KEY CHANGES ON INDONESIAN INSURANCE INDUSTRYBASED ON LAW NUMBER 4 OF 2023 ON DEVELOPMENT ANDREINFORCEMENT OF FINANCIAL SECTOR

1. Background

On 12 January 2023, the President of the Republic of Indonesia has signed the bill of Law number 4 of 2023 concerning Financial Sector Development and Reinforcement (“P2SK Law“). It aims to support, develop and reinforce financial sector in Indonesia, while also catching up with the current growth in the financial services industry.

While P2SK Law aims for new arrangements and adjustments to various regulations in the financial sector, our legal update focuses only on the new arrangements and adjustment on the Insurance Sector as regulated under Law Number 40 of 2014 concerning Insurance (“Insurance Law”).

2. Key Changes in the Insurance Law

Although P2SK Law does not amend Insurance Law in its entirety, P2SK Law amends significantly some provisions under Insurance Law. We summarize below some of those changes:

1. General Provisions

P2SK Law has added several definitions such as Insurance Brokerage Business, Controller, Each Person, Regulation of Financial Services Authority, Financial Services Authority, and Central Government, as follows:

1. Insurance Brokerage Business is not only consulting and/or intermediary service business in insurance closing and sharia insurance closing as provided under Insurance Law, but also has included sharia insurance closing, conventional guarantee and sharia guarantee;

2. Controller in Insurance Law defined as parties who directly or indirectly have the ability to determine the directors, board of commissioners, or equivalent to the board of directors or board of commissioners in a legal entity in the form of a cooperative or joint venture and/or influence the actions of the board of directors, board of commissioners, or equivalent to the board of directors or board of commissioners in legal entities in the form of cooperatives or joint ventures. While P2SK Law does not provide any significant changes to the Controller definition, with only minor additions to the definition by adding pension funds and other legal entities as part of the controlling scoop by the Controller;

3. Each Person in Insurance Law is defined as an individual or a corporation. While P2SK Law has extended the definition of Each Person, with additional scope(s), i.e., business entities in the form of legal entities or non-legal entities or other entities.

In addition to the amendment above, we note there are also changes in Financial Services Authority Regulation and Government definitions. However, we note most of the definition changes are in the form of rearrangement and additional wordings which did not provide any impactful changes.

• Insurance Service Scope of Work

P2SK Law has added a new provision on the sharia principle which previously was not regulated under Insurance Law. The sharia principle within insurance sharia is stipulated by an institution that has the authority to implement such principle, which is followed by enacting a regulation on such implementation. In ensuring sharia principles implementation, then OJK must coordinate with Indonesian Council of Ulama (Majelis Ulama Indonesia) to form a regulation related to sharia insurance activities.

Moreover, P2SK Law has expanded the business scope of Insurance activities, which are not only in the form of additional benefits the amount of which is based on the results of managing fund, but also in the form of providing benefits related to credit/financing activities between creditors and debtors and in the form of suretyship.

P2SK Law also regulates the use of electronic documents in conducting the scope of work of insurance services, as referred to in this section, which was previously not regulated in Insurance Law. The use of electronic documents by Insurance companies will be further regulated in the Regulation issued by the Financial Services Authority.

• Business Implementation

Insurance Law previously has only provided the obligation for insurance company to implement good corporate governance, while P2SK Law has added an inclusion to the good corporate governance, by implementing investment management, risk management and internal control for insurance company in carrying out its business activities. Furthermore, in implementing good corporate governance, insurance companies must apply the principles of prudence, transparency, accountability, responsibility, professionalism and fairness. In implementing good corporate governance, insurance companies are required to develop an internal control system and internal procedures regarding the implementation.

Furthermore, P2SK Law has added a provision on the management of policyholders’ premiums by insurance companies and sharia insurance companies, which obligate the company to calculate the risks and benefits that will be received by policy holders and ensure that there is no failure to fulfil such obligations to the policy holders, the insured or participants. Thus, the provisions regarding good corporate governance above will be regulated in the Financial Services Authority Regulation.

