19 Feb 2024
Indonesia Ups Mandatory Capital and Equity Requirements for Insurers Amid Continuing Jitters

A corruption case involving then executives of state-owned insurer PT Asuransi Jiwasraya (Persero) culminated in the company’s failure to pay out IDR 16 trillion (USD 1.1 billion) in matured policies due in October and November 2018.

The case garnered significant public attention until it sank from the headlines following the outbreak of the Covid-19 pandemic in 2020. However, it was only one of a series of similar cases down the years that have left the Indonesian public jittery about the country’s insurance industry, especially life insurance.

In mid-2023, the Indonesian Financial Services Authority (Otoritas Jasa Keuangan / “OJK”) revealed that at least 13 insurance companies had been placed under supervision in relation to payment defaults on matured policies to customers. This prompted the OJK to launch its “Restoring Confidence through Industry Reform” initiative on 23 October 2023, which includes a 2023-2027 roadmap for the development and consolidation of Indonesia’s insurance industry.[1] In line with this roadmap, the OJK recently issued Regulation No. 23 of 2023 on the Licensing and Strengthening of Insurance, Sharia Insurance, Reinsurance and Sharia Reinsurance Companies (“Reg. 23”).[2]

Increased Minimum Paid-up Capital Requirement for New Insurers

Reg. 23 significantly increases the minimum paid-up capital requirement for a newly established (a) conventional or sharia insurance company (“Conventional Insurer”), and (b) conventional or sharia reinsurance company (“Sharia Insurer”) (collectively, “Insurer”).

The following table shows a comparison between the minimum paid-up capital requirements for new insurers under Reg. 23 compared with those imposed by its antecedent, OJK Regulation No. 67/POJK.05/2016 (and its subsequent amendments, collectively “Reg. 67/2016”)[3]:

*) Note: The more relaxed requirements for Sharia Insurers are explicable by the fact that the sharia insurance industry is still in its infancy in Indonesia, currently accounting for only 4.7% of total premium income.

The paid-up capital of a newly established Conventional Insurer must be paid in cash, upon completion of its incorporation, into a time deposit or current account held in its own name and maintained at an Indonesian bank. In the case of a Sharia Insurer, the time deposit or current account must be maintained at an Indonesian sharia bank.

Increased Equity Requirement for Existing Insurers

For existing Insurers, Reg. 23 imposes a mandatory obligation to gradually increase their equity. Broadly speaking, equity includes paid-up capital, together with other elements, such as retained earnings and receivables.

The required increase in equity must be effected in two phases, based on specific deadlines. Compliance with the equity increase requirement during the first phase was to be completed by no later than 31 December 2023. The following table shows the minimum amount for each type of insurer:

An Insurer with less than the minimum equity shown above is required to submit a minimum equity fulfilment plan within 6 months of the issuance of Reg. 23. Failure to do so is punishable with a fine of up to IDR 100 million.

The second phase of the equity increase requirement must be completed by 31 December 2028. The amounts involved for the second phase depend on the classification of each Insurer. The OJK classifies existing Insurers, based on the amount of their equity, as (i) Category 1 Insurance Company Groups (Kelompok Perusahaan Perasuransian / “KPPE 1”) and (ii) Category 2 Insurance Company Groups (“KPPE 2”).  The minimum equity levels to be achieved during the second phase for each category are as follows:

An Insurer that fails to achieve the minimum equity level stated above prior to expiry of the deadline will be subject to the following sanctions:

1. written warnings; and/or
2. a reduction in the company’s soundness rating.

Unfortunately, Reg. 23 fails to provide details on the procedures through which these sanctions may be imposed. Consequently, it is not clear whether the OJK must first issue the customary three written warnings prior to imposing a reduction in soundness rating. This would seem to permit the OJK, based on the severity of the violation, to immediately impose a reduction in soundness rating without issuing a prior warning.

As an Insurer’s soundness rating reflects its financial capacity, any reduction in it would obviously severely impact customer confidence, and would likely threaten the company’s continued existence as a going concern. Thus, this is a very far-reaching sanction and one that the OJK would need to think long and hard about before imposing.

