The long awaited Indonesian insurance bill has finally been passed (“New Insurance Law”) by the Indonesian House of Representatives (locally known as the “DPR”) on 23 September 2014, and will take effect once it has been signed by the President of Indonesia.
As is usual for primary Indonesian legislation, the New Insurance Law is drafted in fairly broad terms, capturing the key principles. Further important details will be included in secondary implementing regulations to be issued by the government or the Indonesian Financial Services Authority (locally known as the “OJK”). The New Insurance Law provides that the relevant implementing regulations must be issued within two and a half years of the new law being promulgated. Once the New Insurance Law takes effect, pre-existing secondary implementing regulations under the old 1992 Insurance Law will remain effective, insofar as they are not in conflict with the New Insurance Law.
In broad terms, the New Insurance Law updates the old 1992 Insurance Law in various significant areas and provides a stronger consolidated legal foundation to the insurance sector, compared to the previous situation where certain key aspects of Indonesian insurance regulations, developed in the period since 1992, are provided for in a complex web of secondary regulations. However, in order for the New Insurance Law to fulfill its promise of achieving an acceptable level of legal certainty for the insurance sector, it is important that the crucial new regulations (to be issued by the government or OJK), which are required to implement the new principles, are issued in good time. Otherwise, legal uncertainty in certain key areas will persist.
Key highlights for the New Insurance Law are as follows:
- Ownership.To a large extent, the New Insurance Law appears to consolidate the existing position in relation to ownership requirements under pre-existing Law and regulations, although there are a number of subtle – but important – changes introduced in relation to ownership of insurance companies. In particular:
- Quantitative foreign ownership limit. Crucially, the publicly mooted controversial lowering of the foreign ownership cap (in relation to Indonesian insurance companies), to 49% has not been included in the final draft of the bill which was passed by the DPR, although the government may still lower the foreign ownership limit via subsidiary government regulations. It remains to be seen whether this may happen. Hence, as things currently stand, the position remains that foreign share participation in an Indonesian insurance company is limited to 80% at the time of establishment, but a foreign shareholder has in practice been able to subsequently increase its shareholding beyond 80% by subscribing for new shares, provided that the total capital issued to the local party is maintained (in other words, the local party can be diluted by further issue of shares). This ends months of speculation on this issue, although it remains to be seen whether the government or OJK will actually move to introduce lower foreign ownership limits via subsidiary regulations in the future.
- Local shareholding requirement. Under the New Insurance Law, the rules concerning the requirement for a local Indonesian shareholder have been tightened up. Article 7(1)(a) of the New Insurance Law now provides that the relevant Indonesian legal entity holding shares in the insurance company must be “directly or indirectly wholly owned by Indonesian nationals”. In contrast, under the pre-existing Law and regulations, the relevant Indonesian legal entity needed only to be “wholly owned by Indonesian nationals and/or Indonesian legal entities”. Importantly, Article 88(1) of the New Insurance Law provides that an insurance company which does not satisfy the new stricter requirements in Article 7(1)(a) must comply with those requirements by transferring ownership of shares to Indonesian nationals or undertake an initial public offering (IPO) at the latest within 5 years of the New Insurance Law being promulgated. This ‘divest or go public’ requirement is new and was absent under the pre-existing Law and regulations – its implications for existing local shareholding structures of insurance companies will have to be worked through in the months ahead.
- Qualitative criteria. The requirement under the pre-existing Law and regulations that a foreign shareholder in an Indonesian insurance company must be either itself an insurance company which has the same business activity as the Indonesian insurance company, or a parent company where one of its subsidiaries has the same type of insurance business as the Indonesian insurance company, has been preserved under the New Insurance Law. The rationale for this requirement, as it was the case under pre-existing Law and regulations, is that the foreign shareholder should be a party which truly has the experience in the relevant insurance business sector such that it is able to transfer capital, know-how and technology to the Indonesian party.
- Foreign individuals. Foreign nationals (as opposed to foreign legal entities) may only become owners of insurance companies through transactions on the stock exchange.
- Single Presence. A ‘single presence’ policy has now, for the first time, been applied to the insurance sector in Indonesia. This is a significant new development as, unlike the Indonesian banking sector (where such policy has been in place for many years), there has to date been no single presence policy in relation to the insurance sector in Indonesia. In particular, the New Insurance Law provides that each party can only be the ‘controlling shareholder’ of one of each of the following categories of insurance companies:
- Life insurance company
- General insurance company
- Re-insurance company
- Syariah life insurance company
- Syariah general insurance company
- Syariah re-insurance company
The New Insurance Law does not provide, however, further details on how this new policy will be applied in practice in the event that a party is already, or becomes, the controlling shareholder of more than one entity in each of the relevant categories of insurance companies set out above, apart from specifying that the requirement must be complied with within 3 years of the New Insurance Law being promulgated. We will need to wait for the relevant OJK regulations for further details in relation to what is considered a ‘controlling shareholder’ for this purpose and how any consolidation or merger requirement will be implemented (including whether pre-existing holdings, prior to the New Insurance Law taking effect, will be grandfathered). Equivalent rules have been issued in relation to implementation of the single presence policy in the Indonesian banking sector.
