Indonesia has enacted Regulation no.14/2018 on Foreign Ownership of Insurance Companies, which came into force on 18 April 2018 and confirms a maximum threshold for foreign ownership of an Indonesian insurance company of 80%.
The new regulation provides welcome clarification of the law relating to ownership and foreign participation in the Indonesian Insurance Industry. However, as the OJK has already been applying many of the features of the new regulation in practice in recent years, no material impact is anticipated as it amounts to an affirmation of existing policy.
Indonesia has finally passed a long awaited regulation that confirms that the maximum threshold for foreign investment into an insurance company is 80%. In April 2018, the President signed Regulation no.14/2018 on Foreign Ownership of Insurance Companies (the “Regulation”), which came into force on 18 April 2018 and that provides the following:
The maximum limit on foreign ownership in a privately owned Insurance Company remains 80% of paid-in capital;
Insurance Companies that are currently subject to foreign ownership in excess of the 80% limit will be exempt from this requirement, provided that their respective existing foreign ownership percentages will amount to the maximum individual cap on foreign ownership of each of the relevant insurers.
Where an insurance Company has foreign ownership of 80% or more, any future capital increases must be made in a ratio of at least 80:20 (or such lower ratio as will prevent the foreign insurer from increasing his existing stake) with a domestic party; and
There is no maximum limit on foreign ownership of a publicly listed insurance Company (although the free float requirement will apply).
The impact of the Regulation is likely to be limited given that it is effectively an express statement of the existing unwritten policies applied by the Indonesian Financial Services Authority (the “OJK”) in recent years to interpret the Indonesian Insurance Law of 2014 (the “Insurance Law”). However, notwithstanding that it maintains the status quo, it gives much needed clarity to the Insurance Law and greater certainty to existing and prospective foreign investors into the Indonesian insurance industry.
Indonesia passed the Insurance Law in 2014 in order to update and align the previous insurance law of 1992 (the “1992 Law”) with international norms and best practices. Among other things, the Insurance Law laid down the criteria for ownership and investment in insurance Companies, both by domestic and foreign investors. While the Insurance Law provided much needed clarity to the criteria, experience and “fit and proper” requirements applicable to ownership and governance, it omitted to clarify the maximum thresholds for foreign ownership, leaving it to the government to finalise the threshold and implying in the interim that the previous threshold of 80% provided in the 1992 Law remained effective.
In practice, ever since the Asian Financial Crisis of 1998/9, a number of foreign insurers had assumed ownership positions in domestic insurers in excess of the 80% cap under the 1992 Law, as where emergency capital was required to keep their investee companies afloat, they had diluted local partners who had been unable to fund their equity proportions. This non-compliance with the 1992 law was tolerated and had continued until very recently, with the OJK turning a blind eye to dilutive capital increases by foreign insurers in order to support capital requirements.
In the period following 2014 there has been speculation that the government might adopt foreign ownership thresholds of 30%, 49%, 51% and 80%. Public debate over the threshold saw nationalistic politicians advocating a lower limit to establish greater political and economic sovereignty, while economists and liberals were keen to maintain the status quo and preserve the insurance industry’s ability to attract foreign capital and expertise.
It seems that the latter camp, with the support of powerful lobbying by the industry, has won out. The Regulation preserves the 80% ownership threshold (which is higher than equivalent limits in Malaysia, India and Thailand) and grandfathers existing ownership in excess of the cap by foreign insurers, rewarding them for their dedication to the sector and avoiding a potentially disruptive and costly market “sell down” to 80%.
Key Developments under the Regulation
The Regulation provides welcome clarification of the features of the Insurance Law relevant to ownership and foreign participation in Indonesian Insurance Companies. Given that the OJK has in recent years already been applying the Insurance Law in the way set out in the Regulation, no material impact is anticipated as the Regulation merely affirms existing policy.
Insurer Ownership Criteria
The Regulation makes clear ownership of an insurance company is permitted for domestic and foreign entities by way of direct or indirect investment or acquisition, provided that foreign individuals may only own shares in a listed insurance company.
Further, the Regulation affirms that, unless acquiring shares in a listed insurer, a foreign entity must meet the following criteria in order to acquire a stake in a privately held insurer:
it, or one of its subsidiaries, must be an insurance company in the same line of business as the domestic insurer;
it must have equity five times in excess of the value of its investment in the domestic insurer (either on the insurers establishment or where it subscribes for or acquires shares in it); and
it must comply with the OJKs requirements (i.e. the fit and proper test requirements).
Aside from supporting good governance and ensuring that investors have requisite experience, the intention here is that existing insurers can contribute knowledge, technology and management that will improve the quality and performance of the insurer and the industry at large.
