Insurance and reinsurance in Indonesia: overview

A Q&A guide to insurance and reinsurance in Indonesia.

The Q&A gives a high level overview of the market trends and regulatory framework in the insurance and reinsurance market; the regulation of insurance and reinsurance contracts; the corporate structure of insurers and reinsurers; and the regulation of insurers and reinsurers, including regulation of the transfer of risk. It also covers: operating restrictions for insurance and reinsurance entities, including authorisation/licensing requirements; reinsurance monitoring and disclosure requirements; content requirements for policies and implied terms; insurance and reinsurance claims; insolvency of insurance and reinsurance providers; taxation; dispute resolution; and proposals for reform. Finally, it provides websites and brief details for the main insurance/reinsurance trade organisations in Indonesia.

To compare answers across multiple jurisdictions visit the Insurance and reinsurance Country Q&A tool.

This Q&A is part of the global guide to insurance and reinsurance. For a full list of jurisdictional Q&As visit www.practicallaw.com/insurance-guide.

Ira A Eddymurthy and Maria Yudhitama, SSEK Legal Consultants
Contents

Market trends and regulatory framework

1. What were the main trends in the insurance and reinsurance markets over the last 12 months?

The main trend in the insurance and reinsurance business over the last 12 months has been the acquisition of existing Indonesian insurance and reinsurance companies, rather than the establishment of new insurance/reinsurance companies (greenfield projects).

The 2014 report of the Financial Services Authority (Otoritas Jasa Keuangan) (OJK), the authority that oversees the Indonesian insurance industry, shows a 40% increase in insurance claims in 2014. In the authors' view, this was due to the numerous natural disasters that occurred in Indonesia in 2014 including floods, earthquakes and air disasters.

Regarding underwriting, there has been an emphasis on implementing the "know your customer" (KYC) principle as a tool to prevent insurance and reinsurance companies being used to launder money. The KYC principle is mainly applied to perceived high-risk persons (such as civil servants and public officials) and high-risk companies (such as property agents and automotive dealers).

 
2. What is the regulatory framework for insurance/reinsurance activities?

Regulatory framework

The main legislation for insurance and reinsurance business is the newly enacted Insurance Law, issued on 17 October 2014. The new Insurance Law (that is, Law No. 40 of 2014 regarding Insurance) revoked Insurance Law No. 2 of 1992. Implementing regulations under the old insurance law still prevail to the extent that they do not contradict provisions of the new Insurance Law.

The new Insurance Law introduced significant changes to the sector, as follows:

  • Local shareholding requirements. Insurance and reinsurance companies, sharia insurance and reinsurance companies, insurance and reinsurance brokerage companies and loss adjuster companies (insurance business companies) can only be owned by:

    • Indonesian individuals and/or Indonesian legal entities that are directly or indirectly wholly owned by Indonesian individuals; or

    • Indonesian individuals and/or Indonesian legal entities referred to in the point above together with foreign individuals or legal entities engaged in the same insurance business or a holding company whose one subsidiary engages in the same insurance business.

    The requirement in the first bullet point means that the local shareholder in an insurance business company must be ultimately owned by Indonesian individuals. This differs significantly from the previous regulation, under which the local shareholder could be ultimately owned by a foreign party. Insurance business companies have five years from the enactment of the Insurance Law to comply with this requirement.

  • Single presence policy. A party can only be a controlling shareholder in one of each of the following categories of insurance companies:

    • life insurance company;

    • general insurance company;

    • reinsurance company;

    • sharia life insurance company;

    • sharia general company; or

    • sharia reinsurance company.

    A shareholder who controls more than one entity in any one of the above categories must comply with this requirement within three years from the enactment of the Insurance Law.

  • Controller provision. Insurance and reinsurance companies must appoint one controller who will be responsible for any losses of the insurance/reinsurance company under its control. A controller is a party who, directly or indirectly, has the ability to appoint the board of directors (BOD) and board of commissioners (BOC) and/or can influence the actions taken by the BOD or BOC.

  • Sharia unit separation. Sharia units of insurance and reinsurance companies must be separated into standalone entities within ten years of the enactment of the Insurance Law.

  • Statutory management. The Financial Services Authority (Otoritas Jasa Keuangan) (OJK) can appoint a party to take over the management of an insurance or reinsurance company if it:

    • is the subject of restrictions on its business activities;

    • is in an unsound condition and cannot meet its obligations, based on either the company's or the OJK's view; and

    • was used to facilitate/conduct financial crimes such as money laundering.

As a result of the above requirements, an increase in restructurings of insurance and reinsurance companies is expected, particularly to meet the requirements on local shareholding, single presence policy, controller and separation of sharia units.

The Insurance Law divides the insurance sector into two categories:

  • Insurance business. This includes:

    • insurance and reinsurance companies;

    • sharia insurance and reinsurance companies;

    • insurance and reinsurance brokerage companies; and

    • insurance loss adjuster companies.

  • Insurance/reinsurance-related activities. These include:

    • actuary consultants;

    • public accountants;

    • appraisers; and

    • other professions as stipulated by the OJK.

As of the first quarter of 2014, the OJK has implemented levies on the industries it supervises, including the insurance business, in the form of annual and incidental levies for any licensing, approval, registration, authorisation and review of corporate action plans.

