## cr1874 ## Source details **Canonical URL:** [cr1874](https://www.imf.org/-/media/files/publications/cr/2018/cr1874.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr1874.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr1874.pdf.json) --- ### Sector growth and structure - Insurance sector growth: average of 20 percent per year over the last 5 years. - Sector shares of financial assets: - Insurance industry: 12 percent of total financial sector assets. - Banking sector: 76 percent of total financial sector assets. - Premiums: - Gross premium reached IDR 295 trillion as of 2015. - Gross premium reached IDR 223 trillion for the year to August as of August 2016. - Industry composition: - Total insurers/reinsurers: 138 companies. - 50 life insurers (42 percent of total insurance sector assets). - 2 social insurers (28 percent). - 88 general and reinsurers (16 percent). - 3 compulsory insurers (14 percent). - Distribution channels: - Agent distribution: 26 percent share (declining). - Bancassurance: 25 percent. - Brokers: 12 percent. - Direct marketing via Internet and telemarketing: increasing. ### Institutional framework and regulatory developments - OJK established in 2011 as independent, integrated regulator; missions include: 1. ensure activities in the financial sector are fair, transparent, and accountable; 2. promote growth in a sustainable and stable manner; 3. protect the interests of consumers and the public. - New Insurance Law effective October 2014 (Insurance Law 40/2014). - OJK issued more than 100 new regulations in the three years prior to assessment, including on risk based supervision, enhanced fit and proper requirements, governance and risk management. - Assessment timeframe and team: - Conducted as part of the 2016-17 FSAP. - Mission dates: September 21 to October 4, 2016. - Assessment team: Nobuyasu Sugimoto (IMF Expert) and Antony Randle (World Bank Expert). - Assessment based on laws, regulations, supervisory requirements and practices in place at time of assessment in September 2016. - Assessment against IAIS Insurance Core Principles (ICPs) issued October 2011, as revised November 2015. ### Observance shortfalls and institutional/legal gaps - ICP observance summary (26 ICPs assessed): - Observed (O): 6 - Largely observed (LO): 13 - Partly observed (PO): 7 - Not observed (NO): 0 - Key legal/institutional shortfalls: - Law does not set protection of policyholders as the primary objective of the supervisor; OJK’s multiple objectives can conflict with policyholder protection (ICP 1 — LO). - Lack of effective legal protection and indemnity for OJK, Commissioners and staff acting in good faith (ICP 2 — PO). - Arrangements for exchange of information and confidentiality include balanced reciprocity requirements in Law no 21 of 2011 that should be removed/clarified (ICP 3 — LO). - Lack of explicit legal power for OJK to impose conditions, limitations and restrictions on licenses in the main Insurance Law (ICP 4 — O, but recommendation to amend law). - Fit and proper regime: detailed but does not fully extend to Senior Management and defined “Key Persons in Control Functions” (ICP 5 — LO). - Corporate governance regulation needs reorganization and expansion to define duties, reporting lines, and policyholder-interest duties of directors/commissioners (ICP 7 — PO). - Group supervision weaknesses: group-wide supervision and intra-group transaction treatment limited; MoUs and cross-border cooperation need expansion (ICP 23, ICP 26 — LO). - Macroprudential surveillance lacks integrated conglomerate-level analyses and interconnectedness assessment (ICP 24 — LO). - Valuation and solvency treatment: suspension of mark-to-market in 2015 raised moral hazard concerns; discount rate methodology and MOCE application have material shortcomings (ICP 14 — PO). - Capital adequacy: catastrophe risk not yet included; capital add-on lacks transparent framework; intra-group transactions can create double gearing incentives (ICP 17 — PO). ### Assets, liabilities, and product mix - Life insurer asset allocation: - Stocks 30 percent. - Mutual funds 25 percent. - Bank deposits 17 percent. - Government bonds 15 percent. - Corporate bonds 8 percent. - Life product mix: - Unit-linked products 46 percent. - Endowment 34 percent. - Term 9 percent. - P&C product mix: - Property 30 percent. - Motor 28 percent. - Personal accident and health 10 percent. - Liabilities: - Technical provisions account for about 60 percent of total liabilities. - Observations: - Unit-linked products dominate life products. - Property and Motor are largest P&C lines. ### Interconnectedness, groups and reinsurance concentrations - OJK identified 49 conglomerates; 77 of 138 insurers are part of