Foreign insurers nervously await OJK ownership cap decision

Risk and insurance managers with Indonesian companies and multinationals active in the huge country will be watching developments closely too, as a hard line from the government and regulator could make it more difficult to cover major non-life risks in a cost-effective manner. The Indonesian authorities originally passed a law in 2008 that allowed foreign companies to own up to 80% of Indonesian insurance companies. Given that Indonesia is the biggest economy in the Association of Southeast Asian Nations community and has the fourth largest population in the world, it should come as no surprise that leading global corporate insurers are already active in this market.hideMajor global names in the country include Chubb, which controls ACE Jaya Proteksi; Allianz, through Asuransi Allianz Utama Indonesia; AIG, through AIG Insurance Indonesia; AXA, via Asuransi AXA Indonesia; Mitsui Sumitomo through Asuransi MSIG Indonesia; Fairfax via Fairfax Insurance Indonesia; and Zurich, through Zurich Insurance Indonesia and Insurance Australia Group. Mapfre also entered the market in late 2013 with the purchase of a 20% stake in Asuransi Bina Dana Arta. Alarm bells started ringing among the international insurance and reinsurance community in 2014, however, when the Financial Services Authority of Indonesia—known locally as the Otoritas Jasa Keuangan (OJK)—announced a raft of new rules designed to protect the local insurance market by preventing foreign ownership of local companies through the back door via so-called PMA structures and by forcing insurers to offer their business to local reinsurers before any international companies. Matthew Middleditch, partner at Linklaters, Hong Kong; James Clayton-Payne, managing associate at Linklaters, Singapore; and David Holmes, partner at Widyawan & Partners, Jakarta, explained to Commercial Risk Asia’s sister title International Programme News at the time what the planned changes on local retentions meant for local and international companies. The new rules would certainly not make it impossible for international insurers to write Indonesian risks but it would make it more difficult, the lawyers concluded. “The insurance law requires that each insured object in Indonesia must be covered by a licensed Indonesian insurance company. There are exemptions to this requirement if, among other things, there is no Indonesian insurance company with the willingness or capacity to provide insurance coverage with respect to the relevant insured object,” they stated. In these circumstances, the coverage may be provided by a licensed overseas insurer and based on the current unwritten policy of the OJK. But before the cover is provided, the overseas insurer has to notify the OJK in writing. After receiving the letter, the OJK carries out an assessment of whether or not the exemption requirements are actually met. If they are, the OJK will issue a confirmation letter that confirms that the overseas insurer can provide cover. “Global programmes may only be conducted by an overseas insurer if the…exemption requirement is met. Otherwise, global programmes must be marketed through a local Indonesian insurance company that has a product approval from the OJK to market that insurance product in Indonesia,” explained the lawyers. Since then it has become clearer that the Indonesian government is not happy with the volume of premium—estimated to be at least 50%—that is reinsured out of the country. As part of the ongoing effort to stem the flow of premiums and profits out of the country, in October of last year President Joko Widodo signed a bill to establish a big domestic reinsurer—PT Reasuransi Indonesia Utama (Indonesia Re)—through the merger of two of the country’s leading domestic reinsurers. This new reinsurance group is designed to support the government’s economic plan to reduce trade deficit through the reduction in “insurance outflow”, explained credit rating agency Fitch in a recent note on the Indonesian insurance sector. The company was formed through the merger of state-owned PT Asei Reasuransi Indonesia and PT Reasuransi Umum Indonesia. Indonesia Re will have two subsidiaries—PT Asuransi Asei Indonesia and PT Reasuransi International Indonesia—and an initial capital of IDR1.5tn. Annual capital injections are expected to follow. “Fitch believes that Indonesia Re’s establishment could boost domestic reinsurance capacity, enhance the market’s ability to serve higher demand from local insurance businesses and raise competitiveness among regional reinsurers,” stated Fitch. “Nonetheless, risk accumulation is one key risk that needs to be carefully managed as more local risks are retained. Foreign reinsurers’ involve-ment will still have a major role to play in contributing technical expertise and providing additional capacity to keep pace with the expected growth of the insurance industry in Indonesia,” added the Fitch analysts. The OJK also tightened the rules on foreign ownership to try and prevent foreign companies owning Indonesian insurers via the back door under so-called dual-layer PMA structures. At that time, the OJK said that it would subsequently announce its decision on the level of foreign ownership allowed in Indonesian insurers against a backdrop of rising nationalistic sentiment. The biggest worry for the international insurers that have invested in Indonesian companies in recent times will surely be the potential for a big reduction in the level of ownership that they are allowed in their Indonesian operations. Since the introduction of the new law in late 2014, pressure has been building in political circles to cut the foreign ownership cap down from 80% to 49% and the prospect of this happening is real. Earlier this month, Firdaus Djaelani, OJK commissioner for the non-banking financial industry, reportedly told The Jakarta Post that no decision on the foreign ownership threshold had been made yet. Those international insurers that hold more than 49% stakes will have to sweat it out. There are reportedly more than six international insurers that are more than 80% controlled by big foreign shareholders currently. Mr Djealani conceded to The Jakarta Post that many of those insurers that have significant backing from international insurers hope there will be no reduction in the ownership ceiling. The regulator also told the newspaper that insurance firms would be invited to discuss a new ruling on the “single presence policy” in the 2014 law, which requires two sister insurers that are owned by one holding company to be merged.

Foreign insurers nervously await OJK ownership cap decision

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