment strategy, share investment strategy or mixed investment strategy). The insurance company must not provide a guarantee or specific target for the investment results of the product.
- PAYDI assets and liabilities management
The insurance company must record and report the assets and liabilities of each Sub-fund separately from other assets and liabilities of that company. The insurance company must also maintain the continuity of coverage or membership by determining sufficient premiums or contributions and carrying out periodical evaluation of those premiums or contributions.
The implementation of the investment strategy in PAYDI is carried out through the placement of investments in Sub-fund assets. Placement of investments with related parties (which is defined as persons or companies having a controlling relationship with the relevant insurance company, either directly or indirectly through ownership, management and/or financial relationship) in total must not exceed 10% of the total net asset value of each Sub-fund, and placement in one party or one group of non-related parties must not exceed 25% of the total net asset value of each Sub-fund. Exempted from these limitations are investment placements in the form of securities issued by the Republic of Indonesia or Bank Indonesia, or in the form of mutual funds (which can only be placed in mutual funds the underlying investment of which is entirely in the form of securities issued by the Government of Indonesia or Bank Indonesia).
- Marketing of PAYDI
In marketing activities in respect of PAYDI products, an insurance company must ensure the suitability of PAYDI and relevant Sub-funds for the needs, capabilities, and risk profile of the prospective policy holder, insured or participant. The insurance company must also ensure that person's understanding of the PAYDI product by, among other things:
- Providing clear, accurate and complete information on the PAYDI product
- Providing a general version (and personal version containing illustrations) of a summary of the product and service information
- Providing a Sub-fund performance report
- Following the issuance of the PAYDI policy, implementing a "welcome call" during the free look period to confirm the suitability of the product and their understanding of the purchased PAYDI
The insurance company must document its explanation of the PAYDI being marketed and the statement of understanding of the PAYDI product from the prospective policy holder, insured, or participant in the form of video and/or audio recordings, and that documentation must be verified, stored, and maintained by the insurance company.