conglomerates. - Asset allocations and exposures: - Insurers allocate more than 25 percent of assets to bank deposits. - Insurers exposed to banks through equity investments. - Regulatory limits and rules: - Insurers not able to invest more than 20 percent of total investments into affiliated companies (intragroup transaction/investment limit). - 2016 regulation imposed minimum investment requirement of 20 percent into government bonds, to be increased to 30 percent by December 2017. - Intragroup transaction limits: subsidiaries 10 percent and affiliates 20 percent of total investment; additional 10 percent via private placement possible. - Reinsurance concentration and catastrophic risk: - Insurers required to set aside catastrophe reserve and have mandatory reinsurance arrangements with domestic reinsurers. - One reinsurer is owned by all general insurance companies, creating potential contagion if a significant catastrophe occurs. - OJK indicated risks in excess of domestic reinsurer capacity are retroceded to international reinsurers. - Recommendation: conduct stress testing for catastrophe scenarios and contagion from domestic reinsurance concentration; consider suppression of mandatory reinsurance programs if they could cause contagion. ### Solvency, failures, and vulnerabilities - Industry failures and enforcement: - Over the last 10 years, licenses of 24 insurance companies revoked due to management failures. - Since OJK’s establishment, 4 insurance companies failed with an estimated total deficit of about IDR 906 billion. - Example: PT Assuransi Jiwa Bumi Asih Jaya (BAJ): - Established 1988; 2013 total assets IDR 517 billion; over 13,000 policyholders. - Solvency ratio at time of license revocation: 12 percent (minimum level 120 percent). - License revoked October 2013; appeal and legal process culminated with Supreme Court decision in September 2015 in favor of OJK; liquidator appointed; policyholders awaiting payment with no partial payouts; BAJ appeal dismissed September 2016. - Government amended law to give OJK power to appoint liquidators without court process and submitted bill to establish policyholder protection funds. - Industry capitalization and volatility: - Average solvency ratio: over 500 percent for life and over 250 percent for non-life. - Solvency ratios of some insurers, including large groups, are declining and volatile. - In 2015 market turmoil OJK relaxed solvency requirement for nine months and temporarily suspended mark to market valuation rules for some firms; suspension subsequently removed. - Vulnerabilities: - Significant catastrophic risk with domestic concentrations via mandatory reinsurance programs. - Some life underwriting denominated in USD affected by low interest rate environment in advanced economies. - Exposures to credit, claim and reinsurance risk significant for top non-life insurers; credit risk largest for top life insurers (per OJK figures). ### Risk-based capital, reserving framework, and actuarial issues - RBC and reserving framework covers: - default risk of investments, ALM, FX mismatch, premium and claim risk, operational risk, mutual fund related risk, guarantee risk associated with unit-linked products. - Gaps: - Catastrophe risk not yet included in capital requirement though OJK working to include it. - Contagion risk from related parties remains a material risk. - OJK has not conducted thematic reviews for each risk in RBC calculation. - No evidence of OJK validations of asset and liability components and guarantees related to unit-linked products. - Valuation specifics: - Discount rate methodology: maximum discount rates specified as the 3-year average of Indonesian government bond yields; companies can increase discount rate by up to 0.5 percent if better investment performance than 3-year average yields. - MOCE: technical provisions generally valued based on central estimate plus margins for adverse deviation with at least 75 percent confidence level on company level over entire policy period; MOCE required only for premium reserve and not for claims reserves in some instances. - Concerns: 3-year average may materially deviate from current conditions when rates drop; single discount rate by average duration does not capture cash flow characteristics; suspension of mark to market in 2015 may have created moral hazard. ### Capital framework and group capital treatment - Solvency regime: - Solvency Level: insurers must meet Solvency Level of at least 100 percent at any time and 120 percent annually of RBC. - Insurers below 120 percent prohibited from distributing dividends or rewards to shareholders. - If insurer fails to meet minimum solvency ratio of 40 percent, required to formulate Financial Recovery