New Insurance Law

A comprehensive new insurance law passed by Indonesia's parliament could have major consequences for joint venture companies operating in this rapidly growing insurance market. On September 23, 2014, the Indonesian Parliament passed a new law on insurance (New Insurance Law) which came into effect on October 23 replacing Law No. 2 of 1992 on Insurance Business (Old Insurance Law).

The New Insurance Law sets out a comprehensive regulatory framework for Indonesia's insurance sector. It applies to all insurance business companies (IBCs), whether insurers, reinsurers, brokers, agents or loss adjusters.

In addition to providing greater regulation of insurance business, the new law also has an underlying nationalistic sentiment, evidenced by the approach to foreign ownership. Whilst any change to maximum foreign ownership levels (currently 80 per cent) has been held over until an implementing Government Regulation is issued, which will happen within 30 months, the New Insurance Law does introduce several fundamental changes that foreign investors need to consider carefully.

Indonesian shareholders of IBCs must be fully owned by Indonesian citizens

Under both the Old Insurance Law and the New Insurance Law, Indonesian shareholders must hold at least 20 per cent of the issued capital of any joint venture IBC, while foreign shareholders can hold up to 80 per cent.

Under the Old Insurance Law, the Indonesian shareholders of an IBC could be Indonesian citizens and/or Indonesian legal entities fully owned by Indonesian citizens and/or Indonesian legal entities. The New Insurance Law has removed the italicised words meaning that an Indonesian corporate IBC shareholder must now ultimately be fully owned by Indonesian citizens in order to qualify as Indonesian. This now makes unlawful the use of the dual-layer PMA structure1 which foreign entities have utilised to ultimately own 100 per cent of an IBC.

Insurance companies have five years in which to either:

  • ensure that the shares that must be held by Indonesian shareholders are all directly or indirectly held by Indonesian citizens; or
  • conduct an initial public offering, we presume with a minimum free float of 20 per cent.

Since many joint venture insurance companies operating in Indonesia are currently fully controlled by foreign investors through utilising a dual-layer PMA structure to own shares in excess of the foreign direct investment limit of 80 per cent, this change in law could have a major impact.

Single presence policy

The new law also introduces a single presence policy for the insurance sector. Under the new regime, a person or other legal entity can, at any time, only be a controlling shareholder in one life insurance company, one general insurance company, one reinsurance company, one sharia life insurance company, one sharia general insurance company and/or one sharia reinsurance company. Such restriction will not apply to the Indonesian Government.

Shareholders with controlling interests in more than one such insurance company have three years to comply. It follows that several prominent global insurers presently operating in Indonesia will need to sell or merge their Indonesian operations in order to comply with this requirement.

Other noteworthy developments flowing from the New Insurance Law

  • Insurance and reinsurance companies must separate into a stand-alone entity all sharia divisions within ten years from the enactment of the New Insurance Law, or when the sharia component exceeds 50 per cent of the total insurance portfolio, whichever is the earlier.
  • The insurance for any asset or risk located in Indonesia must be placed with a local insurer, irrespective of ownership of that asset or responsibility for a risk, unless no local insurer is able or willing to underwrite the risk. This removes the previous concession that allowed foreign entities to purchase insurance from offshore insurers.
  • A new policy assurance programme replaces the existing mandatory guarantee fund, with the aim of providing protection to policyholders in case their insurer is liquidated or has its licence revoked.
  • Insurance and reinsurance companies must optimise domestic capacity. In other words, domestic insurers and reinsurers must provide local reinsurance coverage 'as far as possible'. The intention is to encourage all insurers and reinsurers (both conventional and sharia) to assist with the expansion of the local market.

Footnote

1The dual-layer PMA structure relied on Article 8(1)(a) of the Old Insurance Law. The rationale is that (a) being a limited liability company incorporated in Indonesia, a PMA company is recognised as an Indonesian legal entity under Indonesia's Constitution and Company Law, and (b) a dual-layer PMA structure satisfies the requirement of an 'Indonesian legal entity fully owned by an Indonesian legal entity' (i.e., another PMA company). Accordingly, a dual-layer PMA structure is adequate to qualify as an Indonesian shareholder of an insurance company.