Other key areas that are regulated by the Insurance Law and its implementing regulations are:

  • Solvency requirements.

  • Foreign investment limitations.

  • Reporting requirements.

  • Fit and proper test for members of the BOD, BOC, sharia supervisory board, actuaries, internal auditors and controllers.

  • Good corporate governance.

  • Capital and equity requirements.

Regulatory bodies

The main body overseeing the insurance business in Indonesia is the OJK.

The authority of the OJK is limited to financial service providers in Indonesia and does not have extraterritorial effect on foreign insurance companies in the same group as the local insurance company. The OJK cannot therefore sanction the foreign sister company of a local insurance company if it violates the Indonesian Insurance Law. However, in practice, violations by a sister company could jeopardize the relationship between the local insurance company and the OJK (for example, leading to practical difficulties in obtaining OJK approvals).

 

Regulation of insurance and reinsurance contracts

3. What is a contract of insurance for the purposes of the law and regulation? How does it differ from a contract of reinsurance?

Insurance contract

Under the Indonesian Commercial Code, insurance is an agreement between the insurer (insurance company) and the insured party under which the insurer agrees to compensate the insured party on the occurrence of uncertain events (such as losses, damages and loss of revenue) in return for receiving premiums from the insured party.

Additionally, under the Insurance Law, insurance is a written agreement between the insurance company and the policyholder under which, in return of a premium, the insurance company agrees to either:

  • Provide compensation to the insured party or policyholder due to losses, damage, costs, loss of revenue or legal liability to any third party that may be suffered by the insured party or the policyholder due to uncertain event.

  • Provide payment due to the death/life of the insured party according to a stipulated benefit and/or based on the result of fund management.

The object of insurance can be in the form of life, health, liability, goods and services, and any other interest that may be lost, damaged, and/or decrease in value (Insurance Law).

Reinsurance contract

A reinsurance contract is a written agreement between an insurance company and a reinsurance company to allocate the risk exposure of the insurance company to claims from its policyholders.

 
4. Are all contracts of insurance/reinsurance regulated?

All insurance and reinsurance contracts are regulated under the:

  • Insurance Law and its implementing regulations.

  • Indonesian Civil Code.

  • Indonesian Commercial Code.

The content of insurance contracts is regulated and these must include specific clauses (see Question 18).

 

Corporate structure

5. What form of corporate organisation can insurers take?

Insurers must take the form of one of the following:

  • Limited liability company.

  • Co-operative.

  • Mutual business, already established when the Insurance Law was enacted.

If an insurer is established in the form of a limited liability company, it can be a wholly Indonesian-owned company or a joint venture company, which is subject to a 80% foreign share ownership limit (see Question 11, Insurance/reinsurance providers).

There are no limitations on the parties that can be insured by an insurer. The insured party can be a legal entity or an individual.

 

Regulation of insurers and reinsurers

6. Are all insurers and reinsurers regulated? Are they all regulated in the same way?

Both insurers and reinsurers must be licensed by the Financial Services Authority (Otoritas Jasa Keuangan) (OJK). Insurers and reinsurers are regulated under a separate set of regulations.

The main regulations for insurers and reinsurers are the:

  • Insurance Law.

  • Government Regulation No. 73 of 1992 regarding the Implementation of Insurance Business, as amended.

  • Minister of Finance Regulation No. 422/KMK.06/2003 regarding the Implementation of the Business of Insurance and Reinsurance Companies.

  • Minister of Finance Regulation No. 426/KMK.06/2003 regarding Business Licensing and Institutional Aspects of Insurance and Reinsurance Companies.

  • Minister of Finance Regulation No. 53/PMK.010/2012 of 2012 regarding the Financial Soundness of Insurance and Reinsurance Companies.

Only insurance and reinsurance companies licensed by the OJK are allowed to engage in the insurance and reinsurance business in Indonesia. Foreign insurance companies can engage in the insurance and reinsurance business in Indonesia through either:

  • A joint venture insurance/reinsurance company.

  • Acquiring an existing insurance/reinsurance company.

 
7. Can insurers and reinsurers carry on non-insurance business? Are there any restrictions on their business activities?

Insurance and reinsurance companies are prohibited from carrying on any non-insurance/reinsurance business.

Insurance and reinsurance companies are only permitted to carry on one type of insurance/reinsurance business. For example, a life insurance company is prohibited from engaging in general insurance business, and vice versa. Reinsurance companies can only conduct reinsurance business, but general insurance companies can also engage in reinsurance business.

 
8. Are there any statutory limits or other restrictions on, or requirements relating to, the transfer of risk by insurance or reinsurance companies?

Insurance and reinsurance companies must determine their own retention in accordance with their financial capability and the level of risk faced by the relevant insurance and reinsurance companies. "Own retention" is defined as the portion of risk retained by the insurer without the support of reinsurance. The maximum own retention for a general insurance or reinsurance company is 10% of its own capital for any risk. The risk of an insurance contract exceeding that level must be transferred to a reinsurance company.

