Indonesia: Detailed Assessment of Observance of the ICPs
|Insurance Core Principle||Recommendations|
|ICP 1||Objectives, Powers and Responsibilities of the Supervisor|
The authority (or authorities) responsible for insurance supervision and the objectives of insurance supervision are clearly defined.
|Description||The Insurance Law 40/2014 is considered to be the primary insurance legislation. Article 57 states that “the arrangement and supervision of Insurance Business activities are carried out by OJK”. “Insurance Business” is defined in Article 1 (4) as “any business related to the services of insurance or risk management, risk reinsurance, marketing, distribution of insurance products or sharia insurance products, consultation and intermediary of insurance, sharia insurance, reinsurance or sharia reinsurance or valuation of insurance or sharia insurance loss.”|
The objectives of the OJK are found in Article 4 of Law No 21 of 2011. The Article states “OJK is formed with the aim that the overall activities within the financial services sector are:
“In order to perform its regulatory duties referred to under Article 6, the supervisor has the authority to:
“In order to perform its supervisory duties referred to, OJK has the authority to:
OJK does not have a specific mandate under either of the laws to identify and resolve conflicts between the legislation and supervisory objectives (it is not required to have a formal legal mandate). However, OJK has resources dedicated to reviews of the laws and regulations and a process for recommending changes to the laws and regulations.
|Comments||The elements required by the Standard are largely present, however, the objective has not been given the priority required by the Standard. This gives rise to the possibility of an unresolved conflict between the objectives e.g., if the supervisor is looking at an initiative that would assist in the development of the insurance sector but would decrease the protection of policyholders, the law needs to ensure that the protection would have priority over the development objective.|
It is recommended to specify that the principal objective of OJK is to promote the maintenance of a fair, safe, and stable insurance sector for the benefit and protection of policyholders.
The supervisor, in the exercise of its functions and powers:
|Description||There are no provisions in either Act that suggest that OJK has to take notice of any party in discharging its responsibilities, including the Minister of Finance or the Parliament. The process for nomination and appointment of the Chairman and Commissioners appears to be sufficiently independent.|
Article 38 of Law 21/2011 requires OJK to report to the House of Representatives by way of an annual report that must include audited financial accounts. The annual report and financial accounts must be made available on the OJK website.
There is nothing in the Law that provides legal protection to the Agency or its staff; the self-assessment notes provisions in the internal rules of the Agency. OJK is funded by levies from all supervised entities. Discussions with the supervisors revealed that there is no outside influence over the use of its resources but the resources are insufficient to be able to provide comprehensive training and fund the appointment of sufficient actuarial assistance.
OJK regulation no 01/17/PDK/XII/2012 establishes a Code of Ethics that applies to both Commissioners and staff and an Ethics Committee to deal with departures from the Code. In addition, the OJK Act no 20 of 2012 prohibits certain conduct of Commissioners such as those that would involve conflicts of interest. The Code is publicly available on the website. Under the Code, an independent Ethics Committee has been appointed to hear instances of non-compliance with the Code. The Code of Ethics imposes obligations to protect the confidentiality of information as required by ICP 2.9.
The organization structure of OJK is detailed in regulation no. 12 /PDK.02/2015; the internal structure of the Insurance Supervision Unit in OJK consists of supervisors, deputy directors, directors, head of supervision and deputy Commissioners. The rationale for the hierarchical structure is amongst other reasons to ensure consistency and timeliness of actions.
There are currently 44 supervisory staff involved in both onsite inspections and offsite reviews of approximately 140 insurance and reinsurance entities and 200 brokers. There is an involved accreditation process in OJK where new entrants work across the agency in short term assignments before being placed in their final position. There are internal training programs that are mandatory for staff. The level of remuneration of staff is more aligned to the industry than public service, meaning that the leakage of supervisors to the industry in pursuit of greater benefits is smaller than in most supervisors. OJK can use the services of outside persons by virtue of articles 59 & 61 of Law no 40 of 2014. Any persons so employed are subject to the extent relevant to the Code of Ethics applying to OJK Commissioners and staff.
OJK is active in its regulation-making role. Law no 40/2014 is effectively framework law and most of the prudential requirements are contained in regulations. OJK has direct power to make binding regulations and circulars and does so frequently. It has a formal process for public and industry consultation through its website and direct communication with insurers and reinsurers. The Insurance Associations are of the view that this process is effective and their concerns are generally given a good hearing and taken into account, where relevant.
OJK discloses the regulations publicly on its website. It also uses the website to provide industry data and information. While the regulations are publicly available, the supervision methodology is not so.
According to OJK, its decisions can and are appealed to the Courts. There is however, no specific provision in the Laws that contemplates appeals, however the appeal process to the Court does not affect the regulatory actions. OJK decisions are executory and not stayed by an appeal.
|Comments||The arrangements for the legal protection of the agency and the staff are not effective. The ICP requires that supervisor and its staff acting in good faith be protected both from any action and the cost of defending any action. The mission was informed that OJK relies on internal rules so that it would use its own resources to fund any defence on behalf of staff or a Commissioner. The Law stipulates the purposes to which the funds of OJK can be put not including the above purpose. It would be preferable to provide in the Law that OJK can fund any defence rather than rely on an internal rule that may be inconsistent with the Law.|
The on-going adequacy of resources, in particular those with expertise, needs to be reviewed.
It is recommended that OJK:
|ICP 3||Information Exchange and Confidentiality Requirements|
The supervisor exchanges information with other relevant supervisors and authorities subject to confidentiality, purpose, and use requirements.
|Description||The general power of OJK to demand information is contained in Article 22 of Law no 40/2014. The Article states “An insurance company [which by definition includes reinsurance and brokerage companies] shall deliver reports, information, data and/or documents to the OJK”. Administrative sanctions can be applied to insurers that do not comply by virtue of Article 71 of Law no. 40 of 2014.|
It is not clear whether OJK has the power to require reports and other information from non-insurance entities within a group in which a licensee operates. OJK maintained practically that it could and is exercised in practice but this is not clear in the Law.
