The first nine months of 2010 have seen a significant upsurge in M&A activity in the insurance sector in Southeast Asia (and beyond) as established players look to the region for growth opportunities and domestic consolidation continues. Most high profile was Prudential’s planned acquisition of AIA on which Herbert Smith acted for the underwriting banks.

In addition to this, changes to rules on capital adequacy requirements in a number of jurisdictions in Southeast Asia have acted as a stimulus for greater inward investment as local players look to raise capital through strategic investments, joint ventures and disposals.

For foreign investors targeting the Asia insurance markets, the Prudential deal brought into focus some key areas of concern, in particular:

  •  foreign investment restrictions;
  •  local competition regimes; and
  •  the approach of home regulators to protecting domestic financial strength and restricting overseas remittance.

Based on our experience, we touch on each of these areas briefly below for the key markets of Singapore, Indonesia, Malaysia and Thailand, including discussion of some recent changes to the regulatory landscape in each of these jurisdictions.


Restrictions on foreign shareholdings

There are no foreign ownership restrictions in relation to insurers operating in Singapore. However, in certain situations, for example, when there is a change of control (20% or more) or when a person becomes a substantial shareholder (5% or more), prior approval of the Monetary Authority of Singapore (“MAS”) must be obtained.

Competition law and regulation

The Singapore Competition Act prohibits mergers that may result in a substantial lessening of competition in the relevant market. Competition concerns are likely to arise if:

  •  the merged entity will have a market share of 40% or more; or
  • the merged entity will have a market share of between 20% and 40% and the post-merger combined market share of the three largest firms is 70% or more.

In a joint notification to the Competition Commission of Singapore (“CCS”), Prudential and AIA argued that the acquisition of AIA did not give rise to the above concerns because of the presence of strong competitors in the market, the factors for the ease of entry and expansion, the high level of supply-side substitutability and other competitive characteristics of the relevant market.

The CCS sought public feedback on the matter. Some commentators questioned whether consumer choice would be enhanced by the merger, which would potentially create an entity with significant agency distribution clout. As the Singapore insurance market is dominated by tied agency distribution, they argued that it would have been debatable whether consumers would be able to easily access critical product information from tied agents to make informed choices. Another argument raised was that a shrinking pool of players – there are currently 11 life insurers licensed by the MAS – would not incentivise product innovation.

Since the acquisition did not proceed, there was eventually no decision by the CCS on the above issues.

Capital remittance

Registered insurers are subject to a risk based capital (“RBC”) framework. Features of the RBC framework which may in practice impinge on the ability of insurers to repatriate capital include the following:

  •  Insurers must maintain separate insurance funds for Singapore and foreign policies, for investment-linked and non investment-linked policies and for participating and non-participating policies.
  •  In order to be registered as an insurer in Singapore, the applicant must have a prescribed amount of paid-up ordinary share capital (or its equivalent under the laws of the country in which the applicant is incorporated). The prescribed amount ranges from S$5 million to S$25 million depending on the type of activity undertaken by the insurer and whether the applicant is applying to be a direct insurer or a reinsurer.
  •  The MAS has authority in certain circumstances to require the assets of an insurer (with a value equal to the whole or a specified proportion of the amount of its domestic liabilities) to be maintained in Singapore.
  •  Prior written approval of the MAS must be obtained before a Singapore insurer reduces its paid-up ordinary share capital. A foreign insurer must notify the MAS before carrying out any capital reduction.
  •  The financial resources of an insurer must not be less than the greater of:
  •  the sum of (i) the aggregate of the total risk requirement of all insurance funds established and maintained by the insurer under the Insurance Act and (ii) in the case of a Singapore insurer, the total risk requirement arising from the assets and liabilities of the insurer that do not belong to any insurance fund established and maintained under the Insurance Act; and
  •  S$5 million.

The MAS is currently consulting on, and is expected to introduce extensions to, its powers to require insurers to maintain assets in Singapore. Currently the MAS is only able to issue an asset maintenance direction to an insurer if there are grounds on which it could cancel the registration of such insurer. It is currently proposed that this regime is to be extended to allow the MAS to require any insurer, or class of insurer, in Singapore to hold such minimum amount of assets in Singapore as may be required to meet its liabilities.

The MAS is currently consulting on, and is expected to introduce extensions to, its powers to require insurers to maintain assets in Singapore. Currently the MAS is only able to issue an asset maintenance direction to an insurer if there are grounds on which it could cancel the registration of such insurer. It is currently proposed that this regime is to be extended to allow the MAS to require any insurer, or class of insurer, in Singapore to hold such minimum amount of assets in Singapore as may be required to meet its liabilities.