Insurance companies must obtain automatic reinsurance (also known as treaty reinsurance) for each line of insurance business marketed. For general insurance, automatic reinsurance must be obtained from one reinsurance company and from another general insurance company in Indonesia. For life insurance, automatic reinsurance must be obtained from one reinsurance company in Indonesia.

Automatic reinsurance from an offshore insurer can only be obtained if the insurance company is unable to obtain automatic reinsurance from an Indonesian reinsurance company. The rating of the offshore reinsurer must be at least BBB or its equivalent by an internationally acknowledged rating agency.

The obligation to obtain automatic reinsurance can be waived in the event that:

  • There is no reinsurer that is able to provide reinsurance support due to the characteristic of the particular risk.

  • The line of insurance business being marketed is new.

  • There is a particular request from the policyholder for a comprehensive insurance package.

  • The risk managed by the insurer does not exceed its self-retention capacity.

An insurance company must also be supported by facultative reinsurance if the automatic reinsurance support is deemed insufficient or the insurance company has failed to obtain automatic reinsurance support due to:

  • The characteristic of the particular risk.

  • The marketing of a new line of insurance business.

  • A particular request from a policyholder for a comprehensive insurance package.

Facultative reinsurance support obtained by a general insurance company must be provided by at least two local reinsurers. For life insurance companies, facultative reinsurance support must be provided by at least one local reinsurance company.

 

Operating restrictions

Authorisation or licensing

9. Does the entity or person have to be authorised or licensed?

Insurance/reinsurance providers

Insurance and reinsurance companies doing business in Indonesia must be licensed by the Financial Services Authority (Otoritas Jasa Keuangan) (OJK). The OJK must approve or reject the licence application no later than 30 days after the complete application is received. Specific procedures to obtain a licence from the OJK will be further regulated by an OJK regulation.

Due to the lack of implementing regulations under the new Insurance Law (see Question 2, Regulatory framework), the procedure for applying for an insurance/reinsurance business licence is still subject to the requirements set out in the implementing regulations of the old insurance law:

  • Government Regulation No. 73 of 1992 dated 30 October 1992 regarding the Implementation of the Insurance Business, as amended (GR 73).

  • Minister of Finance Regulation No. 426/KMK.06/2003 dated 30 September 2003 regarding Business Licensing and Institutional Aspects of Insurance and Reinsurance Companies (KMK 426).

Under the Insurance Law, an insurance or reinsurance company that applies for a business licence must comply with the following requirements and provide the following information:

  • Articles of association (AOA).

  • Organisation and management structure, including a description of duties and authorities.

  • Issued and paid-up capital.

  • Guarantee fund.

  • Ownership of the insurance company.

  • Fit and proper requirement regarding the shareholders and controlling parties.

  • Fit and proper requirement regarding the members of the board of directors (BOD), board of commissioners (BOC), sharia supervisory board, actuaries and internal auditor.

  • Have experts in relevant field.

  • Feasibility of the business plan.

  • Feasibility of the risk management.

  • Products that will be marketed.

  • Arrangement with affiliated parties (if any) and policy for the transfer of functions for business implementation.

  • Infrastructure for the preparation and submission of reports to the OJK.

  • Confirmation from the supervisory authority of the country of origin of the foreign party, if there is direct participation from a foreign party.

  • Other requirements as required by the OJK.

Every insurance company in Indonesia must be a member of an insurance business association in accordance with its type of business. There are two insurance associations in Indonesia:

  • The Indonesian Life Insurance Association (Asosiasi Asuransi Jiwa Indonesia) (AAJI) for life insurance companies.

  • The Indonesian General Insurance Association (Asosiasi Asuransi Umum Indonesia) (AAUI) for loss insurance companies.

Insurance/reinsurance intermediaries

Insurance brokerage companies and reinsurance brokerage companies must be licensed by the OJK. Any individual broker working at an insurance or reinsurance brokerage company and any insurance agent (either working independently or for a company) must be registered with the OJK.

Due to the lack of implementing regulations under the new Insurance Law (see Question 2, Regulatory framework), the procedures for obtaining a licence and registering with the OJK are still subject to the requirements set out in the implementing regulations of the old insurance law:

  • Government Regulation No. 73 of 1992 dated 30 October1992 regarding the Implementation of the Insurance Business, as amended (GR 73).

  • Minister of Finance Regulation No. 426/KMK.06/2003 dated 30 September 2003 regarding Business Licensing and Institutional Aspects of Insurance and Reinsurance Companies (KMK 426).

The requirements for applying for a business licence for insurance and reinsurance intermediaries are the same as for insurance and reinsurance companies (see above, Insurance/reinsurance providers).

An insurance company marketing its insurance products through insurance agents must (OJK Regulation No. 2/POJK.05/2014 regarding Good Corporate Governance for Insurance Companies):

  • Enter into an agency agreement with its insurance agents.

  • Ensure that its agents have obtained certification from the AAUI or AAJI.

Other providers of insurance/reinsurance-related activities

Actuary consultants, public accountants and appraisers providing services related to the insurance business must be registered with the OJK. The specific procedures for registration with the OJK will be further regulated by the OJK.

 
10. What are the main exemptions or exclusions from authorisation or licensing?

Insurance/reinsurance providers

There are no exemptions or exclusions from authorisation and licensing requirements for insurance/reinsurance providers.

