Indonesia
Financial Sector Assessment Program-Detailed Assessment of Observance-Insurance Core Principles

This paper reviews observance of Insurance Core Principles in Indonesia. Insurance regulation and supervision have been remarkably improved since the establishment of the Financial Services Authority (OJK) and the enactment of the new Insurance Law. However, the assessment has identified a significant number of shortfalls in observance with the Insurance Core Principles. Some deficiencies are owing to the lack of effective group regulation and supervision of insurance groups. Although OJK has implemented regulations related with risk management and group capital, intragroup transactions are not well taken into account. It is recommended that OJK should improve the effectiveness of supervision. Thematic reviews of reserving practices will encourage more conservative reserving.

Abstract

This paper reviews observance of Insurance Core Principles in Indonesia. Insurance regulation and supervision have been remarkably improved since the establishment of the Financial Services Authority (OJK) and the enactment of the new Insurance Law. However, the assessment has identified a significant number of shortfalls in observance with the Insurance Core Principles. Some deficiencies are owing to the lack of effective group regulation and supervision of insurance groups. Although OJK has implemented regulations related with risk management and group capital, intragroup transactions are not well taken into account. It is recommended that OJK should improve the effectiveness of supervision. Thematic reviews of reserving practices will encourage more conservative reserving.

Executive Summary1

The insurance sector is rapidly growing through conglomeration, bancassurance and increased sales of investment products. While the insurance sector is still smaller than the banking sector, it has grown rapidly at an average of 20 percent per year over the last 5 years. About the half of insurers belong to conglomerates, typically led by banks but with a number of other financial and non-financial entities within the group. Because of regulations on intra-group transactions from insurance entities, some insurance entities could have material exposures to the affiliates. Bancassurance is playing a very important role in the insurance distribution, mainly in relation to investment products, such as unit-linked products.

Insurance regulation and supervision have been remarkably improved since the establishment of OJK and the enactment of the new Insurance Law. OJK was established in 2011 as an independent and integrated regulator. Since the new Insurance Law became effective in October 2014, OJK has made significant regulatory reforms, by issuing number of new regulations, introducing risk based supervision through the active usage of its supervisory powers including revocation of licenses, and by enhanced regulations for corporate governance and risk management.

However, the assessment has identified a significant number of shortfalls in observance with the Insurance Core Principles. Some deficiencies are due to the lack of effective group regulation and supervision of insurance groups. While OJK has implemented regulations related with risk management and group capital, intra-group transactions are not well taken into account and thus double gearing within the insurance entities and investment arbitrage between insurance entities and non-financial entities may be possible. Including a capital calculation for catastrophic risk and a framework for the imposition of capital add-ons can tighten the capital regime.

The Indonesian insurance sector is still vulnerable to a number of material risks. A number of insurers have failed in the last 10 years. After its establishment, OJK has taken prompt action in order to reduce the loss to policyholders by taking strong actions againt four insurers with material deficits. OJK has monitored the capital adequacy of insurers through its risk based supervision scheme. During the recent market turmoil in 2015, the solvency requirement was relaxed for nine months while introducing the temporary suspension of mark to market valuation rules. The Indonesian insurance industry is exposed to significant catastrophic risk with domestic concentrations through mandatory reinsurance programs. The low interest rate environment in advanced economies is also affecting the life insurance sector, as insurers have some underwriting denominated in USD.

The mission identified that the laws need to be amended to enhance the clarity of legal protection and the primary objective of the supervisor. ICP requires that primary objective of supervisors should be the protection of policyholders. However, OJK has other objectives and particularly the objective of market development seems to have caused conflict with the objective of policyholder protection. Setting the protection of policyholders as the primary objective of OJK will enhance the operational independence of OJK. The law also needs to provide clear and robust legal protection of OJK and its staff acting in good faith. Improvement of legal protection of OJK with clearer internal guidance for applying sanctions will help it to take more prompt and effective regulatory actions to problem insurers.

