Regulatory framework for insurance business

The new Insurance Law introduced significant changes to the sector, as follows:

• Local shareholding requirements. Insurance and reinsurance companies, sharia insurance and reinsurance companies, insurance and reinsurance brokerage companies and loss adjuster companies (insurance business companies) can only be owned by: Indonesian individuals and/or Indonesian legal entities that are directly or indirectly wholly owned by Indonesian individuals; or Indonesian individuals and/or Indonesian legal entities referred to in the point together with foreign individuals or legal entities engaged in the same insurance business or a holding company whose one subsidiary engages in the same insurance business.

The requirement in the first point above means that the local shareholder in an insurance business company must be ultimately owned by Indonesian individuals. This differs significantly from the previous regulation, under which the local shareholder could be ultimately owned by a foreign party. Insurance business companies have five years from the enactment of the new Insurance Law to comply with this requirement.

• Single presence policy. A party can only be a controlling shareholder in one of each of the following categories of insurance companies: life insurance; general insurance; reinsurance; sharia life insurance; sharia general; or sharia reinsurance.
  A shareholder who controls more than one entity in any one of the above categories must comply with this requirement within three years of the enactment of the new Insurance Law.

• Controller provision. Insurance and reinsurance companies must appoint one controller who will be responsible for any losses of the insurance/reinsurance company under its control. A controller is a party who, directly or indirectly, has the ability to appoint the board of directors (BOD) and board of commissioners (BOC), and/or can influence the actions taken by the BOD or BOC.
• Sharia unit separation. Sharia units of insurance and reinsurance companies must be separated into standalone entities within ten years of the enactment of the Insurance Law.
• Statutory management. The Financial Services Authority (Otoritas Jasa Keuangan or OJK) can appoint a party to take over the management of an insurance or reinsurance company if it: is the subject of restrictions on its business activities; is in an unsound condition and cannot meet its obligations, based on either the company’s or the OJK’s view; and was used to facilitate/conduct financial crimes such as money laundering.

The Insurance Law divides the insurance sector into two categories:

• Insurance business. This includes: insurance and reinsurance companies; sharia insurance and reinsurance companies; insurance and reinsurance brokerage companies; and insurance loss adjuster companies.
• Insurance/reinsurance-related activities. These include: actuary consultants; public accountants; appraisers; and other professions as stipulated by the OJK.

Other key areas regulated by the Insurance Law and its implementing regulations are: solvency requirements; foreign investment limitations; reporting requirements; fit and proper test for members of the BOD, BOC, sharia supervisory board, actuaries, internal auditors and controllers; good corporate governance; and capital and equity requirements.

The main body overseeing the insurance business in Indonesia is the OJK. The authority of the OJK is limited to financial service providers in Indonesia and it does not have extraterritorial effect on foreign insurance companies in the same group as the local insurance company. The OJK cannot therefore sanction the foreign sister company of a local insurance company if it violates the Indonesian Insurance Law. However, in practice, violations by a sister company could jeopardize the relationship between the local insurance company and the OJK (for example, leading to practical difficulties in obtaining OJK approvals).