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New Obligation for Borrowers of Offshore Loans

On October 28, 2014, Bank Indonesia issued Regulation No. 16/20/PBI/2014 on Implementation of the Prudential Principle in the Management of Offshore Loans for Non-Bank Corporations (“Regulation”). This Regulation reflects the Government’s concern about offshore borrowing and its impact on the financial health of borrowers, particularly with respect to currency risk, liquidity risk and overleverage risk.

The Regulation may impact investment structuring by foreign investors, who often combine equity capital and loans when capitalizing their investments.

♦  Prudential Principle

According to the Regulation, non-bank corporations that receive loans in a foreign currency must implement the “prudential principle,” which includes obligations to fulfill a minimum hedging ratio, minimum liquidity ratio and minimum credit rating. Hedging ratio is defined as the ratio of total hedged value and negative margin to foreign exchange assets and foreign exchange liabilities. Liquidity ratio is the ratio of foreign exchange assets to foreign exchange liabilities. Credit rating is a valuation conducted by a rating agency to portray the financial condition or credit worthiness of a company.

The Regulation will enter into force on January 1, 2015, with minimum ratios and phases as follows:

The prudential principle obligations do not apply to foreign exchange loans in the form of trade credits, and the credit rating obligations do not apply to foreign exchange loans used for refinancing and foreign exchange loans from international creditors for the purpose of financing infrastructure projects.

♦  Obligation to Report and Sanctions

Borrowers shall submit a report and supporting documents including audited financial year reports or quarterly financial reports to Bank Indonesia on the implementation of the prudential principle. Failure to report will lead to administrative sanctions in the form of written warning starting from the third quarterly financial report in 2015. Bank Indonesia will circulate the warning letters to interested parties, such as foreign creditors, Ministry of State Owned Enterprises, Ministry of Finance c.q. Directorate General of Tax, Financial Services Authority, and Indonesia Stock Exchange (for listed companies). The credit rating obligation applies to offshore loans signed or issued by January 1, 2016.

November 4, 2014

by Bonar

Impact of the New Insurance Law on Insurance Supporting Businesses

As discussed in our recent newsflash, the new Law on Insurance (“New Insurance Law”) passed by the House of Representatives on September 23, 2014, will bring about major changes for the insurance sector. A number of regulations are expected to be issued to implement provisions of the New Insurance Law and to accommodate the shift of authority over the insurance sector from the Minister of Finance (“MOF”) to the OJK, which occurred as of December 30, 2012, in accordance with Law No. 21 of 2011 on the Financial Services Authority (“OJK Law”).

♦  STATUS OF “INSURANCE SUPPORTING BUSINESSES” UNDER THE NEW INSURANCE LAW

Under the previous law on insurance, Law No. 2 of 1992 on Insurance Business (“Old Insurance Law”), parties providing auxiliary or support services for insurance businesses were classified as “Insurance Supporting Businesses”. The term Insurance Supporting Business is no longer used in the New Insurance Law. Instead,

1. Insurance and reinsurance brokerage firms and claims adjuster companies are now categorized as Insurance Business Entities (along with insurance and reinsurance companies), whereas
2. Insurance agents and actuarial consulting companies are no longer considered part of Insurance Business, and are only addressed with minimum provisions.

Because insurance agents and actuarial consulting companies are excluded from Insurance Business, they are only subject to provisions that explicitly refer to them. This has the legal consequence that none of the implementing regulations of the Old Insurance Law will apply, absent specific reference. We understand that OJK will continue to process applications that were filed prior to enactment of the New Insurance Law under the former regulatory regime.

♦  BROKERAGE FIRMS

The New Insurance Law distinguishes between insurance brokerage firms and reinsurance brokerage firms. Insurance brokerage firms provide consultation or intermediary services relating to insurance coverage and act on behalf of policyholders in settling claims, whereas reinsurance brokerage firms provide similar services regarding reinsurance placements and act on behalf of insurance, guarantee and reinsurance companies.

Licensing

All brokerage firms are required to obtain a business license from the OJK in accordance with MOF Decree No. 425/KMK.06/2003 on Licensing and Implementation of Business Activities of Insurance Supporting Business Companies (“Licensing Regulation”).

Ownership

Considering that brokerage firms are classified as Insurance Business Entities under the New Insurance Law, the ownership rules under the New Insurance Law apply.

According to the New Insurance Law, Insurance Business Entities must be owned entirely by Indonesian individuals or legal entities, or can be jointly owned by Indonesian individuals/entities in partnership with foreign legal entities. Note that the New Insurance Law defines Indonesian legal entities as those directly or indirectly owned entirely by Indonesian citizens, meaning that a PMA company that is ultimately 100% owned by Indonesian shareholders can qualify as a local shareholder.