The mission recommends that OJK improve the effectiveness of supervision. Thematic reviews of reserving practices will encourage more conservative reserving. Close dialogue with the industry and clearer guidance on adequacy, independence and reporting lines of key control functions will improve the effectiveness of corporate governance and risk management of insurance groups significantly. OJK is encouraged to increase the expertise of its human resources, in particular actuaries, and facilitate communication with the industry participants which will assist the industry and OJK itself to transition smoothly from a compliance based culture to more risk based supervision. OJK also needs to revise the “three strikes” approach to ensure timely supervisory actions. Given the possible high interconnectedness and contagion risks through conglomerates and domestic reinsurance programs, the authorities are encouraged to enhance macroprudential surveillance by integrating conglomerate analysis to identify possible contagion among conglomerates and sectors.

There is a need for more focus on the regulation of insurance intermediaries and market conduct. OJK has made tremendous efforts to ensure efficiency and fairness in claims payment and complaints handling, which will continue to be important especially in the non-life sector. However, the rapidly increasing life insurance sector and complex unit-linked products make conduct regulations even more important. Enhanced disclosure requirements for intermediaries and close coordination with the insurance associations will improve the quality of intermediaries.

Assessment of Insurance Core Principles

A. Introduction and Scope

1. This assessment of insurance regulation in Indonesia was carried out as part of the 2016–17 Financial Sector Assessment Program (FSAP). It was conducted by Nobuyasu Sugimoto (IMF Expert) and Antony Randle (World Bank Expert) from September 21 to October 4, 2016.

2. The current assessment was made against the Insurance Core Principles (ICPs) issued by the International Association of Insurance Supervisors (IAIS) in October 2011, as revised in November 2015. The ICPs apply to all insurers, whether private or government-controlled. Specific principles apply to the supervision of intermediaries. The institutional arrangements for financial sector regulation and supervision are outlined in Section C.

B. Information and Methodology Used for Assessment

3. The level of observance for each ICP reflects the assessment of its standards. Each ICP is rated in terms of the level of observance as follows:

  • a) Observed: where all the standards are observed except for those that are considered not applicable. For a standard to be considered observed, the supervisor must have the legal authority to perform its tasks and must exercise this authority to a satisfactory level.

  • b) Largely observed: where only minor shortcomings exist, which do not raise any concerns about the authority’s ability to achieve full observance.

  • c) Partly observed: where, despite progress, the shortcomings are sufficient to raise doubts about the authority’s ability to achieve observance.

  • d) Not observed: where no substantive progress toward observance has been achieved.

4. The assessment is based solely on the laws, regulations, and other supervisory requirements and practices that were in place at the time of the assessment in September 2016. While this assessment does not reflect new and on-going regulatory initiatives, key proposals for reforms are summarized by way of additional comments in this report. The authorities provided a full and comprehensive self-assessment, supported by examples of actual supervisory practices and assessments relating to unidentified insurance entities, which enhanced the robustness of the ICP assessment.

5. The assessors are grateful to the authorities and private sector participants for their cooperation. The assessors benefitted greatly from the valuable inputs and insightful views from meetings with OJK, insurance companies and industry and professional organizations.

C. Overview—Institutional and Macroprudential Setting

Institutional Framework and Arrangements

6. The Financial Services Authority (OJK) is responsible for the regulation and supervision of the entire financial sector, including banking, capital markets, insurance, and pension funds. OJK was established in 2011 to take over the role of Bapepam-LK (Supervisory Agency of Capital Market and Financial Institutions under the Ministry of Finance (MoF)) in regulating and supervising the capital markets and non-bank entities, as well as that of Bank Indonesia in regulating and supervising banks. OJK has three missions, 1) to ensure activities in the financial sector are fair, transparent, and accountable, 2) to promote growth in a sustainable and stable manner and 3) to protect the interests of consumers and the public.

7. The new insurance law became effective in October 2014, and since then OJK has made significant improvements to its insurance regulation and supervision. OJK has improved insurance regulation and supervision by adopting a number of new regulations. In the last three years, OJK has issued more than 100 new regulations, including those relating to risk based supervision, enhanced fit and proper requirements, governance and risk management requirements.