Article 23 of the same Law limits the external uses to which the information obtained in Article 22 may be made, stating: “Certain reports and analysis as referred to in Article 22(1) cannot be disclosed by OJK to another party, except to:
From an international perspective, Article 47 of Law no 21 of 2011 is relevant, stating: “OJK may cooperate with Financial Service Institutions Authorities in other countries and international organizations and other international agencies, among others, in the field and/or activities as follows:
ICP 3 specifically states that regulators should not insist on reciprocity as a condition for sharing information.
Article 48 of the same law provides “all forms of international cooperation, including in the areas of regulation, supervision and investigation, shall be based on the principle of balanced reciprocity”.
OJK has a number of Memoranda of Understanding in place with both domestic agencies and overseas regulators. The Law does not require such a Memorandum before information can be exchanged and OJK confirmed that its practice is not to insist on one for one off information exchanges. While individual Memoranda were not reviewed, OJK noted that there were confidentiality requirements within them. OJK referred to a response letter sent to the agency seeking the information reminding it of the need to keep the information confidential.
Where OJK receives information from another supervisor or source, the staff and directors are bound by the Code of Ethics and Law no 20 of 2012 not to misuse the information.
The process for receiving and making information requests is not clear. In particular, it was unclear as to the level at which decisions to release information could be made, how the supervisors establish the purpose of the information request, how it would deal with a situation where the recipient agency intended to share the information with another agency that had not received it in the first instance.
|Comments||The requirements for reciprocal arrangements need to be removed to comply with ICP 3. It is recommended that OJK develop internal policies and processes for information requests particularly for those regulators with which OJK does not have a Memorandum of Understanding. The policies and processes should cover who receives and approves requests, how the recipient organization is bound by confidentiality, bound not to share the information with a third party without OJK consent, how it ensures that the information provided is to be used for proper purposes.|
It is recommended that:
A legal entity that intends to engage in insurance activities must be licensed before it can operate within a jurisdiction. The requirements and procedures for licensing must be clear, objective, and public, and be consistently applied.
|Description||Article 8 (1) of Law no 40 of 2014 states that “every party conducting insurance business shall firstly acquire a business permit (license) from the OJK.” Article 1(14) states “insurance business is any business related to the services of insurance or risk management, risk reinsurance, marketing and distribution of insurance products or sharia insurance products, consultation and intermediary of insurance, sharia insurance, reinsurance, or sharia reinsurance or valuation of insurance or sharia insurance loss”. The definition of “insurance business” is so wide as to capture most activities attached to the insurance industry. OJK has read this narrowly and considers that it is insurance and reinsurance companies, brokers and loss adjustors to which the licensing requirements apply. Insurance agents are under a separate registration regime.|
Article 9 of Law no 40 of 2014 makes it clear that it is OJK that is solely responsible for the licensing function. Article 6 of the same Law limits the legal form of entities that can obtain a license to limited liability companies and cooperatives. A third form being a collective business that was an insurer before the promulgation of Act no 20 of 2014 is entitled to maintain its license.
In making application for a license, an applicant must provide a comprehensive suite of documents outlined in Article 8(2) of Law 20 of 2014. These include:
Licenses remain in force until surrendered by the entity or revoked by OJK. OJK does not have explicit legal powers to impose conditions, limitations or restrictions on licenses. Similarly, it does not appear to have the explicit legal power to impose a scope on the license, although it effectively does so in practice. The scope of a licensee’s license is limited by its business plan. As part of an application, an applicant’s business plan must detail the products that it intends to offer and its license, when granted is limited to those products. If it wishes to sell additional products, it must apply to have authorisation to do so. Effectively, the scope of the license can be determined in relation to products but not necessarily other parameters such as geographical areas.
OJK maintains a register of licenses granted on its website.
The provisions relating to foreign insurers operating in Indonesia are restrictive. Only a company registered in Indonesia can obtain a license. Article 7 of Law no 40 of 2014 limits the ownership thus: “An insurance company shall only be owned by:
Article 73 of Law No 40 of 2014 provides for significant penalties for acting as an insurance company without a license within its wide definition thus:
Insurance/reinsurance without a license-IDR 200 billion prison sentence no greater than 15 years;
Broker without a license-IDR 3 billion and prison sentence no greater than 10 years;
Insurance Loss Adjuster without a license-IDR 1 billion and prison sentence no greater than 3 years.
|Comments||It would be helpful for greater transparency if the Law detailed explicitly the requirement to be licensed and to which entities the requirements apply. Putting explicit requirements in Act no 40 of 2014 that gives OJK the power to impose conditions and restrictions on licenses is useful.|
It is recommended that OJK:
|ICP 5||Suitability of Persons|
The supervisor requires Board Members, Senior Management, Key Persons in Control Functions2 and Significant Owners of an insurer to be and remain suitable to fulfil their respective roles.
|Description||The principal suitability requirement is at Article 12(1) of Law no 40 of 2014. It states “members of the board of directors, members of the board of commissioners, or the equivalent to members of the board of directors and members of the board of commissioners in a cooperative or collective business legal entity as referred to in Article 6 (1) (c), members of the board of Sharia controllers, the company’s actuary, the internal auditor and the Controller* shall at any time fulfill the ability and appropriateness requirements.”|
*Controller means significant owner and is a party who on his or her own or in conjunction with related parties owns or controls more than 25 percent of the shares of the