Insurance/reinsurance intermediaries

There are no exemptions or exclusions from authorisation, licensing and registration requirements for insurance/reinsurance intermediaries.

Other providers of insurance/reinsurance-related activities

There are no exemptions or exclusions from registration requirements for insurance/reinsurance-related activities.

 

Restrictions on ownership or control

11. Are there any restrictions on the ownership or control of insurance-related entities?

Insurance/reinsurance providers

Under the new Insurance Law, insurance and reinsurance companies can only be owned by either:

  • Indonesian individuals and/or Indonesian legal entities that are directly or indirectly wholly owned by Indonesian individuals.

  • Indonesian individuals and/or Indonesian legal entities together with foreign individuals or legal entities that are engaged in the same insurance business or a holding company with one subsidiary engaging in the same insurance business.

Foreign individuals referred to in the second bullet above can only hold shares in an insurance or reinsurance company through a transaction on the stock exchange.

The maximum foreign ownership of an insurance and reinsurance company is 80% of the issued share capital. Under Government Regulation No. 73 of 1992 (GR 73), this 80% limitation only applied at the time the company was established. Foreign ownership could be increased during the operation of the company, provided that the capital issued to the Indonesian shareholder was maintained.

However, the new Insurance Law mandates the enactment of government regulations on the criteria and limitation of foreign shareholders in insurance business companies. It is expected that the new foreign ownership requirements will be more stringent.

Insurance/reinsurance intermediaries

The same applies as for insurance and reinsurance companies (see above, Insurance/reinsurance providers).

Other providers of insurance/reinsurance-related activities

There are no restrictions on the ownership of actuary consultancies, public accountants and appraisers.

 
12. Must owners or controllers be approved by or notified to the relevant authorities before taking, increasing or reducing their control or ownership of the entity?

Insurance/reinsurance providers

Any change of ownership in an insurance and reinsurance company must first be approved by the Financial Services Authority (Otoritas Jasa Keuangan) (OJK). If the change of ownership is due to a foreign entity becoming a shareholder of the company, such foreign entity must either be:

  • An insurance or reinsurance company engaging in the same insurance business.

  • A holding company with one subsidiary engaged in the same insurance business.

This requirement only applies if the foreign entity holds shares in the insurance or reinsurance company.

The controller of an insurance/reinsurance company must pass a fit and proper test conducted by the OJK at any time. At the time of establishment, this requirement must be fulfilled when applying to the OJK for a business licence.

Any change of ownership that results in the amendment of the articles of association (AOA) of the insurance/reinsurance company must be approved by, or notified to, the Minister of Law and Human Rights (MOLHR).

Further provisions on the procedures and requirements regarding change of ownership of insurance and reinsurance companies will be included in an OJK regulation.

Insurance/reinsurance intermediaries

The same applies as for insurance and reinsurance companies (see above, Insurance/reinsurance providers).

Other providers of insurance/reinsurance-related activities

There are no provisions on change of ownership of actuarial consultants, public accountants and appraiser companies.

 

Ongoing requirements for the authorised or licensed entity

13. What are the key ongoing requirements with which the authorised or licensed entity must comply?

Insurance/reinsurance providers

The key ongoing requirements that insurance/reinsurance companies must comply with are to (among others):

  • Ensure that the board of directors (BOD), board of commissioners (BOC), sharia supervisory board, actuary, internal auditor and controller pass the fit and proper test administered by the Financial Services Authority (Otoritas Jasa Keuangan) (OJK).

  • Maintain the financial soundness of the company, including minimum solvency level based on a risk-based capital (RBC) calculation (that is, 120% of minimum capitalisation, self-retention and permitted investment).

  • Appoint a controller and report the appointment and any change of controller to the OJK.

  • Comply with OJK and public reporting requirements, including submission to the OJK of:

    • an annual report on the implementation of good corporate governance (GCG);

    • periodic operational reports (annually, quarterly and monthly); and

    • the strategic investment policy of the insurance/reinsurance company.

  • Comply with GCG requirements, including requirements related to the general meeting of shareholders (GMS), BOD and BOC, formation of committees (such as investment committee and development of insurance product committee), shareholders and investment.

  • Obtain prior approval from the OJK for the launch of any new product.

  • Report any amendment to the articles of association (AOA), including any increase of capital through the issuance of shares.

The OJK does not require private insurance and reinsurance companies to notify the OJK of any material transaction that is outside the ordinary course of business, or if there is an affiliated transaction. However, in practice, private insurance and reinsurance companies usually notify the OJK of any material transaction.

Publicly-listed insurance and reinsurance companies must notify the capital markets division of the OJK of any affiliated or material transaction. In addition, they must satisfy several requirements under capital market laws and regulations.

Insurance/reinsurance intermediaries

The key ongoing requirements with which insurance and reinsurance brokerage companies must comply include the obligation to:

  • Meet requirements relating to the operation of the business (for example, the employment of insurance experts).

  • Comply with GCG requirements, such as GMS, BOD, BOC and shareholder requirements.

  • Ensure that the controlling shareholders, members of the BOD and BOC, foreign employees and technical experts pass the fit and proper test administered by the OJK.