Market Structure and Industry Performance

Industry Structure and Recent Trends

8. The insurance sector dominates the other non-bank financial institutions, and the sector is growing very rapidly. The banking sector controls 76 percent of the total assets in the financial sector. The insurance industry accounts for 12 percent. The insurance sector has grown rapidly at an average rate of 20 percent per year over the last five years (refer to Figure 1). During 2010–2014, gross premium of the insurance sector almost doubled from IDR 125 trillion in 2010 to IDR 247 trillion in 2014. In 2015, gross premium of the insurance sector reached IDR 295 trillion. As of August 2016, the amount of gross premium reached IDR 223 trillion for the year to August.

Figure 1.
Figure 1.

Growth of Insurance Sector

Citation: IMF Staff Country Reports 2018, 074; 10.5089/9781484346297.002.A001

Source: OJK, Unit; Million IDR.

9. The insurance industry consists of 138 insurance and reinsurance companies, and the life industry accounts for bigger share in terms of assets. The insurance industry comprises 50 life insurers with a share of 42 percent of the total insurance sector assets, two social insurers with 28 percent, 88 general and reinsurers with 16 percent, and three compulsory insurers with 14 percent (refer to Figure 2). Most of the premium of life insurers comes from unit-linked products (46 percent share), followed by endowment (34 percent) and term (9 percent). In general insurance, property insurance accounts for 30 percent, followed by motor (28 percent) and personal accident and health (10 percent).

Figure 2.
Figure 2.

Industry Asset Shares

Citation: IMF Staff Country Reports 2018, 074; 10.5089/9781484346297.002.A001

Source: OJK.

10. The profitability of the insurance sector has been high and stable, but liability valuation has influenced the results. Both ROE and ROA have been stable over the past five years and were positive even in 2015, when market stress hit the balance sheet of the insurance sector through lower equity prices and FX volatility (refer to Figure 3). However, it should be noted that insurance liabilities may not be valued as conservatively as the insurance core principles require. Therefore, careful consideration is needed to judge the profitability of the industry.

Figure 3.
Figure 3.

Industry Performance

Citation: IMF Staff Country Reports 2018, 074; 10.5089/9781484346297.002.A001

Source: OJK.

11. The mode of distribution of insurance products has changed over time. While agent distribution still has the highest share (26 percent), the share has declined very rapidly in the last three years. Bancassurance is permitted and now accounts for 25 percent as banks do distribute insurance products very actively. Direct marketing through the Internet and telemarketing are also getting more popular. Brokers are also contributing to the distribution but the share is limited (12 percent).

Assets and Liabilities

12. The life insurance sector has significant asset allocation to stocks and mutual funds, partially through unit-linked products. Stocks have the highest asset allocation (30 percent), followed by mutual funds (25 percent) and bank deposits (17 percent) (refer to Figure 4). Government and corporate bonds have very limited shares (15 percent and 8 percent respectively). The majority of the shares are attributable to unit-linked products. While policyholders of unit-linked products will cover the loss, there seems a wide spread industry practices of insurers providing some guarantees for the products. Therefore, it is difficult to describe the riskiness of the life sector. The P&C insurance sector has material allocations to bank deposits (51 percent), mutual funds (14 percent) and corporate bonds (12 percent).

Figure 4.
Figure 4.

Asset Allocation of Life Insurers

Citation: IMF Staff Country Reports 2018, 074; 10.5089/9781484346297.002.A001

Source: OJK.

13. Technical provisions account for the majority of liabilities. Technical provisions account for about 60 percent of the total liabilities. Other liabilities arise from miscellaneous items, such as deferred tax liabilities. In the life sector, unit-linked products are responsible for the largest share of products, followed by traditional products, such as endowment, term and health. In P&C sector, Property and Motor have the largest shares (refer to Figure 5).

Figure 5.
Figure 5.