Plan. - Capital requirement schedules (selected): - Schedule A: asset default risk (equity charge 16 percent; bonds 2 to 16 percent depending on credit quality). - Schedule B: cash-flow mismatch risk (4 percent of difference between asset and liability in same duration bucket). - Schedule C: foreign currency mismatch risk (20 percent allowance; beyond that 30 percent capital charge if liabilities in FX higher than assets; 10 percent if assets higher than liabilities). - Schedule D: claim risk with 95 percent confidence level. - Schedule E: premium risk. - Schedule F: reinsurance risk. - Schedule G: operational risk. - Schedule H: investment fund’s default risk (0.1 percent of investment fund) and risks associated with unit-linked products (guaranteed or non-guaranteed benefits). - Group capital: - Financial conglomerate group capital required at aggregated capital minimum of 100 percent of combined ratio using building block method (simple summation of individual entity capital requirements). - Capital resources aggregated similarly; bank parent capital provided to subsidiaries is deducted from bank. - Intragroup transactions up to investment limits not adjusted for in capital calculations for insurance entities, creating potential for double gearing and capital inflation. - Capital resources and subordinated loans: - Capital resources defined as total admitted assets minus total liabilities (except eligible subordinated loans). - Subordinated loans recognized as capital resources only when solvency ratio drops below 120 percent and loans meet conditions (payment of principal only if it does not breach capital requirement; term amortization not limited; interest rate max one fifth of Bank Indonesia interest rate at agreement time). ### Consumer protection, complaints handling, and policyholder protection funds - Complaints and ADR: - OJK requires financial institutions to establish complaints handling/IDR systems. - Alternative Dispute Resolution for whole financial sector developed December 2015; ADR for insurance in place since 2006 (mediation, adjudication, arbitration). - OJK analyzes complaints and takes up issues with companies/intermediaries as appropriate. - Complaint numbers: 2014: 445; 2015: 162; 2016 (partial): 20. - Policyholder protection: - No industry-wide guaranty fund established at time of assessment; current protection relies on company-level guarantee funds. - Company-level guarantee fund requirements: - Fund comprises minimum of 20 percent of insurer’s capital and must be held in bank deposits and government bonds. - Withdrawal needs prior OJK approval; funds to be used solely for payment to policyholders. - Life insurer must establish guarantee fund: either 20 percent of 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, whichever is higher. - General insurer and reinsurer must establish guarantee fund: either 20 percent of capital, or 1 percent from net premiums plus 0.25 percent from reinsurance premium, whichever is higher. - New bill to establish industry-wide policyholder protection funds: - Draft Bill being developed by MoF in accordance with Article 53 of the Insurance Law. - Bill due to be enacted by October 2017 (as stated in source content). - Preliminary design considerations include limiting scheme to eligible policyholders who are natural persons and possibly capping at 80 to 90 percent of value of valid claim. - Recommendation: develop funds with sufficient contributions and flexible operations while avoiding moral hazard; Indonesia’s conglomeration and bank interconnectedness may require larger and more flexible design (e.g., interim continuation of policy coverage, temporary liquidity facility). - Winding-up and exit issues: - No clear timeline after insurer breaches minimum capital level (40 percent) for revocation and liquidation; policyholders have experienced delays (BAJ example). - Recommendations for OJK include developing and publishing guidance to ensure timely revocation, clarifying financial restructuring plans, and establishing industry-wide policyholder protection funds. ### Supervisory priorities and recommended reforms (selected) - Legal/institutional: - Amend Insurance Law to specify protection of policyholders as OJK’s primary objective (ICP 1). - Amend Law no 21 of 2011 to ensure OJK, its Commissioners and staff protected from legal actions for acts in good faith and ensure legal defense costs can be met (ICP 2). - Remove/clarify balanced reciprocity requirements in Law no 21 of 2011 and expand MoU scope (e.g., join IAIS MMoU) (ICP 3, ICP 26). - Provide explicit power for OJK to impose conditions, restrictions and limitations on licenses in Insurance Law (ICP 4). - Group and macroprudential supervision: - Strengthen group regulation and supervision to address intra-group transactions, double gearing, and investment arbitrage between insurance entities and non-financial affiliates (ICP 23, ICP 24). - Integrate conglomerate-level analyses and conduct contagion stress tests (e.g., failure of large domestic reinsurer) (ICP 24). - Solvency, capital and reserving: - Incorporate catastrophe risk into RBC and implement a framework for imposition of capital add-ons (ICP 17). - Conduct thematic reviews of reserving practices to encourage more conservative reserving and reviews of RBC schedule components (B, E, H) (ICP 14, ICP 17). - Apply more market consistent discount rates using the entire yield curve and apply MOCE consistently over all reserves (ICP 14). - Supervisory effectiveness and resources: - Increase OJK human resources expertise, particularly actuaries; accelerate actuarial capacity building (PAI engagement and OJK scholarship initiatives). - Improve guidance on adequacy, independence and reporting lines of key control functions; establish dedicated risk management/internal control regulation obliging adequately resourced, independent risk management, compliance, internal audit, and actuarial functions (ICP 8). - Revise the “three strikes” approach to ensure timely supervisory actions (ICP 11). - Facilitate communication with industry to support transition from compliance-based to risk-based supervision and clarify ORSA expectations (ICP 16). - Market conduct and intermediaries: - Enhance disclosure requirements for intermediaries including terms and remuneration information (ICP 18). - Strengthen coordination with insurance associations on training and examinations for intermediaries (ICP 18). - Continue efforts to ensure efficiency and fairness in claims payment and complaints handling given growth in life and complex unit-linked products (ICP 19). ### Actuarial capacity, accounting and markets - Actuarial profession: - Fellows of Society of Actuaries of Indonesia around 200. - OJK committed to accelerate increase in number of actuaries in five years starting from 2013; coordinating with universities and international organizations and offering scholarships. - PAI Standards of Practice Committee coordinating with OJK to develop Manual of Actuarial Standards of Practice. - Accounting and auditing: - Indonesian accounting and auditing standards developed in line with international best practices with commitment to full convergence to IFRS. - Statutory Accounting Practice (SAP) adopted in Ministry of Finance regulation for prudential requirements. - Financial markets: - Money markets not very liquid; small share of government and corporate bonds in insurers’ investment allocation suggests fixed income markets need further development. - Authorities deepening monetary and capital markets via initiatives including reserve requirement averaging and OJK’s launch of the Global Master Repurchases Agreement. ### Selected ICP-specific recommendations (condensed) - ICP 1: Amend principal Insurance Law to specify principal objective of OJK is protection of policyholders. - ICP 2: Amend Law no 21 of 2011 to provide non-liability for acts within scope and done in good faith and indemnification for defense costs; review actuary resources. - ICP 3: Remove/clarify reciprocity requirement; develop internal policies/processes for safe information exchange; expand MoU scope (e.g., IAIS MMoU). - ICP 4: Clarify licensing scope and give OJK explicit power to impose license conditions. - ICP 5: Extend fit and proper requirements to Senior Management and define “Key Persons in Control Functions”. - ICP 7: Revise regulation no 02/POJK.05/2014 to clearly assign duties, reporting lines, and policyholder protection responsibilities. - ICP 8: Establish dedicated risk management/internal control regulation defining roles, independence and resourcing for risk manager, internal auditor, compliance officer, actuary. - ICP 9: Require missing reporting items under ICP 9.5 and formalize risk rating update policies. - ICP 11: Revise “three strikes” approach to ensure timely supervisory action. - ICP 12: Publish guidance for timely license revocation; clarify restructuring plans for breaches of 120 percent and below 40 percent; establish industry-wide policyholder protection funds. - ICP 14: Work with actuarial association on guidance for assumptions; apply market-consistent discount rates and consistent MOCE; impose enhanced prudential standards on firms that relied on 2015 suspension. - ICP 15: Enhance investment limits to mitigate concentration and contagion; conduct thematic reviews of investment practices; aggregate exposures across instruments. - ICP 16: Improve communication on new