Additionally, P2SK Law has added a new provision that apart from regulating the obligations for directors, commissioners and other same-level positions, sharia supervisory board members, company actuaries, internal auditors and controllers to meet fit and proper requirements, these parties must also have integrity and competence in carrying out their responsibilities. The foregoing will be further regulated in the Financial Services Authority Regulation.

• Compulsory Insurance Program

P2SK Law has added new provisions on the establishment of the Compulsory Insurance Program which previously were not previously regulated under the Insurance Law. The government may establish a Compulsory Insurance Program as needed. Further, the government may oblige certain groups in society to participate in the Compulsory Insurance Program and to pay premiums or participation contribution as a funding source for the Compulsory Insurance Program.

• Dissolution, Liquidation and Bankruptcy

P2SK Law has amended the provision regarding bankruptcy by adding a provision on the postponement of debt obligation (penundaan kewajiban pembayaran utang or PKPU), which previously the Insurance Law only acknowledged an application for a declaration of bankruptcy to an insurance company, sharia insurance company, reinsurance company or sharia reinsurance company can only be filed by OJK.

Furthermore, P2SK Law has added new provision regarding the bankruptcy of sharia insurance company. After fulfilling its obligation to the policy holders, Participants, or other parties that are entitled to the insurance benefits, if there is an excess of tabarru’ fund, tanahud fund, and participant investment funds, the excess can be used to fulfill the obligations to the third parties.

• Policy Holders, Insured Or Participants Protection

P2SK Law has added new provisions on the appointment of Statutory Manager which previously were not regulated under the Insurance Law. In appointing the Statutory Manager, the Financial Services Authority considers the availability of individual staff to be appointed as Statutory Manager, such appointment must first pass a fit and proper test.

The Statutory Manager is required to report every decision and management action that has a material and significant impact to the Financial Services Authority periodically. The provisions regarding the procedure of appointment of the Statutory Manager is regulated in the Financial Services Authority Regulation.

Furthermore, in relation to the responsibilities of the Statutory Manager, in the event that the loss is not caused by fraud, dishonesty, or intentional to not comply with the provisions of laws and regulations in the field of insurance by the Statutory Manager, the Controller will be responsible for the losses of the insurance companies, sharia insurance companies, reinsurance companies, or sharia reinsurance companies and/or third parties.

• Criminal Sanctions

P2SK Law has added new provisions on criminal sanctions, which previously were not regulated under Insurance Law. For instance, P2SK Law has added Article 73A in the Insurance Law which  provides that criminal sanctions apply to a Controller if they fail to fulfill their obligation(s) to take responsibility for indemnifying its insurance company, sharia insurance company, reinsurance company, and sharia reinsurance company in the event that the said loss is caused by the actions of the Controller, the influence of the Controller, and/or the actions of the parties under their control.

Another addition to the criminal sanctions added is provided in Article 73B, applying sanctions to Controllers, shareholders, members of the board of directors, members of the board of commissioners, or the equivalent of shareholders, members of the board of directors and members of the board of commissioners in legal entities in the form of cooperatives or joint ventures, employees and/ or other parties who intentionally request or receive, allow or agree to receive without rights a reward, commission, additional money, services, money, or valuables, for personal gain or for the benefit of their family, in order to obtain services, business gains, investment placement, and/or disbursement of claims from the insurance corporation.

P2SK Law has also added Article 73C in Insurance Law which applies sanctions to any person who embezzle wealth owned and/or managed by an insurance company, sharia insurance company, reinsurance company, or sharia reinsurance company by transferring, pledging, collateralizing, using wealth, or taking other actions that are detrimental to the insurance company, sharia insurance company, reinsurance companies, or sharia reinsurance companies, shall be subject to imprisonment for a maximum of 8 (eight) years and a fine of a maximum of Rp. 50,000,000,000.00 (fifty billion rupiah).