Breakdown of Life and P&C Products

Citation: IMF Staff Country Reports 2018, 074; 10.5089/9781484346297.002.A001

Interconnectedness Between the Insurance and Banking Sectors

14. The majority of insurers belong to conglomerates with high degrees of interconnectedness between banks and insurers. OJK has identified 49 conglomerates in Indonesia and 77 insurers out of 138 insurers are part of these conglomerates. Many conglomerates have both banks and insurers within the group. Insurers have allocated more than 25 percent of their assets to bank deposits and are also exposed to the banks through equity investments. Insurers are not able to invest more than 20 percent of the total investments into affiliated companies, which could exceed the loss absorption capacity of the insurance entities. In 2016, OJK imposed a minimum investment requirement (20 percent of the investment) into government bonds and this will be increased to 30 percent by December 2017. This will reduce interconnectedness between banks and insurers by reducing the high allocation to bank deposits.

15. While group capital is required, capital requirements may not be sufficient due to the lack of recognition of intra group transactions. A conglomerate is required to calculate group capital by adding the capital requirements of each sector. However, in the capital calculation of insurance entities, there is no adjustment for intragroup transactions up to the investment limit. The investment limit is based on the total investment of the insurance entities; thus it could be much higher than the available capital of insurance entities. Therefore, there is a possibility that capital is inflated through double gearing and capital requirements could be reduced through other intra group transactions, for example by shifting risky assets to non-financial entities within the group.

Key Risks and Vulnerabilities

16. A number of insurers have failed in the last 10 years and solvency ratios of even large insurers are still volatile. Over the last 10 years, the licenses of 24 insurance companies have been revoked due to management failures. Since the establishment of OJK, OJK has actively used its powers, including revocation of licenses and 4 insurance companies have failed with an estimated total deficit of about IDR 906 billion. While the industry is well capitalized (the average solvency ratio of the industry is over 500 percent for life and over 250 percent for non-life, which is much higher than the minimum), some insurers, including large insurance groups, are exhibiting declining solvency ratios (refer to Figure 6). A new resolution regime has been introduced which allows OJK to declare bankruptcy for the insurers and to appoint statutory managers.

Figure 6.
Figure 6.

Solvency Ratios of Publicly Listed Insurance Companies

Citation: IMF Staff Country Reports 2018, 074; 10.5089/9781484346297.002.A001

Source: OJK.

17. The Indonesian insurance industry is exposed to significant catastrophic risks with domestic concentrations through mandatory domestic reinsurance programs. Indonesia is prone to landslides, floods, storms, earthquakes, tsunamis, and volcanic eruptions. Insurers are required to set aside a catastrophe reserve and also have mandatory reinsurance arrangements with domestic reinsurers. One reinsurer is owned by all of general insurance companies, thus creating potential contagion in case of significant catastrophe events. According to the OJK, risk in excess of domestic reinsurer capacity is retroceded to international reinsurers.

18. The economic slowdown in 2015 and the current low interest rate environment also affected the insurance sector. The economic slowdown has affected the growth of the insurance sector through lower growth in premiums. As the life sector has a significant exposure to equity and mutual funds, the performance has been affected negatively. In addition, the low interest rate environment has reduced the insurance investment return. In 2015, OJK allowed insurers to abandon mark to market valuation for solvency purpose (RBC calculation)temporarily. OJK followed up with the firms that needed to use this temporary suspension to ensure that their treatment was, in fact, temporary. OJK has subsequently removed this suspension to avoid moral hazard in the industry and the expectation that it would accommodate further concessions in the future. There were a few insurers that utilized the policy and OJK stringently monitored these insurers.

Failure of Medium Size Life Insurance Company (BAJ)

PT Assuransi Jiwa Bumi Asih Jaya (BAJ) was a life insurance company with a long history. BAJ was one of the oldest insurance companies in Indonesia, having been established in 1988. In 2013, its total assets were IDR 517 billion and it had over 13,000 policyholders. It belonged to a financial conglomerate group that consists of 33 rural banks. Starting in 2007, it faced difficulties in meeting the minimum capital requirement, and the Ministry of Finance (the insurance supervisor at that time) imposed several sanctions. However, BAJ could not improve its solvency position. OJK, which took over supervision of Bapepam-LK, revoked the license and requested the court to declare bankruptcy and liquidate the company in October 2013. At that time, the solvency ratio was 12 percent, which is well below the minimum level (120 percent).