  • Submit periodical reports to the OJK.

Other providers of insurance/reinsurance-related activities

There are no key ongoing requirements that must be fulfilled by actuary consultants, public accountants and appraisers. Such providers must be registered with the OJK before providing insurance-related services.

 

Penalties for non-compliance with legal and regulatory requirements

14. What are the possible consequences of an entity failing to comply with applicable legal and regulatory requirements? What recourse do policyholders have if they have done business with a non-approved entity?

Insurance/reinsurance providers

Any party (either an individual or corporation) that fails to comply with the Insurance Law and its implementing regulations may be subject to:

  • Administrative sanctions such as:

    • warnings;

    • suspension of business activities;

    • prohibition to market certain insurance products;

    • cancellation of registration with the Financial Services Authority (Otoritas Jasa Keuangan) (OJK);

    • fines; and

    • prohibitions to become a shareholder or controller or serve on the board of directors (BOD) and board of commissioners (BOC) of any insurance business company.

  • Criminal sanctions of up to 15 years' imprisonment and fines of up to IDR600 billion.

Policyholders that have conducted business with a non-approved entity in Indonesia can seek either or both:

  • Civil remedies. Under the Indonesian Civil Code, a policyholder can file a civil claim against the non-approved entity for compensation of its loss based on:

    • breach of contract; or

    • tort, by showing that they have suffered losses as a result of actions taken by the non-approved entity.

  • Criminal remedies. Policyholders may also report the non-approved entity to the police to be investigated for fraud.

Insurance/reinsurance intermediaries

See above, Insurance/reinsurance providers.

Other providers of insurance/reinsurance-related activities

See above, Insurance/reinsurance providers.

 

Restrictions on persons to whom services can be marketed or sold

15. Are there any restrictions on the persons to whom insurance/reinsurance services and contracts can be marketed or sold?

There are no specific restrictions on the persons to whom insurance/reinsurance services and contracts can be marketed or sold. However, insurance objects located in Indonesia can only be insured by insurance companies licensed with the Financial Services Authority (Otoritas Jasa Keuangan) (OJK), except if either:

  • There are no Indonesian insurance companies that are able to underwrite such risk, either solely or jointly.

  • There are no Indonesian insurance companies that are willing to provide coverage for such risk.

 

Reinsurance monitoring and disclosure requirements

16. To what extent can/must a reinsurance company monitor the claims, settlements and underwriting of the cedant company?

The rights of a reinsurance company to monitor the claims, settlement and underwriting of the cedant company (insurance company) are typically set out in the reinsurance contract. In practice, the reinsurance company has the right to:

  • Monitor the acceptance of policyholders by the insurance companies, especially where the insured project is of a significant value.

  • Investigate large claims and settlements.

 
17. What disclosure/notification obligations does the cedant company have to the reinsurance company?

The disclosure/notification obligations of a cedant company to its reinsurer are typically set out in the reinsurance contract. Reinsurance contracts usually require the insurance company to:

  • Submit financial statements.

  • Submit a risk-based capital (RBC) report.

  • Notify of any amendment of its articles of association (AOA).

  • Submit an actuary report.

  • Provide information on the risk insured by the reinsurance company, including information on insurance products and premiums.

 

Insurance and reinsurance policies

Content requirements and commonly found clauses

18. What are the main general form and content requirements for insurance policies? What are the most commonly found clauses?

Form and content requirements

An insurance policy must be in writing in Bahasa Indonesia (or in bilingual format) and cannot include any wording that may be open to multiple interpretations regarding risks and the insurer's and insured's obligations, or which result in the insured having difficulty in claiming payment. The Financial Services Authority (Otoritas Jasa Keuangan) (OJK) requires that insurance policies must contain at least the following clauses:

  • Period of insurance.

  • Benefit to the insured/insured value.

  • Method of premium payment.

  • Grace period for premium payments.

  • Exchange rates used for an insurance policy in a foreign currency, if premium and benefit payments are in Rupiah.

  • Agreed time of receipt of premium payment.

  • Company's policy if the premium is paid after the end of the grace period.

  • The period within which the company cannot review the validity of the particular insurance policy (incontestable period).

  • Cash value table for life insurance policies that contain cash value.

  • Calculation of dividend policy (or the equivalent) for life insurance policies that promise dividends (or the equivalent).

  • Termination of coverage, by either party, including the conditions and reasons.

  • Requirements and procedures for filing claims, including supporting evidence.

  • Dispute resolution venue.

  • Governing language for any insurance policies written in more than one language

In addition, any changes to the insurance policy must be notified to policyholders within 30 days before such changes become effective.

Commonly found clauses

Commonly found clauses in general insurance policies include the following:

  • Calculation of payment and premium.

  • Claim procedure.

  • Policy duration.

  • Governing law and jurisdiction.

  • Reinstatement value.

  • Average relief.

  • Appraisement.

  • Duty of disclosure.

  • Fraudulent report.

  • Reimbursement.

Common clauses in life insurance policies include the following:

  • Calculation of payment and premium.

  • Claim procedure.

  • Governing law and jurisdiction.

  • Duty of disclosure.

  • Additional insured.

  • Change of policyholder.

  • Administrative cost.

