New Insurance Law


On 17 October 2014, Law No. 40 of 2014 on Insurance (“new Insurance Law”) was enacted to replace the over 20 years old Law No. 2 of 1992 on Insurance Business (“Law 2/1992”).

The new Insurance Law clarifies several provisions of Law 2/1992 and also provides new provisions.

Foreign Ownership
Article 7 of the new Insurance Law states that insurance companies can only be owned by:
•    Indonesian citizens or entities which are directly or indirectly wholly owned by Indonesian citizens, or
•    Indonesian citizens or Indonesian entities together with foreign citizens or foreign entities. Such foreign entity must be an insurance company.

There is no change to the maximum percentage of foreign ownership in insurance business under the new Insurance Law. It remains at up to 80% as stipulated under Government Regulation No. 39 of 2008 on Second Amendment of Government Regulation No. 73 of 1992 on Implementation of Insurance Business.

However, according to the new Insurance Law, foreign citizens or foreign entities may only own an insurance company through a transaction in the stock exchange. This clarifies the provisions under Law 2/1992 which did not clearly state that an insurance company may be owned by foreign citizens or entities and did not provide information on details of ownership.

The new Insurance Law sets a deadline of five (5) years after enactment for existing insurance companies with foreign ownership to make the necessary ownership adjustments.

Mutual Fund Companies
Law 2/1992 required insurance companies to be in the form of a limited liability company, cooperative or mutual fund company. Under Article 7 paragraph 3 of Law 2/1992, insurance companies in the form of the mutual fund companies were to be further regulated under a law. However, the law was never been passed.

In addition to limited liability companies and cooperatives, the new Insurance Law recognizes existing mutual fund companies. The new Insurance Law will acknowledge such existing mutual fund companies as legal entities.

New Key Provisions
Below are some new noteworthy provisions introduced under the new Insurance Law.

1.    Syariah concept
The new Insurance Law provides basic regulatory basis for syariah insurance business, which previously not regulated under Law 2/1992 and only been regulated under government and Ministry of Finance regulations.

Wherein pursuant to Article 87, insurance companies must separate the syariah insurance business unit into syariah insurance company or syariah reinsurance company:
(i)    where the syariah funds exceed 50% of all insurance funds held; or
(ii)   ten (10) years after the enactment of the new Insurance Law in cases where the syariah funds do not exceed 50% of all insurance funds held.

2.    The controlling shareholders
Article 16 of the new Insurance Law provides that a party can only be a controlling shareholder in one life insurance company, one general insurance company, one reinsurance company, one syariah life insurance company, one syariah general insurance company, and one syariah reinsurance company. This requirement is not applicable to the government.

3.    Appointment of a controller
Insurance companies should appoint at least one (1) controller, i.e. individual or business entity which has direct or indirect control to determine the directors or commissioners and/or influence the Board of Directors (“BOD”), Board of Commissioners (“BOC”), or other person equivalent to the BOD or BOC in their actions.

4.    Deactivation of BOD and/or BOC
The Financial Services Authority (Otoritas Jasa Keuangan – “OJK”) is authorized to deactivate the BOD, BOC, or other person equivalent to the BOD or BOC, and to appoint a statutory manager to take over the management of insurance companies. Deactivation is possible under the circumstances stipulated under Article 62 paragraph 1 of the new Insurance Law (e.g. In the case where the insurance company is imposed with a sanction of business activity restriction; according to OJK’s judgment, the insurance company may be unable to fulfill the obligation or may stop the fulfillment of any obligation that is due. Therefore the OJK may deactivate the BOD and/or BOC and appoint a statutory manager).

5.    Protection for policyholders
Insurance companies are required to be members of a policy guarantee program. The implementation of the policy guarantee program is to be further stipulated under a law which will be formed within three (3) years following the new Insurance Law.

Prior to the enactment of such law, insurance companies are required to have security funds (funds that constitute a guarantee of last resort to protect the policyholders in cases where an insurance company is liquidated). The amount and size of the security funds will be determined by OJK.

6.    Obligation to be a member of mediation body
Insurance companies are obliged to be members of an independent and impartial mediation body to settle disputes which arise between them and their policyholders, insured parties and other participants, or any parties which are entitled to receive insurance benefits. The consensus under this mediation is final and binding upon the parties.

The new Insurance Law offers more comprehensive provisions compared to Law 2/1992, as well as stricter supervision by OJK. The key, as always is whether the new Insurance Law can be effectively implemented.



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