Limitations to OJK’s legal power on resolution prevented prompt liquidation of the company. The insurance company appealed to the court, insisting that OJK could submit a bankruptcy request only when the creditors of BAJ had suffered losses. At that time, policyholders and other creditors were still being paid when claims fell due. It also argued that insurance claims could not be recognized as debts under the definition set out in the Bankruptcy Law. The Commercial Court ruled in favor of BAJ and rejected OJK’s bankruptcy petition against BAJ. OJK filed an appeal in June 2015. Finally, in September 2015, the Supreme Court ruled in favor of OJK and approved the bankruptcy petition against BAJ.

After the Supreme Court decision, a liquidator was appointed and the company entered into liquidation. Creditors including policyholders are still waiting for payment without any partial payouts having been made. Currently, the trustees are verifying BAJ’s rights and obligations. The loss incurred by policyholders is unknown. While the bankruptcy has had some negative impact on the rural banks (BPR) and other financial entities within the group, the capital ratio of the bank is still above the requirement and it continues to operate. BAJ appealed the Supreme Court decision. However, based on the outcome in September 2016, BAJ’s appeal was dismissed.

The government amended the law and gave OJK the power to appoint liquidators without a court process. Based on the lesson of BAJ, the Government amended the OJK law to improve the clarity of the bankruptcy procedures and gave OJK the power to appoint official receivers without a court process. The Government also submitted a new bill to establish policyholder protection funds.

19. While OJK has introduced a risk-based capital and reserving framework, the framework still need some improvements. The capital framework covers a number of risks, such as default risk of investments, asset and liability mismatch (ALM), FX mismatch, premium and claim risk, operational risk and mutual fund related risk (refer to Figure 7 and 8). OJK has introduced guarantee risk associated with unit-linked products. However, some material risks (such as catastrophe risk addressed through reinsurance, and contagion risk from related parties) need further improvements. OJK has not conducted thematic reviews for each risk in RBC calculation.

Figure 7.
Figure 7.

Breakdown of Solvency Requirements—Top 5 Life Insurers

Citation: IMF Staff Country Reports 2018, 074; 10.5089/9781484346297.002.A001

Source: OJK.
Figure 8.
Figure 8.

Breakdown of Solvency Requirements—Top 5 Non-life Insurers

Citation: IMF Staff Country Reports 2018, 074; 10.5089/9781484346297.002.A001

Source: OJK.

D. Preconditions for Effective Insurance Supervision

Sound and Sustainable Macroeconomic and Financial Sector Policies

20. Indonesia has an established framework of fiscal, monetary, and macroeconomic policies. Indonesia has a fiscal rule that limits the deficit of the general government to 3 percent of GDP and the public debt to 60 percent of GDP. In 2015, the central government deficit was estimated to have reached 2.8 percent of GDP, leaving the deficit of the general government close to the limit. Despite the sharp fall in international oil prices, episodes of capital outflows, and turbulent global financial markets, the Indonesian economy performed well in 2015. Bank Indonesia has implemented and enhanced monetary policy measures within the inflation-targeting framework and introduced macroprudential measures in an attempt to achieve the stability needed to support sustainable economic growth and improve social welfare.

21. The financial sector regulatory framework is in transition. Bank supervision and regulation were moved from Bank Indonesia to the new financial supervisory agency (OJK) in 2014, while Bank Indonesia retained regulatory responsibility for macroprudential policy. There is a need to align the legislation pertaining to the financial sector agencies to the new institutional arrangement. In addition, there are some gaps in areas such as the bank liquidity assistance and resolution frameworks, and legal protection for supervisors for actions arising out of acts done in good faith. The authorities have submitted to Parliament a bill to remedy these matters. OJK is developing a framework for consolidated supervision of banks and non-banks (including insurance) and upgrading risk-based supervision.

