This country-specific Q&A provides an overview to insurance and reinsurance laws and regulations that may occur in Indonesia.
This Q&A is part of the global guide to Insurance & Reinsurance (3rd edition). For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/insurance-and-reinsurance-3rd-edition
How is the writing of insurance contracts regulated in your jurisdiction?
The Indonesian Commercial Code, the Indonesian Civil Code, Law 40 of 2014 on Insurance (Insurance Law) and Financial Services Authority (OJK) Regulation 23/POJK.05/2015 on Insurance Products and the Marketing of Insurance Products (OJK Regulation 23/2015) regulate the writing of insurance contracts in Indonesia. OJK Regulation 23/2015 specifically provides for the minimum requirements and restrictions applicable to insurance contracts (e.g. payment methods, including required currency, grace periods for premiums and contributions, and dispute settlement mechanisms).
Are types of insurers regulated differently (i.e. life companies, reinsurers?)
Different insurer and reinsurer types (e.g. life, general and sharia) are all regulated under the umbrella of the Insurance Law and various implementing regulations.
Are insurance brokers and other types of market intermediary subject to regulation?
Although generally regulated in the Insurance Law, insurance brokers, reinsurance brokers, loss adjusters and insurance agents are subject to separate specific regulations that are different to those for insurers and reinsurers. For example, OJK licensing regulations require insurance brokers, reinsurance brokers, loss adjusters and insurance agents to be registered with OJK. In addition, insurance agents must be certified by a relevant insurance industry association.
Is authorisation or a licence required and if so how long does it take on average to obtain such permission?
Insurance companies must obtain a business licence from OJK in order to conduct business in Indonesia. OJK will issue such a licence within 20 business days after receiving a “complete” business licence application, consisting of documents required under the regulations (and at OJK’s discretion), as well as attending meetings with OJK, if required. In practice, the total process may take up to three months (if all the required documents and information are readily available).
Are there restrictions or controls over who owns or controls insurers (including restrictions on foreign ownership)?
Under the latest 2018 OJK regulations, a foreign investor may only own up to 80% of a privately-held insurance company’s paid-up capital (subject to grandfathering for those foreign investors in insurance companies that already owned more than 80% shareholding before the 2018 OJK regulations came into force). No such restriction applies to publicly-listed insurance companies.
Under the Insurance Law, a foreign investor/shareholder in an Indonesian insurance or reinsurance company shareholder must:
(a) be an insurance company that conducts the same type of insurance business as the company being acquired, or a holding company with a subsidiary, where the subsidiary conducts the same type of insurance business as the company being acquired;
(b) have “equity” of at least five times the direct participation in the insurance company at the time of the insurance company’s change of ownership; and
(c) satisfy any other requirements specified by OJK, such as information on the shareholder’s authorised representatives and criminal records (if any).
If an Indonesian insurance or reinsurance company shareholder is that company’s controlling shareholder, that shareholder may not become a controlling shareholder in any other Indonesian insurance or reinsurance company, if the two companies engage in the same type of insurance business in Indonesia.
In addition, all controllers (being either controlling shareholders or any party that has the indirect ability to determine the composition or influence the actions of the board of directors and/or board of commissioners of an insurance company) must pass OJK’s fit and proper test.
Is it possible to insure risks in your jurisdiction without a licence or authorisation? (i.e. on a non-admitted basis)?
The Insurance Law does not contemplate insurance being provided on a non-admitted basis. Instead, the Insurance Law and its implementing regulations require that every insurance business in Indonesia be duly licensed by OJK (as considered in our response to question 4).
However, in certain limited circumstances where insurance or reinsurance coverage is not available in Indonesia, non-admitted insurance or reinsurance may be available.
What penalty is available for those who operate in your jurisdiction without appropriate permission?
Any person who operates, without a business licence:
(a) an insurance, sharia insurance, reinsurance or sharia reinsurance business, may be imprisoned for up to 15 years and / or fined up to Rp200 billion (about US$14 million);
(b) an insurance brokerage or reinsurance brokerage business, may be imprisoned for up to 10 years and / or fined up to Rp3 billion (about US$200,000); or
(c) a loss adjustment insurance business, may be imprisoned for up to three years and / or fined up to Rp1 billion (about US$70,000).
How rigorous is the supervisory and enforcement environment?
The insurance sector is highly regulated and, as a consequence, the supervision and enforcement environment is quite rigorous. OJK’s supervisory powers, which are provided for under the Insurance Law, include, among other things: approving, rejecting and revoking insurance business licences; and approving and rejecting changes of controller, including by conducting fit and proper tests. OJK is also authorised to investigate insurance and reinsurance companies, and other parties affiliated with, or which provide services to, insurance companies.
OJK also exercises its supervisory powers through its review of reports, which are required to be regularly submitted to OJK by insurance and reinsurance companies. If a company fails to submit such reports, it may be subject to administrative sanctions, ranging from written warnings to the ultimate sanction of business licence revocation.