 
19. Is facultative or treaty reinsurance more common? What are the most commonly found clauses in reinsurance policies?

Facultative/treaty reinsurance

Treaty (automatic) reinsurance is more common since treaty insurance is required for any line of insurance business marketed by insurance companies. Facultative insurance is required only if the treaty reinsurance's support is deemed insufficient or the insurance company has failed to obtain treaty reinsurance support.

See also Question 8.

Commonly found clauses

The following clauses are commonly found in reinsurance policies:

  • Retention clauses.

  • Reinsurance commission clauses.

  • Claims clauses.

  • Reinsurer's right to information clauses.

  • Dispute settlement clauses.

  • Portfolio clauses.

 

Implied terms

20. Are there any terms that are implied by law or regulation (even if not included in the insurance or reinsurance contract)?

The following terms are implied in insurance and reinsurance contracts by the Commercial Code and the Civil Code:

  • Duty of utmost good faith. The insurer and the insured are under a duty to act in utmost good faith at all times when carrying out their rights and obligations under insurance policies.

  • Insurable interest principle. The insured party must have an interest in the insured object.

  • Indemnity principle. Any insurance for more than the amount of the real value or the real interest of the insured object is only valid up to the amount of the real value or real interest.

  • Minimisation of loss principle. The insured has the duty to minimise any loss or damage suffered.

 

Customer protections

21. How do customer protections in the general law affect insurance contracts? What customer protections are generally included in insurance policies to supplement this?

General law

Under the Indonesian Consumer Protection Law (Law No. 8 of 1999 dated 20 April 1999), consumers have the right to receive correct, clear and honest information on the services to be provided to them by business actors. Therefore, insurance companies must provide correct, clear and honest information that is not misleading in any documentation (such as insurance policies, brochures, advertisements or terms and conditions documents) to customers.

Insurance policies

The Financial Services Authority (Otoritas Jasa Keuangan) (OJK) has issued Regulation No. 1/POJK.07/2013 regarding Consumer Protection in the Financial Service Sector (Customer Protection Regulation). This applies to customers of insurance and reinsurance companies.

Requirements of the Consumer Protection Regulation relating to insurance policies include:

  • The insurance company must provide information regarding its products and services which is accurate, truthful, clear and not misleading in its insurance policies, advertisements, brochures or any other related documents. Such information must be in a written form that is capable of being used as evidence. The above information must be given:

    • when providing information to the consumer on his rights and obligations;

    • when entering into an agreement with the consumer;

    • in any advertisement made by the insurance company.

  • The insurance company must submit updated and easily accessible information to consumers on the company's products and services.

  • The insurance company must use simple, easy to understand terms, phrases and sentences in the Indonesian language in every document that sets out the rights and obligations of the consumer, that may be used by the consumer to make a decision and that legally binds the consumer. The Indonesian language may be used in conjunction with another language.

  • The insurance company must provide an explanation of the terms, phrases, sentences, symbols, diagrams and signs that are not understood by the consumer.

  • The insurance company must provide a summary of its products and services. This must be done in writing and set out the benefits and risks, and the terms and conditions under which the products are offered.

  • The insurance company must provide the consumer information on the costs of a product or service. The insurance company is prohibited from offering any product or service that automatically increases costs without the consumer's written approval.

  • Before the consumer executes an agreement to purchase products or services, the insurance company must provide a document that contains the terms and conditions of the product or service.

  • The insurance company must inform the consumer within 30 days before any effective change in benefits, costs, risks, terms and conditions provided, including any change to the provisions under the relevant insurance policy.

  • The insurance company must include its name and/or logo in any offering of its products or services and a statement that the company is registered with (that is, that the company has a business licence) and supervised by the OJK.

 

Standard policies or terms

22. What are the main standard policies or terms produced by trade associations or relevant authorities?

The Financial Services Authority (Otoritas Jasa Keuangan) (OJK) does not produce any standard insurance policies. The Indonesian General Insurance Association (Asosiasi Asuransi Umum Indonesia) (AAUI) has issued, among others, standard earthquake, fire and motor vehicle policies for use by general insurance companies. These standard policies are available on the AAUI website (www.aaui.or.id/). The Indonesian Life Insurance Association (Asosiasi Asuransi Jiwa Indonesia) (AAJI) does not produce any standard policies for life insurance companies.

 

Insurance and reinsurance policy claims

Establishing an insurance claim

23. What must be established to trigger a claim under an insurance policy?

On the occurrence of an insured event (such as death of an insured party, loss or fire), the insured party or the insured party's beneficiary is entitled to claim payment by providing relevant evidence of the insured event such as photographs, doctor's statement or death certificate from the relevant institution.

In practice, the notification requirements are set out in the insurance policy. These requirements set out the time limit to submit a claim, and the documents, information and evidence that must be provided.

Insurance companies should require policyholders to submit a claim immediately to avoid any evidence being lost/damaged and to avoid any reason for the loss/damage being unidentified.

 

Third party insurance claims

24. What are the circumstances in which third parties can claim under an insurance policy?

A third party can claim under an insurance policy if the policy specifically states his right to receive the insurance benefit (for example, the right of the insured party's spouse to claim the insurance benefit on the insured's death). The insurance policy may also include a banker's clause under which the bank of the insured is entitled to receive the insurance benefit on the occurrence of an insured event.

