25 Jul 2013
REGULATION REGARDING FINANCIAL HEALTH OF INSURANCE AND REINSURANCE COMPANIES

Regulation No. 53/PMK.010/2012 of the Minister of Finance (“MOF”) regarding Financial Health of Insurance and Reinsurance Companies (“Regulation”) which was issued last year has been in force since 1 January 2013. The Regulation revokes the following previous regulations:
-Article 21, 22, 28, and 31 of MoF Decree No. 422/KMK.06/2003 on Conduct of Insurance and Reinsurance Business;
-MoF Decree No. 424/KMK.06/2003 on Financial Health of Insurance and Reinsurance Companies, as lastly amended by MoF Regulation No. 158/PMK.010/2008;
-Article 18 of MoF Decree No. 426/KMK.06/2003 on Business Permits and Organizational Structure of Insurance and Reinsurance Companies; and
-MoF Decree No. 504/KMK.06/2004 on Financial Health of Insurance and Reinsurance Companies for Incorporated Entities Not Classified as Limited Liability Company.

The insurance and reinsurance companies meant in this Regulation are insurance and reinsurance companies which are subject to Law No. 2 of 1992 regarding Insurance Business (“Insurance Company/ies”).

Some highlights of the Regulation are as follows:

Financial Health / Risk Base Minimum Capital
Insurance Companies are required to maintain at all times a solvency level which is not less than 100% of their risk based minimum capital. Further, they are required to set out an annual solvency level which is not less than 120% of their risk based minimum capital, and the MOF may require them to raise this solvency target by considering the possible risks of a strategy change and/or business expansion plan.

Solvency Level
The Regulation defines ‘solvency level’ as the difference between the Company’s total permitted assets and its total liability. What is meant by ‘permitted assets’ are assets which are permitted to be included in the calculation of the solvency level, comprising (i) ‘investment assets’, such as pure gold, shares traded in the stock exchange, mutual funds, real estate, investment funds, and (ii) ‘non-investment assets’ such as reinsurance, insurance claim, investment bills, and policy loans. The permitted assets must be owned and controlled the Company, not under a dispute, not being attached, and not being blocked by the authorities.

Reinsurance Support and Self-Retention
The Regulation requires these Insurance Companies to obtain (i) automatic reinsurance support for every line of insurance they offer including automatic reinsurance for catastrophic risks; or (ii) facultative reinsurance support in the event that they cannot get the automatic reinsurance or in the event that the automatic reinsurance support does not cover the risks they have to bear. In seeking the reinsurance support, priority must be given to national reinsurance companies.
The Regulation also requires these Companies to have self-retention for each risk managed and to set up their maximum and minimum self-retention margins based on their risk and loss profile.

Guarantee Fund and Reporting Obligation
The Regulation stipulates that 20% of the minimum capital of these Companies must be administered by a custodian bank. These Companies are also required to submit quarterly reports and annual reports. (By: Anastasia Irawati)