regulations; conduct thematic reviews and clarify expectations for stress tests and risk tolerance statements. - ICP 17: Adjust solo capital ratios for entities providing capital to group financial entities; conduct thematic reviews of RBC schedules. - ICP 18: Require intermediaries to disclose status and remuneration; continue training certification enhancements. - ICP 19: Encourage exercise and dialogue to improve cyber resilience. - ICP 20: Implement ICP 14 and 16 improvements before amending disclosure; encourage voluntary disclosure of risk management and corporate governance. - ICP 23: Participate more actively in supervisory colleges and IAIS activities; analyze intergroup transactions for group-wide supervision scope. - ICP 24: Integrate conglomerate-level analyses and conduct contagion stress tests; consider suppression of mandatory reinsurance if contagion risk exists. - ICP 26: Expand MoU scope (e.g., IAIS MMoU) and share inspection analyses with home supervisors. *Source: IMF/World Bank assessment excerpt (Indonesia, Insurance Core Principles) contained in the supplied content.* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 4 ### EXECUTIVE SUMMARY ### Key Findings — Sector Growth and Structure - The insurance sector has grown rapidly at an average of 20 percent per year over the last 5 years. - The insurance industry accounts for 12 percent of total financial sector assets; the banking sector controls 76 percent. - As of 2015, gross premium reached IDR 295 trillion; as of August 2016, gross premium reached IDR 223 trillion for the year to August. - The industry comprises 138 insurance and reinsurance companies: 50 life insurers (42 percent of total insurance sector assets), two social insurers (28 percent), 88 general and reinsurers (16 percent), and three compulsory insurers (14 percent). - Distribution modes: agent distribution has 26 percent share (declining); bancassurance accounts for 25 percent; brokers account for 12 percent; direct marketing via Internet and telemarketing increasing. ### Institutional Framework and Regulatory Developments - OJK (Financial Services Authority) established in 2011 as independent, integrated regulator; missions: 1) ensure activities in the financial sector are fair, transparent, and accountable, 2) promote growth in a sustainable and stable manner, and 3) protect the interests of consumers and the public. - New Insurance Law effective October 2014. - In the last three years prior to assessment, OJK issued more than 100 new regulations, including those on risk based supervision, enhanced fit and proper requirements, governance and risk management. - Assessment conducted against IAIS Insurance Core Principles (ICPs) issued October 2011, as revised November 2015. ### Observance and Legal/Institutional Shortfalls - The assessment identified a significant number of shortfalls in observance with the Insurance Core Principles. - Deficiencies include lack of effective group regulation and supervision of insurance groups; intra-group transactions are not well taken into account. - The law does not set protection of policyholders as the primary objective of the supervisor; OJK’s multiple objectives (including market development) can conflict with policyholder protection. - Legal protection for OJK and its staff acting in good faith needs strengthening; clearer internal guidance for applying sanctions is recommended. ### Assets, Liabilities, and Product Mix - Life insurer asset allocation: stocks 30 percent, mutual funds 25 percent, bank deposits 17 percent, government bonds 15 percent, corporate bonds 8 percent. - Life premiums: unit-linked products 46 percent, endowment 34 percent, term 9 percent. - P&C product shares: property 30 percent, motor 28 percent, personal accident and health 10 percent. - Technical provisions account for about 60 percent of total liabilities. - Unit-linked products dominate life products; P&C largest shares are Property and Motor. ### Interconnectedness and Group Risks - OJK identified 49 conglomerates; 77 of 138 insurers are part of conglomerates. - Insurers allocate more than 25 percent of assets to bank deposits and are exposed to banks through equity investments. - Regulatory investment limit: insurers are not able to invest more than 20 percent of total investments into affiliated companies. - 2016 regulation imposed minimum investment requirement of 20 percent into government bonds, to be increased to 30 percent by December 2017. - Group capital requirement: conglomerate is required to calculate group capital by adding capital requirements of each sector. However, capital calculations for insurance entities do not adjust for intragroup transactions up to the investment limit, creating potential