 

Time limits

25. Is there a time limit outside of which the insured/reinsured is barred from making a claim?

Generally, the time limit outside of which the insured/reinsured is barred from making a claim is 30 years (Indonesian Civil Code). However, in practice, many insurance policies provide for a shorter period (such as two years from the expiry date of the policy).

 

Enforcement

26. Can the original policyholder or other third party enforce the reinsurance contract against a reinsurer?

A reinsurance contract aims to allocate a portion of the risk of the insurance company to the reinsurance company, not to provide coverage to insurance policyholders or any other third party. Therefore, the original insurance policyholder or other third party cannot enforce a reinsurance contract as they are not a party to the contract.

For more details on the protection of policyholders if the insurer is insolvent, see Question 29.

 

Remedies

27. What remedies are available for breach of an insurance policy?

Insurer

The insurer can file a civil claim with the District Court on the basis of breach of contract. The claim can allege that the insured party acted in bad faith.

Insured

The insured party can file a civil claim with the District Court on the basis of breach of contract. The claim can allege that the insurer acted in bad faith.

In addition, insured parties can file a complaint with the Financial Services Authority (Otoritas Jasa Keuangan) (OJK) if they suffer financial damages exceeding either:

  • IDR500 million for customers of life insurance companies.

  • IDR750 million for customers of general insurance companies.

 

Punitive damage claims

28. Are punitive damages insurable? Can punitive damages be reinsured if they are covered by an underlying policy?

Punitive damages are not recognised and not insurable in Indonesia.

 

Insolvency of insurance and reinsurance providers

29. What is the regulatory framework for dealing with distressed or insolvent insurance or reinsurance companies, or other persons or entities providing insurance or reinsurance related services? What regulatory and/or other protections exist for policyholders if the insurance company is insolvent?

A bankruptcy petition for insurance and reinsurance companies can only be filed by the Financial Services Authority (Otoritas Jasa Keuangan) (OJK) (Insurance Law). Creditors, including policyholders, who have not received payment of claims and want to file a bankruptcy petition against an insurance or reinsurance company must do so through the OJK.

If an insurance or reinsurance company is bankrupt or is liquidated, policyholders, participants and insured parties have preferred rights over the bankruptcy assets. The funds derived from premiums managed by the insurance/reinsurance company must first be used to pay policyholders, participants or insured parties.

 
30. Can excess insurance policies "drop down" to provide coverage if the primary insurer goes into insolvency?

The Insurance Law and its implementing regulations are silent on this matter.

 
31. Is a right to set-off mutual debts and credits recognised in an insolvency proceeding involving an insurer or reinsurer?

The right to set-off mutual debts and credits can only be relied on if the debts are verified at the debt verification hearings during the relevant bankruptcy proceedings and the set-off is approved by the liquidation team.

 

Taxation of insurance and reinsurance providers

32. What is the tax treatment for insurers, reinsurers, and other persons or entities providing insurance and reinsurance-related services?

Insurance and reinsurance companies, insurance/reinsurance intermediary companies and companies involved in insurance-related activities are subject to corporate income tax (pajak penghasilan) at a rate of 25%.

Individuals providing insurance and reinsurance-related services are subject to a progressive income tax rate (ranging from 5% to 30%) based on the individual's annual income.

Insurance agents who are not working in an insurance company are taxed at a rate of 50% on their monthly income less non-taxable income and subject to the income tax progressive rates (see above).

 

Insurance and reinsurance dispute resolution

33. Are there special procedures or venues for dealing with insurance or reinsurance complaints or disputes?

Insurance policies must include a choice of venue and procedure to settle disputes. The parties are free to choose the dispute settlement forum (either the District Court or an alternative dispute settlement forum). Under the Financial Services Authority's (Otoritas Jasa Keuangan) (OJK) Regulation No. 1/POJK.07/2014 on Alternative Dispute Resolution in the Financial Service Sector, alternative dispute resolution agencies, including in the insurance sector, must be registered with the OJK. In addition, insurance business companies must be a member of an insurance alternative dispute resolution agency registered with the OJK.

The Indonesian Insurance Mediation Agency (Badan Mediasi Asuransi Indonesia) (BMAI) is an insurance dispute settlement agency registered with the OJK. Under the BMAI's regulation, the BMAI can only handle insurance disputes for either:

  • Claims of less than IDR750 million in the general insurance sector.

  • Claims of less than IDR500 million in the life insurance sector.

 
34. Are arbitration clauses in insurance and reinsurance agreements enforceable?

Arbitration clauses in insurance and reinsurance agreements are enforceable in Indonesia. Local and foreign arbitration awards are recognised and enforceable in Indonesia.

Foreign arbitration awards are enforceable in Indonesia if the following requirements are satisfied:

  • The award is made by an arbitrator or arbitration board in a country with which Indonesia has agreed, under a bilateral or multilateral convention, to recognise and enforce foreign awards.

  • The award falls within the scope of commercial law.

  • The award does not violate public order.

  • The award has obtained exequatur (that is, an enforcement order) from the Head of the Central Jakarta District Court.