Foreign Ownership Threshold
The Regulation provides clarity on the foreign ownership thresholds in Insurance Companies and updates the Insurance Law. The key changes are as follows:
The Regulation provides that the maximum limit on foreign ownership in a privately owned Insurance Company remains 80% of paid-in capital. This includes all cumulative and affiliated interests and the OJK will look through the chain of legal and beneficial ownership to established the precise threshold proposed to be acquired. This reaffirms the position set out in the 1992 Law.
There is a key exemption provided in the Regulation, which permits insurance companies with foreign ownership in excess of the 80% threshold to maintain their existing shareholding structure provided that there is a complete prohibition on any further increase of such existing percentage by the foreign insurer. The Regulation explains that where this exemption applies, the existing foreign ownership threshold in the relevant domestic insurer will amount to a maximum individual cap on foreign ownership of each of the relevant insurers. However, this cap may be subject to change in the event that the relevant foreign shareholder reduces its percentage ownership or sells out completely to a third party. For example, if as of 18 April 2018, a foreign insurer owns 88% of a domestic insurer, it may continue to maintain its 88% interest, although it may not increase this percentage. If they sell down their interest to, for example, 84% then this new percentage will become the new upper limit for foreign ownership in that insurer.
Where there remains uncertainty is where a foreign insurer sells a 88% stake in an insurer to another foreign purchaser, and whether the foreign purchaser would need to team up with a local party or commit to sell down to 80%. Following recent OJK policy and the notes to the Regulation, it would appear that if there were such a change of control, the grandfathering provisions would not apply to the purchaser and they would only be able to acquire an 80% interest. This, however, would remain negotiable with the OJK and if such a purchaser were to commit to a post-acquisition disposal or listing plan in order to comply with the law, the OJK may be minded to agree to such a structure.
In practice, the Regulation preserves the status quo and respects the capital invested and risks taken by a number of foreign insurers in the years after the Asian Financial Crisis that caused them to assume the percentage interests that they hold to this day. It also suggests that lessons may have been learned from recent experience in Malaysia, where mandatory sell downs to meet a foreign ownership threshold have caused market disruption and losses for foreign insurers forced to accept reduced valuations for rump stakes being sold to domestic parties.
The Regulation sets out the basis upon for which future capital raising may be undertaken. Where an Insurance Company has foreign ownership of 80% or more, any future capital increases must be made in a ratio of at least 80:20 with a domestic party, or such lower ratio as will avoid the foreign insurer from increasing his existing equity stake. This concept supports the ownership threshold limits on an ongoing basis and reflects OJK policy in recent years, whereas in the past there was general acceptance that foreign shareholders could increase their stakes in domestic insurers through dilutive equity issuances.
Where this has led to issues in the past, in both Indonesia and other markets where foreign ownership limits apply to the sector (e.g. in India), is where the relevant insurer is undercapitalised, needs funding and it is not possible from a regulatory perspective for the foreign shareholder to fund without diluting its domestic partner. In practice, we have seen structures to get around this issue where the domestic party cannot or will not fund its proportional contribution, including foreign shareholders making capital contributions that do not impact the parties’ respective equity percentages, but allow the increase of the insurers capital account. Commercial issues often impact these structures though unless there is an emergency funding situation.
The Regulation provides that there is no maximum limit on foreign ownership of a publicly listed insurance Company. The notes to the Regulation highlight existing OJK policy to encourage the listing of insurance companies, on the basis that it improves their governance, supervision, transparency and the ability of the public to participate in the growth of the sector. For listing on the Indonesian Stock Exchange, there is a 7.5% free float requirement, which restricts 100% ownership of a listed insurance company.
An added point to note here is that one of the intentions of the Insurance Law was to close down the previous dual layer investment structures, which permitted foreign shareholders to acquire an interest in insurance Companies without having to consider the relevant foreign investment thresholds by using a wholly-owned Indonesian SPV as their investment vehicle. These structures are now prohibited and the OJK will look through them. However, notwithstanding this, it has been their policy in recent years to treat all listed companies as being “local” even if their majority owners are foreign entities. In practice, this would permit foreign ownership of a privately held Insurance Company in excess of the 80% threshold if the relevant purchaser were an Indonesian listed company that is majority held by a foreign insurer.
Other Notable Developments
The Regulation additionally restates the OJK’s supervisory and regulatory authority, insurer reporting requirements and the regulatory sanctions applicable for breach.
The Regulation provides a helpful affirmation of OJK Policy in applying the Insurance Law and creates clarity for existing and prospective investors in the Indonesian insurance industry.