for double gearing and capital inflation through intra-group transactions. ### Solvency, Failures, and Vulnerabilities - Over the last 10 years, licenses of 24 insurance companies have been revoked due to management failures. - Since OJK’s establishment, 4 insurance companies failed with an estimated total deficit of about IDR 906 billion. - Industry capitalization: average solvency ratio over 500 percent for life and over 250 percent for non-life. - Despite high averages, solvency ratios of some insurers, including large insurance groups, are declining and volatile. - During 2015 market turmoil, OJK relaxed the solvency requirement for nine months and temporarily suspended mark to market valuation rules. - Industry exposures: significant catastrophic risk with domestic concentrations through mandatory reinsurance programs; some life underwriting denominated in USD affected by low interest rate environment in advanced economies. ### Assessment Methodology and Scope - Assessment conducted as part of the 2016-17 Financial Sector Assessment Program (FSAP). - Assessment team: Nobuyasu Sugimoto (IMF Expert) and Antony Randle (World Bank Expert); mission dates September 21 to October 4, 2016. - Level of observance rated per ICP standards: Observed; Largely observed; Partly observed; Not observed. - Assessment based solely on laws, regulations, supervisory requirements and practices in place at time of assessment in September 2016. ### Policy Recommendations and Supervisory Priorities - Amend laws to set protection of policyholders as OJK’s primary objective and provide clear legal protection for OJK and staff acting in good faith. - Strengthen group regulation and supervision to address intra-group transactions, double gearing, and investment arbitrage between insurance entities and non-financial affiliates. - Incorporate capital calculation for catastrophic risk and implement a framework for imposition of capital add-ons to tighten capital regime. - Improve effectiveness of supervision by: - Conducting thematic reviews of reserving practices to encourage more conservative reserving. - Providing clearer guidance on adequacy, independence and reporting lines of key control functions. - Increasing OJK human resources expertise, particularly actuaries. - Revising the “three strikes” approach to ensure timely supervisory actions. - Facilitating communication with industry participants to support transition from compliance-based to risk-based supervision. - Enhance macroprudential surveillance by integrating conglomerate analysis to identify possible contagion among conglomerates and sectors. - Increase focus on regulation of insurance intermediaries and market conduct by: - Enhancing disclosure requirements for intermediaries. - Strengthening coordination with insurance associations. - Continuing efforts to ensure efficiency and fairness in claims payment and complaints handling, especially given growth in life insurance and complex unit-linked products. *Source: IMF/World Bank assessment of Indonesia insurance sector, executive summary and ICP assessment material (content as provided).* ### 17. The Indonesian insurance industry is exposed to significant catastrophic risks with ### 17. The Indonesian insurance industry is exposed to significant catastrophic risks with ### Catastrophic risk, domestic reinsurance concentrations, and contagion - Indonesia is prone to landslides, floods, storms, earthquakes, tsunamis, and volcanic eruptions. - Insurers are required to set aside a catastrophe reserve and 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. ### Impact of the 2015 economic slowdown and low interest rates - The economic slowdown in 2015 affected the growth of the insurance sector through lower growth in premiums. - The life sector has significant exposure to equity and mutual funds; performance was affected negatively. - The low interest rate environment reduced insurance investment returns. - 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 subsequently removed this suspension to avoid moral hazard and the expectation of further concessions. - There were a few insurers that utilized the policy and OJK stringently monitored these insurers. ### Box 1 — Failure of Medium Size Life Insurance Company (BAJ) - PT Assuransi Jiwa Bumi Asih Jaya (BAJ) background: - Established in 1988. - In 2013, 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. - Solvency and enforcement timeline: - Starting in 2007, BAJ faced difficulties meeting the minimum capital requirement and the Ministry of Finance imposed several sanctions. - OJK 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). - The Commercial Court initially ruled in favor of BAJ and rejected OJK’s bankruptcy