Restrictions on foreign shareholdings

Under prevailing Indonesian insurance regulations, at establishment, the foreign ownership of an insurance company must not exceed 80%. However, after establishment the Indonesian ownership percentage may be diluted provided that the Indonesian shareholder(s) maintain the original number of shares held at establishment. The 80% threshold also applies to any Indonesian insurance company which is acquired by foreign party(ies) rather than established with foreign ownership. In our experience it is common for foreign insurance companies owning Indonesian insurance companies to enter into cooperative arrangements with a local party or parties owning the 20% local shareholding. Indonesian law does not recognize trust structures, however our team has worked with a number of clients to assist with alternative structuring arrangements.

Foreign shareholders in an Indonesian insurance sector company must operate in the same area of insurance. Accordingly, a foreign insurance company may only invest in an Indonesian insurance sector company if that company operates in the same area of business as the foreign insurance company (or its subsidiaries).

Any proposed transfer of shares in an unlisted Indonesian insurance company requires the prior approval of the Minister of Finance of the Republic of Indonesia. This requirement does not apply to acquisitions of shares in a listed insurance company through the Indonesian Stock Exchange, provided that the acquisition does not result in a change of control (50% equity stake or the ability, whether directly or indirectly, to determine management policy) of the relevant insurance company.

Proposed new shareholders in an unlisted insurance company are in principle subject to a ‘fit and proper test’. To date however, no clear regulations have yet been issued specifying the criteria and standards that must be satisfied by new shareholders in relation to the fit and proper test. In practice, pending the issue of implementing regulations providing detailed criteria for the ‘fit and proper’ test, any proposed shareholder is deemed to have satisfied the test provided that they are not on the Bank Indonesia blacklist.

Obtaining approval from the Minister of Finance can be a long process. In our recent experience, obtaining such approval can in practice take several months from the date of the application, particularly where the transferee is a newly established or a company unknown to the Ministry of Finance.

Competition law and regulation

Eleven years after the introduction of Indonesia’s Anti Monopoly Law No.5 of 1999 (the “Anti Monopoly Law”), the Government of Indonesia has recently issued its much anticipated implementing regulations of the Anti Monopoly Law, namely Government Regulation No.57 of 2010 on mergers and consolidation of business entities and company’s share acquisitions which may cause monopoly practices and unfair business competition (“GR 57”), effective as of 20 July 2010.

The Anti Monopoly Law prohibits any mergers, consolidations and share acquisitions which could result in a monopoly situation or uncompetitive business practices. Pursuant to GR 57, any merger, consolidation, or acquisition must be notified to the Business Competition Supervisory Commission (the “KPPU”) within 30 business days of completion if either (i) the legal entity resulting from a merger or consolidation; or (ii) the acquirer and target company in respect of an acquisition of shares, have an aggregate asset value of IDR 2.5 trillion (approximately USD$280 million) or more and/or aggregate sales of IDR 5 trillion (approximately USD$560 million) or more.

In order to obtain comfort from the KPPU before the transaction becomes effective, parties may voluntarily elect to consult the KPPU verbally or in writing. The KPPU will provide a written response within 90 business days after a complete form and documents are submitted. However, this preliminary response is not binding on the KPPU and therefore the process is not commonly used in practice given its inherent uncertainty and unreliability. The KPPU has little experience in assessing the relevant market and potential impact of sophisticated transactions, and consequently it generally tends to act conservatively. Recent decisions have tended to show a suspicion of any transactions submitted for approval with a consequent reluctance by KPPU to give clearance for transactions in practice.

Capital remittance

With the exception of certain Bank Indonesia regulations on reporting requirements for the movement of foreign currency from Indonesian banks, there are currently no general restrictions on the repatriation of foreign currency from Indonesia to other countries. In the insurance sector, however, capital repatriation may be prohibited if it causes an insurance company to fail to comply with the prescribed minimum solvency level of not less than 120% of the risk of loss which could arise from any “deviation” in the management of the assets and bligations of the company. Such risk of loss is determined in accordance with a prescribed calculation, but essentially comprises of at risk capital and claims liability.

Insurance companies in Indonesia must also comply with a risk based capital adequacy framework with certain minimum capital requirements (which have recently been increased with effect from 31 December 2010). Insurance companies are also required to maintain security funds of at least 20% of the minimum required capital of the company.


Restrictions on foreign shareholdings

Since 22 April 2009 foreign ownership restrictions on insurance companies and Takaful operators in Malaysia have been relaxed such that the maximum threshold has increased from 49% to 70%. In addition, it has been announced by Bank Negara Malaysia (“BNM”) that for insurance companies which can facilitate the consolidation and rationalization of the industry in Malaysia, a higher threshold (up to 100%) will be considered on a case-by-case basis.

While there has been recent liberalization of foreign investment restrictions in Malaysia, various consent requirements remain. By way of example, investors must still approach BNM for inprinciple approval prior to commencing preliminary negotiations or due diligence in connection with a proposed acquisition of an insurance business (and approval must be obtained for each line of business (e.g. life, general or takaful) in question), whether structured as an asset or share purchase. Although not particularly onerous, this preliminary approval process can take approximately two weeks.