For a foreign legal entity to hold shares in an Indonesian Insurance Business Entity, it must be in the same line of business, or hold a subsidiary in the same line of business, as the target company. Foreign individuals are limited to acquiring shares through stock exchanges.

The exact percentage of permitted foreign ownership will be further stipulated under a Government Regulation, but for the time being, Government Regulation No. 73 of 1992 on Organizing Insurance Business, as amended (“Insurance Regulation”), caps foreign ownership at 80% at the time of establishment, with a minimum initial investment of IDR 1 billion, which must be entirely paid up. We understand that the foreign ownership cap may be significantly reduced in the forthcoming Government Regulation.

Fit and Proper Test

Under OJK Regulation No. 4/POJK.04/2013 on Fit and Proper Test of Primary Parties in Insurance Companies, Pension Funds, Financing Companies, and Credit Insurance Companies, the following parties of a brokerage firm are required to pass the fit and proper test upon being nominated, periodically to maintain their position, and at any time required by the OJK:

1. Directors;
2. Commissioners;
3. Members of the representative body;
4. Controlling shareholders; and
5. Experts and foreign workers.

Good Corporate Governance

To implement good corporate governance under OJK Regulation No. 2/POJK.05/2014 on Good Corporate Governance for Insurance Companies (“Corporate Governance Regulation”), brokerage firms are required to appoint at least two directors and two commissioners if the annual income derived from providing intermediary services exceeds IDR 10 billion. There are also provisions that specifically apply to directors, commissioners and shareholders of brokerage firms, which cover:

1. Composition and obligations of the board of directors and board of commissioners; and
2. Requirements and prohibited conduct applicable to directors, commissioners and shareholders.

In addition, brokerage firms are obligated to follow rules under the Corporate Governance Regulation on:

1. Remuneration and wage policies for directors, commissioners, and employees;
2. Public information disclosure;
3. Relations with stakeholders and insurance agents; and
4. Business ethics.

OJK Levies

Brokerage firms are obligated to pay levies imposed by the OJK based on Government Regulation No. 11 of 2014 on Levies by the Financial Services Authority, covering:

1. Direct service fee of IDR 5 million for each business license application; and
2. Annual fees amounting to 1.2% of their total business revenue for the respective year.

No Composite

The New Insurance Law prohibits composite brokerage firms, and consequently, insurance brokerage firms are only allowed to carry out insurance brokerage activities, while reinsurance brokerage firms are limited to providing reinsurance brokerage services.

♦  CLAIMS ADJUSTER COMPANIES

Claims adjuster companies are those that provide services to appraise claims and consultation services on insured objects (such as property, motor vehicles and personal liability).

With the exception of the mandatory minimum initial investment, the same provisions that apply to brokerage firms also apply to claims adjuster companies. There is no minimum initial investment for claims adjuster companies.

♦  INSURANCE AGENTS

Insurance agents can be either sole proprietorships or employees of an agency that provide marketing services on behalf of insurance companies. They may also receive premium payments from policyholders on behalf of their insurance company partner.

Applicable Provisions under the New Insurance Law

Because insurance agents are not included in the definition of Insurance Business Entities under the New Insurance Law, only specific provisions under the New Insurance Law apply to insurance agents, including requirements to be registered with the OJK, possess sufficient competence regarding insurance matters, and follow good corporate governance provisions.

♦  ACTUARIAL CONSULTING COMPANIES

In providing services to insurance and reinsurance company clients, actuarial consulting companies provide reserve analyses and calculations, issue actuarial reports, evaluate risks and design insurance programs. While actuarial consulting companies are now excluded from regulation as Insurance Business Entities, individual actuaries that are employed by Insurance Business Entities continue to be subject to OJK oversight and must undergo the fit and proper test, while non-employee actuaries that intend to provide services to Insurance Business Entities must be registered with the OJK.

Applicable Provisions for Actuarial Consulting Companies

The most notable provision under the New Insurance Law is the return of supervisory authority over actuarial companies from the OJK to the MOF. Under MOF Decree No. 210/KMK.01/2013 on Implementation of Duties and Functions of the Former Capital Market and Financial Institutions Supervisory Agency, the Accountant and Appraiser Supervisory Center (Pusat Pembinaan Akuntan dan Jasa Penilai – “PPAJP”) assumed regulatory authority over actuarial consulting companies, although in practice, OJK has continued to act as the regulator  since assuming oversight of insurance businesses at the end of 2012.

Now that the implementing regulations of the Old Insurance Law no longer apply to actuarial consulting companies, the MOF plans to issue its own regulations to govern the sector. We understand that a draft regulation has been prepared and issuance is pending official delegation from the MOF. For now, the transitional provisions of the New Insurance Law allow actuarial consulting companies to continue operating under existing business licenses.

October 27, 2014

by Bonar

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
appraisers);
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

by Bonar