 
35. Are choice of forum, venue and applicable law clauses in an insurance or reinsurance contract recognised and enforced?

Choice of forum and venue clauses in insurance and reinsurance contracts are recognised and enforceable. Indonesian law also recognises applicable law clauses provided that such law has a connection with the insurance and reinsurance contract (such as location of the insurance object or citizenship of the parties).

However, it is the authors' view that the law applicable to an insurance or reinsurance contract made with a local company for an insurance/reinsurance object located in Indonesia should be Indonesian law, even in the absence of specific provisions in the Insurance Law and implementing regulations.

Foreign court judgments are not enforceable in Indonesia and cases settled through a foreign court judgement must be re-examined in an Indonesian court. A foreign court judgment can be given evidentiary weight in Indonesian court proceedings at the discretion of the panel of judges hearing the case.

 

Reform

36. What proposals are there for reform of the law, regulation or rules relating to the provision of insurance or reinsurance services?

The government is expected to issue numerous implementing regulations under the new Insurance Law, including those on:

  • Foreign ownership of insurance companies.

  • Licensing and reporting procedures.

  • Good corporate governance.

  • Fit and proper tests.

  • Controller provisions.

  • Financial soundness.

The implementing regulations must be issued within two and a half years after the enactment of the new Insurance Law.

 

Main insurance/reinsurance trade organisations

Indonesian General Insurance Association (Asosiasi Asuransi Umum Indonesia) (AAUI)

Main activities. The AAUI's main activities include:

  • Applying standards of practice and ethical conduct for insurance businesses to create sound market competition.

  • Co-ordinating the establishment of risk profiles, policy standards and similar products.

  • Optimising national insurance retention capacity.

  • Co-ordinating joint actions to address special risks.

  • Organising education and training in insurance.

  • Issuing general insurance agency certification.

All general insurance companies in Indonesia must be members of the AAUI.

W http://aaui.or.id/ ( www.practicallaw.com/0-524-2923)

Indonesian Life Insurance Association (Asosiasi Asuransi Jiwa Indonesia) (AAJI)

Main activities. The AAJI represents the interests of life insurance companies in Indonesia. The AAJI's main objective is to unite the aims and purposes of life insurance companies to protect the community, especially policyholders. All life insurance companies in Indonesia must be members of the AAJI.

W www.aaji.or.id/

Association of Indonesian Insurance and Reinsurance Brokers (Asosiasi Perusahaan Pialang Asuransi dan Reasuransi Indonesia) (APPARINDO)

Main activities. APPARINDO represents the interests of insurance and reinsurance brokers in Indonesia. APPARINDO's main objective is to create a good and responsible business climate in the insurance sector. All insurance and reinsurance brokers must be members of APPARINDO.

W http://apparindo.or.id/vision.php ( www.practicallaw.com/1-524-2927)



Online resources

Financial Services Authority (Otoritas Jasa Keuangan) (OJK)

W www.ojk.go.id

Description. Official website of the OJK, the supervisory body for the insurance sector in Indonesia.



Contributor profiles

Ira A Eddymurthy, Founding Partner

SSEK Legal Consultants

T +62 21 5212038
F +62 21 5212039
E iraeddymurthy@ssek.com
W www.ssek.com

Professional qualifications. Indonesia, Advocate; Capital Markets Legal Consultant

Areas of practice. Banking and finance; corporate; foreign investment; insurance; mergers and acquisitions; tax law.

Recent transactions

  • Acting as Indonesian counsel for Dai-ichi Life Insurance Company of Japan in its IDR3.3 trillion (US$337 million) acquisition of a 40 % stake in Indonesia's PT Panin Life.
  • Acting for Chartis Insurance in the restructuring of PT Chartis Indonesia, which created the first multi-tiered ownership structure for an insurance company in Indonesia.
  • Acting for Rolls-Royce on all Indonesian aspects of its US$1.2 billion global sale of its energy gas turbine and compressor business to Siemens.
  • Advising on all Indonesian aspects of the US$430 million global acquisition by Enerflex of the international contract compression, processing and after-market services business of Axip Energy Services.
  • Advising on all Indonesian aspects of a US$635 million revolving credit facility for Enerflex.
  • Representing GlaxoSmithKline on a three-part deal that saw the pharmaceutical company take full control of its Indonesian Consumer Healthcare business, while divesting a non-core brand and a manufacturing facility in the country.
  • Advising US-based private equity firm SK Capital Partners on all Indonesian aspects of its global acquisition of the textile chemicals, paper specialties, and emulsions businesses of Clariant Corporation, the Swiss-based specialty chemicals company.

Languages. English, Indonesian

Professional associations/memberships. International Bar Association; Inter-Pacific Bar Association; Indonesian Advocates Association; Indonesian Capital Market Legal Consultants.

Maria Yudhitama, Associate

SSEK Legal Consultants

T +62 21 5212038
F +62 21 5212039
E mariadewi@ssek.com
W www.ssek.com

Professional qualifications. Indonesia, Advocate

Areas of practice. Banking and finance; corporate; foreign investment; insurance; mergers and acquisitions.

Languages. English, Indonesian

Professional associations/memberships. Indonesian Advocates Association.


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