Competition law and regulation

The Malaysia Competition Act and Malaysia Competition Commission Act were passed on 10 June 2010. The Government however announced in July that it would be approximately 18 months before the Competition Commission and Competition Appeals Tribunal would be established and before the substantive provisions of the Competition Act will take effect. 1 January 2012 has been set as the target date on which the acts will come into force.

The new competition regime provides for abuse of dominant positions and for anti-competitive agreements (both vertical and horizontal). It does not however provide for a merger control regime. The Competition Act also introduces a right of private action pursuant to which civil claims for loss or damage may be brought directly by any person.

Capital remittance

The Insurance Act requires that insurers maintain separate funds for life and general business, as well as separate funds for Malaysian and foreign policies. The Insurance Act also imposes a dual test in that an insurer must maintain both (i) assets in its insurance fund of a value equal to or higher than the liabilities of that fund; and (ii) a separate margin of solvency for each class of insurance business. Should an insurer experience a deficiency in more than one fund, priority in rectifying such deficiency must be given to Malaysian policies.

The Ministry of Finance, together with BNM, administers a risk-based capital framework for insurers to determine the capital adequacy ratio (“CAR”) of all insurers licensed in Malaysia. The framework was formulated to conform with international trends towards risk-based capital frameworks (e.g. Solvency II and Basel II) and aims to better reflect the risk profiles of insurers. Under this framework each insurer is required to determine the adequacy of the capital available in both its insurance and shareholders’ funds. The capital adequacy ratio formula adopted under this framework preserves the fundamental principle that the valuation surplus of the participating life insurance fund should not be used to support the capital requirements of other insurance or shareholders’ funds. To the extent that an insurer’s CAR is less than its internal target capital level or if the payment of a dividend would impair its CAR to below its internal target, such payment is prohibited. In addition, BNM may impose restrictions on any discretionary payments (including dividends, interest or redemption of capital instruments) where it believes such restrictions are necessary to ensure capital is available to protect policyholders.

Content on Malaysia has been produced in conjunction with Malaysian law firm Skrine.


Restrictions on foreign shareholdings

Insurance companies in Thailand are required to be public companies and are subject to substantial restrictions on foreign shareholding imposed by amendments to legislation in 2008.

At least three quarters of an insurance company’s directors must be Thai nationals and the number of shares held by Thai nationals and Thai companies must be at least 75% of the total voting shares. The Council of State (the body which provides legal advice to Thai regulatory authorities) has expressed the view that the reference to voting shares is a reference to voting control, effectively preventing the use of preference share structures to provide minority shareholders with voting control.

The foreign shareholding limit can be increased to 49% with the approval of the Office of the Insurance Commissioner (“OIC”) and can be increased to more than 49% in case of financial difficulties, subject to permission from the Minister of Finance. Foreign life insurance companies can also apply for an operating licence by establishing a branch office.

Insurance companies which existed as at 2008 are required to comply with the above foreign shareholding and director requirements by 6 February 2013. Insurance companies which do not comply by that deadline will not be granted approval to open new branches, appoint new agents or brokers or invest in other businesses, effectively limiting expansion. Insurance companies which fail to comply by 2016 risk having their licences revoked.

Competition law and regulation

The Trade Competition Act prohibits any merger of businesses which may result in monopoly or unfair competition as prescribed and published in the Government Gazette by the Trade Competition Commission (“TCC”) unless the TCC’s permission is obtained.

To date the TCC has not prescribed or published categories of monopoly or unfair competition applicable to the insurance sector and as such there is presently no requirement to make any filings or obtain approval under the Trade Competition Act for any merger or acquisition in the insurance sector.

Capital remitance

In addition to maintaining insurance reserves (2% of life insurance premiums and 10% of non-life insurance premiums), insurance companies are required to maintain a risk-based capital fund and liquid assets in accordance with rates to be determined by the OIC. The rates are expected to be finalised by 2011 and it is not yet clear to what extent they will mirror the requirements of Solvency II, however there is speculation that the introduction of risk-based capital will trigger substantial M&A activity in Thailand as insurance companies seek to secure additional equity. Life insurance companies are also required to make contributions to a life insurance fund for the protection of life policyholders in the event that an insurance company goes bankrupt or has its licence revoked.

Life insurance companies are required to obtain approval from the OIC before paying dividends and in practice the OIC will consider the company’s previous year’s financial results and long term financial strength when deciding whether to grant approval.

Outward remittances of currency are subject to approval by the Bank of Thailand – in practice the approval function is delegated to commercial banks and will usually be granted on production of the underlying documentation pursuant to which the remittance is made (such as a loan agreement in the case of repaying an offshore loan).