Further, OJK regularly conducts audits of insurance and reinsurance companies.
How is the solvency of insurers (and reinsurers where relevant) supervised?
OJK requires insurance and reinsurance companies to:
(a) maintain their financial health (e.g. by maintaining certain solvability levels, technical reserves, investment adequacy levels, equity and collateral funds); and
(b) submit quarterly and annual reports to OJK.
Specifically, a company’s solvability level must be at least 100% of the company’s Risk Based Capital (RBC). A company is also required to set an annual target for its internal solvability level of at least 120% of its RBC, taking into account the company’s risk profile and stress test. OJK may, after considering the company’s risk profile and stress test, require the company to increase and satisfy its internal solvability level target.
What are the minimum capital requirements?
The minimum issued and paid-up capital requirements are:
(a) Rp150 billion (about US$10.5 million) for an insurance company;
(b) Rp300 billion (about US$21 million) for a reinsurance company;
(c) Rp100 billion (about US$7 million) for a sharia insurance company;
(d) Rp175 billion (about US$12 million) for a shariareinsurance company;
(e) Rp3 billion (about US$200,000) for an insurance brokerage company;
(f) Rp5 billion (about US$350,000) for a reinsurance brokerage company; and
(g) Rp500 million (about US$35,000) for a loss adjustment company.
Is there a policyholder protection scheme in your jurisdiction?
Policyholder protection is ensured by:
(a) a guarantee fund maintained by the relevant insurance company, the form and amount of which is set by OJK; and
(b) OJK’s direct and indirect supervision of consumer protection procedures and policies, and their respective implementation. In this respect, OJK may impose administrative sanctions, ranging from written warnings to (ultimately) business licence revocation.
How are groups supervised if at all?
The Insurance Law provides for a single presence policy, such that a party can only be a controlling shareholder of one life insurance company, one general insurance company, one reinsurance company, one sharia life insurance company, one sharia general insurance company and one sharia reinsurance company.
Financial institutions of various types, including banks, insurance companies, securities companies, pension funds and financing companies that belong to a group of companies are referred to as Financial Conglomerates. For the purpose of supervising Financial Conglomerates, OJK implements specific, comprehensive regulations on good corporate governance that must be observed by Financial Conglomerates.
Do senior managers have to meet fit and proper requirements and/or be approved?
OJK Circular Letter 31/SEOJK.05/2016 on the Fit and Proper Test for Primary Parties of Non-Bank Financial Services Institutions provides that the following parties must pass a fit and proper test:
(a) controllers (as explained in our response to question 5); and
(b) directors, commissioners, pension fund executors, members of a sharia supervisory board, internal auditors and company actuaries.
Are there restrictions on outsourcing parts of the business?
Underwriting, claims approvals and actuarial functions may not be outsourced.
An Indonesian insurer may only outsource to foreign (offshore) legal entities engaging in limited activities, such as product research and development, information systems, and other functions that cannot be performed by the Indonesian insurer, subject to giving OJK prior notification.
How are sales of insurance supervised or controlled?
In selling its insurance products, a company may only use the following channels:
(a) direct marketing;
(b) insurance agents;
(c) bancassurance; and / or
(d) any entity other than a bank.
A company may also market “micro-insurance products”, which are low price, high volume and relatively simple to administer, such as health, life, travel, vehicle, house and personal accident insurance, through channels (a) to (d) above and / or marketers (ie. persons or groups of people who have knowledge of insurance and micro-insurance products, such as agricultural cooperatives).
Cooperation arrangements for the selling of insurance products must be set out in a written agreement that requires OJK’s prior approval.
Are consumer policies subject to restrictions? If so briefly describe the range of protections offered to consumer policyholders
OJK Regulation 1 of 2013 on Consumer Protection in the Financial Services Sector (OJK Regulation 1/2013) provides for consumer protection applicable to insurance products. Specifically, OJK Regulation 1/2013 provides for consumer protection applicable to, among other things, product design, the preparation and delivery of information, product offerings, dispute resolution, and consumer complaints.
OJK Regulation 1/2013 further provides that each financial service product document must be written simply, and provide a summary of the product together with up-to-date and accessible details.
Further, insurance sector-specific consumer protections are provided for under OJK Regulation 23/2015, which requires, among other things, that an insurance company:
(a) only conveys accurate and clear details about its products;
(b) develops sophisticated risk profile assessment policies and procedures; and
(c) handles all product complaints submitted by its policyholders, insured parties or participants.
Are the courts adept at handling complex commercial claims?
The Civil Court system (commencing in the relevant District Court) is authorised to administer both simple and complex commercial claims. However, judges’ experience in handling complex commercial cases may be quite limited, especially in rural areas of Indonesia.