22. The new Financial System Crisis Prevention and Resolution Law (PPKSK Law) 2016, established a Financial System Stability Committee (KSSK). This Committee is tasked with the prevention and resolution of financial system crises. The membership of the Committee comprises the Minister of Finance as chair, the Governor Bank of Indonesia, the Chairman of the Board of Commissioners of OJK, all with voting rights, and the Chairman of the Board of Commissioners of the Deposit Insurance Corporation (LPS), without voting rights. The Committee, among other things, has the authority to recommend to the President to declare a (systemic) crisis status in the financial system and on resolution measures.

Mechanisms for Consumer Protection

23. The authorities are making efforts to improve the capacity of complaints handling. OJK requires financial institutions (including insurers) to establish an effective complaints handling unit or Internal Dispute Resolution system to handle complaints properly. In addition, OJK developed an Alternative Dispute Resolution process in December 2015 for the whole financial sector. However, Alternative Dispute Resolution for the insurance sector has been in place since 2006. This conducts mediation, adjudication, and arbitration for insurance policyholders. OJK itself also analyzes and responds to complaints, taking up issues with companies or intermediaries and requiring them to address the issues when appropriate.

24. While there is some protection for policyholders, an industry wide guaranty fund, which supports the policyholders of failed insurers, has not yet been established. Insurers must comply with minimum capital requirements, and if the ratio drops below 40 percent, OJK has the authority to require the firm to increase its fund to protect policyholders. The rights of policyholders to the assets of insurers are ranked higher than other parties in case of liquidation. However, a guaranty fund has not been established and thus policyholders seem to be suffering from material loss in the case of failures. For example, in the case of PT Asuransi Jiwa Bumi Asih Jaya (BAJ) failure, policyholders have not received any payments since the revocation of license three years ago and final loss of policyholder could be significant (refer to Box 1). For more detail regarding policyholder protection programs, refer to the Box 2.

Policyholder Protection Funds

Currently, policyholder protection relies on a guarantee fund maintained at individual company level. Each insurer is required to maintain a guarantee fund. The fund comprises a minimum of 20 percent of the insurer’s capital and must be held in the form of bank deposits and government bonds. Withdrawal of the deposits needs prior approval of OJK and funds are supposed to be used solely for the payment to the policyholders.

The amount of the guarantee fund must correspond with business volume development:

1. A life insurer must establish a guarantee fund with 20 percent of its capital, or 2 percent from premium reserve of investment linked insurance product plus 5 percent from premium reserve of non-investment linked insurance product and unearned premium reserve, which ever is higher.

2. A general insurer and reinsurer must establish a guarantee fund with 20 percent of its capital, or 1 percent from net premiums plus 0.25 percent from reinsurance premium, which ever is higher.

A new bill is being drafted to develop industry wide policyholder protection funds in accordance with Article 53 of the Insurance Law. The MoF is currently developing a draft Bill to improve policyholders’ protection by establishing policyholder protection funds. It will also widen the ambit of resolution powers that can be applied to insurers and establish new institutional responsibility for insurer resolution. The Bill is due to be enacted by October 2017.

The key structure and design features of the protection funds are still under discussions. At this stage, the thinking is at an early stage. It appears likely that the scheme will be limited to eligible policyholders who are natural persons and it may be capped at 80 to 90 percent of the value of a valid claim. In discussions with the authorities, it was noted that, in designing the scheme, consideration will need to be given to several factors, such as objectives and coverage of the scheme, flexibility of the scheme (interim continuation of policy coverage), transfer of long-term policies, treatment of investment-linked products, comparable treatment with other similar products, funding arrangement, levy structure, and supervisory oversight.

