Client Newsflash

New Comprehensive Umbrella Law for the Insurance Sector

One of the most anticipated draft laws circulating in recent years was finally passed by the House of  Representatives (“House”) on September 23, 2014. The Bill on Insurance will replace the current o bsolete legislation governing the insurance sector – Law No. 2 of 1992 on Insurance Companies (“1992 Law”) – when it becomes a law and receives a number after being signed by the President (or by operation of law 30 days after being passed by the House).

The Bill aims to facilitate the constantly growing insurance sector, which can no longer be accommodated by  the 1992 Law. To this end, the Bill extends to additional insurance businesses previously unregulated under the 1992 Law and provides a generally broader scope of provisions compared to the 1992 Law.

Aspects under the Bill that are discussed below include:
1. Scope, definition, and permitted legal forms of insurance companies under the Bill;
2. Ownership provisions, which include new restrictions for controlling shareholders;
3. Controllers;
4. Insurance policyholder guarantee program;
5. Statutory administrators;
6. Fit and proper test of key individuals;
7. Mandatory separation of sharia units to become separate companies;
8. New provisions for professions providing services to insurance companies; and
9. Sanctions.

♦  Scope and Definition

“Insurance business” as regulated under the Bill includes insurance and reinsurance, whether operated based  on conventional or sharia principles, as well as insurance and reinsurance brokerage and loss adjusting. The inclusion of sharia insurance companies is a step forward for the insurance sector, considering that the 1992 Law did not address them, although they were addressed as business units attached to conventional insurance companies in Government Regulation No. 73 of 1992 on Organizing Insurance Business, as lastly amended by Government Regulation No. 81 of 2008 (“GR 73”).

While the Bill expands the definition of “insurance business,” the concept of “insurance supporting business”  has been abandoned. As such, insurance agents and actuarial consulting companies are no longer regarded as  part of insurance business.

Insurance Company Classifications

The Bill recognizes two types of insurance companies, both of which can be conventional or sharia:

1. General insurance companies; and
2. Life insurance companies.

General insurance companies can provide health and accident insurance products for losses, damages, costs,  lost profits and third party liability. General insurers can also provide reinsura nce for insurance companies.

Life insurance companies can provide health and accident insurance and annuities.

Apart from these insurance company types, the Bill also governs:

1. Reinsurance companies, whether conventional or sharia, which can only provide reinsurance services;
2. Insurance brokers, who provide consulting and intermediary services for policyholders and act on  their behalf when purchasing insurance and settling claims;
3. Reinsurance brokers, who are act on behalf of insurance companies, underwriters or other  reinsurance companies in settling claims; and
4. Insurance loss adjustors, who evaluate claims and provide consultation regarding insured objects, such as property and motor vehicles.

Insurance business entities are required to be established as a limited liability company or cooperative. Mutual organizations are also acknowledged by the Bill as a valid legal form, but only for those already in existence as of the Bill’s enactment.

♦  Ownership

An insurance company must be owned entirely by Indonesian individuals or legal entities, or jointly owned by  Indonesian individuals or legal entities together with foreign legal entities. Indonesian legal entities can include foreign investment (PMA) companies, as long as they are ultimately directly or i ndirectly owned entirely by Indonesian citizens.

Only foreign legal entities that are in the same line of insurance business, or hold a subsidiary in the same line  of insurance business, may hold shares in an Indonesian insurance company, and foreign individuals are limited to acquiring shares of insurance companies through stock exchanges.

The exact percentage of permitted foreign ownership will be further stipulated under a Government Regulation, but for the time being, GR 73 caps foreign ownership at 80 percent at the time of establishment/initial investment, and foreign ownership of an insurance company can be increased subsequently by means of dilution as long as the total capital invested by Indonesian shareholders remains the same.

Controlling Shareholders

The Bill introduces new rules for controlling shareholders. Under Financial Services Authority (Otoritas Jasa  Keuangan – “OJK”) Regulation No. 4/POJK.05/2013 of 2013 regarding Fit and Proper Test of Primary Parties in  Insurance Companies, Pension Funds, Financing Companies, and Credit Insurance Companies (“Fit and Proper Regulation”), a controlling shareholder is an individual or entity that fulfills any of the following conditions:

1. Owns more than 25 percent of issued shares; or
2. Owns less than 25 percent of issues shares but has direct or indirect control over the company.

A single shareholder can be a controlling shareholder of only one of each of the following companies:

1. Life insurance company;
2. General insurance company;
3. Reinsurance company;
4. Sharia life insurance company;
5. Sharia general insurance company; and
6. Sharia reinsurance company.

Parties that exceed this limitation are given 3 years from the enactment of the Bill to comply. Procedures and sanctions will be regulated by the OJK.

♦  Controllers

“Controller” (pengendali) is a new concept introduced by the Bill. Controllers are different from controlling  shareholders, as the Bill defines Controller as a party who possesses the power to appoint or influence the directors or commissioners, whether directly or indirectly.

Every insurance or reinsurance company must appoint at least one Controller, who must be notified to the OJK. The OJK will appoint the Controller, if the company does not do so. Once appointed, Controllers are prohibited from withdrawing from their position without the prior approval of the OJK.

♦  Guarantee Program

Insurance companies must become members of a policyholder guarantee program, which is similar to the insurance provided to bank deposit holders by the Deposit Insurance I nstitution. The policyholder guarantee program will be provided for under separate legislation within 3 years of the Bill becoming effective.

♦  Statutory Administrator

A statutory administrator is an official appointed by the OJK to take over the management of an insurance company if the company in question is:
1. Sanctioned with business activity restrictions;
2. In financial distress or unable to meet outstanding obligations; or
3. Carrying out activities in contradiction to prevailing laws and regulations, which includes facilitating financial crimes and money laundering.

♦  Fit and Proper Test

The following parties under an insurance company must pass the Fit and Proper Test held by the OJK before  being appointed and to maintain their position:

1. Directors (or equivalent);
2. Commissioners (or equivalent);
3. Sharia supervisory board members;
4. Internal actuaries and auditors; and
5. Controllers.

The Fit and Proper Test is elaborated in detail under the Fit and Proper Regulation.

♦  Separation of Sharia Business Units

The Bill requires sharia business units to be separated from the main entity to form a separate company under alternative circumstances:

1. If the sharia insurance and investment capital reaches 50 percent of the insurance and investment capital of the main entity; or
2. Within 10 years of the Bill coming into force.

♦  Professions Providing Services to Insurance Companies

In addition to insurance companies, the Bill covers professions that provide services for insurance companies, including actuaries, public accountants, and appraisers.

Individuals working in these professions must register with the OJK prior to providing services for insurance  companies. Other professions may also be determined as being subject to this obligation by the OJK. Details on the requirements and procedures for registration will be further regulated by the OJK.

♦  Sanctions

The Bill incorporates additional varieties of administrative sanctions for the OJK to impose, as well as more strict criminal charges for severe violations. The different types of administrative sanctions include:
1. Written warning;
2. Partial or total business activity restriction;
3. Marketing prohibition;
4. License revocation;
5. Registration revocation (specifically for brokers, agents, actuarial consultants, public accountants, and
6. Approval revocation (specifically insurance mediation institutions and insurance associations);
7. Administrative fine; and
8. General prohibition to hold a managerial position in an insurance company or to become a controller
or controlling shareholder of an insurance company.

October 17, 2014

The foregoing material is the property of may not be used by any other party without prior written consent. The information herein is of general nature and should not be treated as legal advice, nor shall it be relied upon by any party for any circumstance. Specific legal advice should be sought by interested parties to address their particular circumstances.

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