- Controller. The New Insurance Law provides that an insurance company must specify at least one “controller” in relation to the insurance company. A “controller” is defined under the New Insurance Law as a party which directly or indirectly has the ability to determine the directors or commissioners and/or influence the actions of the directors or commissioners, although the New Insurance Law also provides that further details regarding the criteria of a “Controller” for these purposes will be provided in further OJK regulations. This is a significant development, which seeks to apply equivalent concepts of “controller” as found in the banking regulations to the insurance sector. By virtue of this change, OJK will seek to identify the controller(s) of insurance companies so that OJK can determine who is responsible, in the event that the insurance company fails to fulfill its obligations to policy holders or insured persons, as a result of the influence of the relevant party on the management of the insurance company. In particular, Article 15 provides that a Controller must also be responsible for the loss of the insurance company which is caused by a party through its control. OJK has the power, under the New Insurance Law, to determine that an insurance company is controlled by controller(s) other than the controller(s) indicated by the insurance company itself. In addition, under the New Insurance Law, each party identified as a controller must report to the OJK, and any change in controller must also be reported to OJK. A party which has been identified as a controller cannot cease to be controller without OJK’s approval.
- Syariah Insurance. The New Insurance Law also provides express basis for Syariah insurance businesses, and seeks to unify the basic regulatory basis for conventional and Syariah insurance under one legislation. Prior to the introduction of the New Insurance Law, Syariah insurance businesses have been regulated by government and Ministry of Finance regulations. The New Insurance Law also provides that, in light of the underlying conceptual difference between Syariah insurance (which is based on risk sharing) and conventional insurance (which is based on risk transfer), Syariah insurance businesses, which are currently typically conducted as a business unit within a conventional insurance company, will in the future be encouraged to be spun-off and conducted using a separate legal entity from the conventional insurance business. The New Insurance Law further provides that, if the insurance company has a Syariah unit where the value of itsTabarru’ fund and participants investment fund has achieved at least 50% of the total of the insurance fund, Tabarru’ fund and participants investment fund of the parent company, or within 10 years of the New Insurance Law being promulgated, the insurance company must spin-off the Syariah unit into a separate legal entity.
- Deepening local insurance and re-insurance capacity. Another key theme in the New Insurance Law is the policy objective of deepening the local insurance and re-insurance capacity. In particular:
- Article 36 requires that insurance and re-insurance companies optimize the utilization of local insurance and/or re-insurance. The elucidation to this article further provides that the optimization of local reinsurance capacity will be undertaken by placing as much reinsurance as possible with local insurance and/or reinsurance companies, whether individually or together, taking into account risk management principles. Article 37 further provides that the government and/or OJK will encourage the same by, for example, setting up a new reinsurance company, merging various state-owned insurance companies to undertake reinsurance activities, providing incentives to form a ‘pool’ or consortium for certain risks e.g. natural disaster, or minimizing double taxation for the insurance industry.
- Requirement to obtain insurance cover from a licensed insurance company in Indonesia. Article 25 of the New Insurance Law provides that an Insured Object1 in Indonesia may only be insured by an insurance company and Syariah insurance company which are licensed by the OJK, except where:
- no insurance company or Syariah insurance company in Indonesia, whether by itself or together with others, has the ability to cover or manage the insurance risk or Syariah insurance risk in relation to the relevant Insured Object; or
- no insurance company or Syariah insurance company in Indonesia is prepared to provide insurance or Syariah insurance coverage in relation to the relevant Insured Object.
In this regard, the New Insurance Law largely preserves the position adopted by the pre-existing Law and regulations, which also mention the above as circumstances under which an Insured Object in Indonesia may obtain insurance coverage from an insurance company that is not licensed by the OJK (e.g. from a foreign insurer). However, the New Insurance Law further limits the circumstances that would allow such an arrangement to be entered into by an Insured Object in Indonesia. The most apparent change is the removal of an exception that has until now been available under the previous Insurance Law whereby an Insured Object in Indonesia that is owned by a foreign citizen or legal entity has been permitted to obtain insurance coverage from an insurance company that is not licensed by the OJK. It will be important to monitor how OJK responds to this change in practice, including how this change may affect existing insurance policies.
- Policyholder Protection. Another key aspect of the New Insurance Law is increased policyholder or consumer protection. In particular, the New Insurance Law:
- Obliges insurance companies to participate in a policyholder protection program. The New Insurance Law provides that the implementation of this program will be implemented by further primary legislation which must be introduced at the latest within 3 years of the New Insurance Law being promulgated. The policyholder protection program is expected to be similar with the Indonesian Deposit Insurance Corporation (“Lembaga Penjamin Simpanan”) which apply to the banking sector.
- Also requires insurance companies to adhere to certain minimum standards in relation to policies, premiums or contribution, underwriting and KYC, claims handling, expertise in insurance sector, distribution or marketing of products and handling of customer complaints. Significantly, the New Insurance Law provides that, in the context when premiums are paid through insurance agents, the insurance coverage shall commence once the premium is received by the insurance agent. In addition, the insurance company must pay out any claims once the insurance agent has received the premium, even if the insurance agent has yet to pass on the premium to the insurance company.
- Legal Form. The New Insurance Law provides that entities undertaking insurance activities must be in the form of either a limited liability company, cooperative, or a mutual association (“usaha bersama”). In the case of mutual association, it must already be in existence at the time when the New Insurance Law is promulgated. The New Insurance Law seeks to preserve existing insurance undertakings which take the form of mutual association, but the elucidation to the relevant provision seeks to encourage such entities to be converted into cooperative forms.