In addition, Article 74 of Insurance Law has been amended by P2SK Law, which further provides criminal sanctions in the form of imprisonment for a minimum of 5 (five) years and a maximum of 15 (fifteen) years and a fine of a minimum Rp. 10,000,000,000.00 (ten billion rupiah) and a maximum of Rp. 200,000,000,000.00 (two hundred billion rupiah) to shareholders, members of the board of directors, members of the board of commissioners or equivalent to shareholders, members of the board of directors and members of the board of commissioners in a legal entity in the form of a cooperative or joint venture, employees and insurance company affiliated parties who intentionally:

• make or cause false records in the books or in reports, documents or business activity reports, and/or transaction or financial reports;
• omit, does not record, or cause non-recording in the books or in reports, documents or business activity reports, and/or transaction or financial reports; and/or
• change, obscure, hide, delete, or eliminate the existence of a record in the books or in reports, documents or business activity reports, and/or transaction or financial reports, or change, obscure, omit, hide, or damage the bookkeeping records.

Criminal sanctions also apply to any person who deliberately causes or participates in an act or assists in an act as mentioned above and shall be subject to imprisonment for a minimum of 3 (three) years and a maximum of 8 (eight) years and a fine of a minimum of Rp. 5,000,000,000.00 (five billion rupiah) and a maximum of Rp. 100,000,000,000.00 (one hundred billion rupiah).

Moreover, criminal sanctions also apply to any person who intentionally does not provide information or provides incorrect, false and/or misleading information to prospective policyholders, prospective insureds, prospective participants, regarding the risks, benefits, obligations and charges associated with insurance products or sharia insurance products offered to prospective policyholders, prospective insureds, prospective participants, policy holders, insureds, or participants, shall be subject to imprisonment for a maximum of 5 (five) years and a maximum fine of Rp. 5,000,000,000.00 (five billion rupiah).

Additionally, P2SK Law has added Article 82A in the Insurance Law which provides that in addition to being sentenced to imprisonment and fines as referred to the abovementioned actions, may be subject to additional punishment in the form of compensation if the actions results in a loss to the affected party in the amount of losses suffered or proportionately in the event that the amount of compensation is not sufficient for the total losses incurred.

3. Impact on the Insurance Industry

With the current case in the insurance industry broadcasted all over the news, i.e., PT Asuransi Jiwasraya (Persero) experienced default on policy payments to customers related to investment products Saving Plan, then it is understandable that public’s trust has been declining in the insurance industry. However, the issuance of the P2SK Law is expected to increase public’s trust, especially on the business implementation, protections, and sanctions. This law aims to strengthen the institutional, regulatory, and supervisory perspective in the insurance industry.

In light of the above, P2SK Law requires every insurance company to implement good corporate governance in terms of investment management, risk management and internal control. Insurance companies are also required to apply the principles of prudence, transparency, accountability, accountability, professionalism, and fairness. The goal is for insurance companies to be able to manage insurance premiums and place investments in a safe and prudent manner. Furthermore, the insurance companies’ controller, management and/or other same-level positions, apart from having to meet fit and proper requirements, these positions are also required to have integrity and competence in carrying out their responsibilities. P2SK Law also provides a legal breakthrough by recognizing the use of electronic documents in conducting the scope of work of insurance services.

In the near future, we expect Financial Services Authority to issue and/or amend regulations to support the enactment of P2SK Law. 

For further information, please contact Ms. Sylvia Mauren at:
Marieta Mauren
Menara Global – 7th Floor
Jln. Gatot Subroto Kav. 27 Jakarta Selatan 12950, Indonesia
Phone: +62 21 5292 0918 / 0919
E-mail: mauren@marietamauren.id, info@marietamauren.id
Website: http://marietamauren.id

Disclaimer:
This article is intended for general information only. It is not intended to be, nor should it be construed as, legal advice applicable to your particular situation. You should seek the advice of legal counsel of your choice before acting upon any of the information in this article.