Indonesian judges have broad discretion in the management of court proceedings and in choosing the relevant matters, including evidence, on which to base their judgments. As with most other civil law jurisdictions, Indonesia does not apply the doctrine of binding precedent, although judgments of the High Court and the Supreme Court can be used as evidence in proceedings, with the evidentiary weight to be determined at the judges’ discretion. Accordingly, Indonesian judgments, even at the highest level, can be inconsistent with each other.
Is alternative dispute resolution well established in your jurisdictions?
Law 30 of 1999 on Arbitration and Alternative Dispute Resolution (Law 30/1999) provides for several forms of alternative dispute resolution, including arbitration, mediation, consultation, negotiation, conciliation and expert evaluation.
Commercial agreements between Indonesian parties commonly provide for negotiation in the early stages of dispute resolution. Further, mediation is required as an initial step in civil court proceedings, as regulated under Supreme Court Regulation 1 of 2016 on Court-Sanctioned Mediation Procedures.
In relation to the financial sector, OJK Regulation 1/POJK.07/2014 on Alternative Dispute Resolution in the Financial Services Sector provides for internal and external dispute resolution procedures. Internal dispute resolution procedures deal with customer complaints, in which the relevant financial services company must attempt to settle the dispute by reaching consensus. Upon failure to reach consensus, the parties may settle a dispute through external dispute resolution (e.g., the Civil Court, the Pension Fund Mediation Agency, the Capital Markets Arbitration Board, the Alternative Dispute Institution for Indonesian Banking, the Bank Indonesia Mediation Team, or the Insurance Mediation and Arbitration Institution (Badan Mediasi dan Arbitrase Asuransi Indonesia or BMAI).
What are the primary challenges to new market entrants?
As discussed in our response to question 5 above, foreign ownership of the insurance business is subject to an 80% cap (unless grandfathered), and, as discussed in response to question 12 above, there is a single presence policy.
The limitation of foreign ownership means that new entrants must find a suitable local partner, which can be challenging. Given that nominee arrangements are prohibited under Indonesian law, the local partner must be a party that intends to invest in an insurance company.
Once an insurance company has been established, it has to deal with various issues such as financial illiteracy and competition in the market. Although the Indonesian market is considered huge, most of the population, particularly those living in the rural areas, are financially illiterate. The majority of Indonesians living in rural areas do not understand the role of insurance and therefore do not value its importance. Therefore, selling insurance products may be very challenging, particularly in these rural areas. On the other hand, those living in large urban areas with higher than average disposable income would be more likely to have already purchased insurance products from the many existing companies. As a consequence, for new market entrants, it is often difficult to effectively market insurance products in an extremely competitive market.
To what extent is the market being challenged by digital innovation?
Like many other countries, the rapid growth of technology has influenced the Indonesian financial industry. Significant developments in digital communications technology in recent years have resulted in a rapidly increasing number of financial technology (fintech) companies to support the financial services sector.
Digital innovation has given rise to a strong trend in online shopping in Indonesia. Media reports indicate that by the end of 2018 the number of online shoppers reached 11.9% of the total Indonesian population and is likely to continue growing as smartphone penetration increases.
For insurance and reinsurance companies, the development of digital innovation, the increase in the number of smartphone users and online shopping can result in new growth areas. Digital innovation has enabled insurers to tap into a broader range of prospects in the Indonesian market, with the potential to expand much further into rural areas. Digital innovation has also opened up new markets, such as online shoppers who wish to insure purchased products in case of damage during shipment or delivery.
Unfortunately, for insurance brokers and agents, the existence and development of digital innovation could potentially reduce their roles in the digital insurance market.
Given the significant pool of potential new customers using smartphones and internet, insurance companies are now in a race to take advantage of fintech companies’ extraordinary reach. This is achieved by way of collaboration between insurers and fintech companies, with insurers leveraging off of the technological advances made by fintech companies and the ability of fintech companies to find new prospects and obtain feedback on products (and potential products).
Although insurance product marketing and promotion can currently be carried out through digital marketing, new regulations concerning insurance product digital marketing are still in the pipeline, which may have a positive or negative impact on the insurance market. Regulation on digital insurance marketing is currently limited to micro-insurance products.
Over the next five years what type of business do you see taking a market lead?
Indonesian population reports indicate that approximately half of Indonesia’s population is under 30, with millennials (18 to 35 years old) numbering about 80 million. Given this dominant, young, targeted consumer population with a facility and thirst for digital technology, the businesses that are likely to take a market lead over the next five years would be those that focus on technological innovation and are able to adapt to the fast-changing digital world (particularly by cooperating with fintech companies).
Subject to the success of OJK’s financial literacy program (which seeks to educate the public on financial services and products), smartphone penetration, and the issuance of positive new regulations for digital marketing channels, it would appear that micro-insurance products and retail insurance, particularly those generated from online transactions, would likely lead the new markets in coming years.