New Option for Fulfilling Minimum Equity Requirement: Insurance Company Group Scheme

As under Reg. 67/2016, should an Insurer foresee that it may not be able to comply with the minimum equity requirement, it may do so through a merger or consolidation with another Insurer. However, Reg. 23 also introduces a new option, only available to affiliated Insurers, which is to enter into an “Insurance Company Group” (Kelompok Usaha Perusahaan Asuransi / “KUPA”) scheme. A KUPA arrangement allows an Insurer that suffers from low equity to join forces with an affiliated Insurer that boasts stronger financials.

Under the KUPA structure, the Insurer with the stronger equity structure acts as a “holding company” that directly controls all KUPA operations, whilst its weaker affiliate effectively becomes a “subsidiary” under the holding company’s control. Using this scheme, the “subsidiary” is only required to satisfy the first-phase minimum equity requirement, while fulfilment of the second-phase minimum equity requirement becomes the responsibility of the “holding company,” thus releasing the “subsidiary” from the obligation to comply with the requirement.

Tweak to Security Fund Rules

As under Reg. 67/2016, Reg. 23 also requires a newly established Conventional Insurer to maintain a security fund of at least 20% of its paid-up capital. The fund must be maintained in the form of:

1. a time deposit account with automatic renewal at an Indonesian bank that is not affiliated with the insurer; and/or
2. commercial paper issued by the  Indonesian government with maturity of at least 1 year after the date of business-license issuance.

Sharia Insurers are obliged to maintain the security fund as a time deposit held with a sharia bank or as sharia-based commercial paper issued by the Indonesian government.

As Reg. 67/2016 previously required the security fund to be maintained in a time deposit at an Indonesian bank, Reg. 23 thus expands the range of investments open to Insurers in this regard.

New Requirement for Foreign Shareholders

Despite the major changes in paid-up capital and equity requirements, Reg. 23 does not significantly alter the foreign shareholding restrictions applicable to Insurers. The maximum 80% foreign shareholding cap, as previously applied, is maintained under Reg. 23 as it expressly provides that the existing foreign shareholding restriction under Government Regulation No. 14 of 2018 (as amended) remains in effect.

However, Reg. 23 introduces a new requirement for a foreign entity to qualify as a shareholder of an Indonesian Insurer or parent company of an Indonesian Insurer. To qualify, a foreign entity is now required to have at least an “A” rating or equivalent from an internationally recognized ratings agency. This adds to the previous criteria that require foreign shareholders of Indonesian Insurers to: (i) operate a similar type of insurance business, and (ii) have equity that amounts to at least 5 times the size of its direct shareholding in the Indonesian Insurer at the time of establishment and at the time of any subsequent change of ownership of the Indonesian Insurer.

ABNR Commentary

While the increased safeguards introduced by Reg. 23 are to be welcomed and should help to reduce the level of defaults in the insurance sector, they are unlikely to do much in the short term to alleviate the public’s jitters, given how deeply rooted the problems appear to be, especially among local players. The introduction of the KUPA scheme is also to be welcomed as it provides an alternative route to compliance for Insurers that would otherwise be unable to meet the new requirements.

However, it is also difficult to envisage how certain aspects of Reg. 23/2023 will be applied in practice, given that image and prudence are of the utmost importance in the insurance industry. If the OJK were, for example, to announce a reduction in a particular Insurer’s soundness level or even publicly announce that it has failed to satisfy any of the new capital or equity requirements, this would likely damage its business, leading to the prospect of potential collapse.

However, it is likely that the OJK will have carefully considered eventualities such as this in the deliberations leading up to the issuance of Reg. 23/2023 and will use thus its powers wisely.

By partner Mr. Ayik C. Gunadi (agunadi@abnrlaw.com) and senior associate Mr. Muhammad Muslim (mmuslim@abnrlaw.com)

This ABNR News and its contents are intended solely to provide a general overview, for informational purposes, of selected recent developments in Indonesian law. They do not constitute legal advice and should not be relied upon as such. Accordingly, ABNR accepts no liability of any kind in respect of any statement, opinion, view, error, or omission that may be contained in this legal update. In all circumstances, you are strongly advised to consult a licensed Indonesian legal practitioner before taking any action that could adversely affect your rights and obligations under Indonesian law.