It is recommended that the authorities develop funds with sufficient contributions and flexible operations, while avoiding any moral hazard to the insurance industry. While the ICPs do not establish requirements related to policyholder protection funds, there are a number of different international practices in policyholder protection funds. In addition, the situation that the Indonesian insurance sector is facing is quite different from some other jurisdictions and could present challenges due to a significant presence of conglomeration and interconnectedness with banks. This may require larger size and more flexible design (for example, the industry wide protection funds can provide policyholders with interim continuation of policy coverage on the life side or a temporary liquidity facility to pay claims on the non-life side) than is the case in typical policyholder protection funds in other countries, with appropriate design to avoid creation of moral hazard in the insurance sector.

A Well-developed Public Infrastructure

25. Indonesian accounting and auditing standards have been developed in line with international best practices. The Accounting Standards Board of the Indonesian Accountants Association makes accounting standards. There is a clear commitment to full convergence to IFRS by Indonesia. In application of regulations in the insurance sector, Statutory Accounting Practice (SAP) is adopted in the Ministry of Finance regulation for prudential requirements of insurers and reinsurers. The Indonesia Institute of Certified Public Accountants (IAPI) was established in 1994.

The court system and other legal infrastructure are developed and the independence of the judiciary is respected. There is a comprehensive body of business laws, including on insolvency and on contractual and property rights. The constitution recognizes a strict separation among the judiciary, parliament, and government. The principle of judicial independence, i.e., freedom from legislative or political interference, is secured in practice through provisions in the law, providing for security of tenure, financial security, and administrative independence. Insurance professionals are readily available, for example from consulting firms with a global presence.

Financial Markets

26. Indonesian financial markets are growing but money markets are not very liquid and financial access is limited. The authorities are making efforts to deepen the monetary and capital markets with a number of initiatives, including the introduction of reserve requirement averaging and OJK’s launch of the Global Master Repurchases Agreement. However, as the small share of government and corporate bonds in the insurers’ investment allocation suggests, the financial markets, in particular fixed income markets, still need further development.

Actuaries

27. The Indonesian industry is facing a lack of domestic actuaries. The number of fellows of the Society of Actuaries of Indonesia is around 200. OJK in coordination with relevant associations has committed to accelerate the increase in the number of actuaries in five years starting from 2013. OJK is coordinating with several universities and international organizations to promote the actuarial profession by providing scholarships to candidate students and industry experts. In practice, internationally active insurers are using actuaries from home countries and third party actuarial services seem to be readily available.

28. A framework of actuarial standards is being established. The Society of Actuaries of Indonesia (PAI), as the organization of the actuarial profession in Indonesia, is committed to maintaining the profession’s integrity, high standards of practices through its discipline procedures and its constant review. Its Standards of Practice Committee has the responsibility for setting actuarial technical standards and is coordinating with OJK to develop the Manual of Actuarial Standards of Practice.

Table 1.

Indonesia: Summary of Observance with the ICPs

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E. Recommendations and Authorities’ Response

Table 2.

Indonesia: Summary of Observance Level

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Table 3.

Indonesia: Recommendations to Improve Observance with the ICPs

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F. Authorities’ Responses to the Assessment

29. We thank the assessors for taking time to understand the non-bank financial sector in Indonesia and for the detailed assessment report.

30. While we are in agreement with many of the ICP comments, we feel that some of the comments do not fully reflect the proportionality principle given the nature and scale of the insurance sector which is still developing in Indonesia. At OJK, we have progressed significantly in adopting the risk-based supervisory regime, advancing good corporate governance requirements and internal control mechanisms. Furthermore, with OJK’s integrated and strengthened regime for the financial conglomerates, we are well positioned to contribute to the continuing confidence of the financial sector in Indonesia.

31. We look forward to implementing most of the recommendations in due course.

Detailed Assessment

Table 4.

Indonesia: Detailed Assessment of Observance of the ICPs

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1

It was conducted by Nobuyasu Sugimoto (IMF) and Antony Randle (WB) from September 21 to October 5, 2016.

2

Control functions include risk management, compliance, actuarial, and internal audit functions.

Indonesia: Financial Sector Assessment Program-Detailed Assessment of Observance—Insurance Core Principles
Author: International Monetary Fund. Monetary and Capital Markets Department