petition. - OJK filed an appeal in June 2015. - 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. - BAJ appealed the Supreme Court decision; based on the outcome in September 2016, BAJ’s appeal was dismissed. - Wider effects and legal reform: - The bankruptcy had some negative impact on the rural banks (BPR) and other financial entities within the group, but the capital ratio of the bank is still above the requirement and it continues to operate. - The government amended the law and gave OJK the power to appoint liquidators without a court process. - The Government also submitted a new bill to establish policyholder protection funds. ### Risk-based capital, reserving framework, and outstanding gaps - OJK introduced a risk-based capital (RBC) and reserving framework covering risks such as: - default risk of investments, - asset and liability mismatch (ALM), - FX mismatch, - premium and claim risk, - operational risk, - mutual fund related risk, - guarantee risk associated with unit-linked products. - Remaining material risks needing further improvements: - catastrophe risk addressed through reinsurance, - contagion risk from related parties. - OJK has not conducted thematic reviews for each risk in RBC calculation. - Figures referenced (from OJK) indicate: - For top 5 life insurers: credit risks account for the biggest share of total capital requirements. - For top 5 non-life insurers: credit, claim and reinsurance risk account for the biggest shares of total capital requirements. ### Preconditions for effective insurance supervision — macroeconomic and institutional context - Fiscal and monetary framework: - 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. - Bank Indonesia has implemented and enhanced monetary policy measures within the inflation-targeting framework and introduced macroprudential measures. - Regulatory transition and legal gaps: - Bank supervision and regulation were moved from Bank Indonesia to OJK in 2014; Bank Indonesia retained regulatory responsibility for macroprudential policy. - Need to align legislation to the new institutional arrangement; gaps exist in bank liquidity assistance, resolution frameworks, and legal protection for supervisors for 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. - Financial System Crisis Prevention and Resolution Law (PPKSK Law) 2016 and KSSK: - Established a Financial System Stability Committee (KSSK). - KSSK membership: 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 can recommend to the President to declare a (systemic) crisis status and recommend resolution measures. ### Consumer protection, complaints handling, and policyholder protection funds - Complaints handling: - OJK requires financial institutions (including insurers) to establish an effective complaints handling unit or Internal Dispute Resolution system. - OJK developed an Alternative Dispute Resolution process in December 2015 for the whole financial sector; ADR for insurance has been in place since 2006 (mediation, adjudication, arbitration). - OJK analyzes and responds to complaints and takes up issues with companies or intermediaries as appropriate. - Current policyholder protection and limitations: - No industry wide guaranty fund has been established; policyholder protection currently relies on guarantee funds maintained at individual company level. - Insurers must comply with minimum capital requirements; if ratio drops below 40 percent, OJK can 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 liquidation, but a guaranty fund absence means policyholders can suffer material loss (BAJ example). - Box 2 — Design and status of policyholder protection funds: - Current company-level guarantee fund requirements: - 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 payment to 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, whichever 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, whichever is higher. - New bill to establish industry-wide policyholder protection funds: - 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 developing a draft Bill to improve policyholders’ protection by establishing policyholder protection funds and to widen the ambit of resolution powers and establish new institutional responsibility for insurer resolution. - The Bill is due to be enacted by October 2017. - Preliminary design considerations include limiting the scheme to eligible policyholders who are natural persons and possibly capping at 80 to 90 percent of the value of a valid claim. - Design factors to consider: objectives and coverage, flexibility (interim continuation of policy coverage), transfer of long-term policies, treatment of investment-linked products, comparable treatment with similar products, funding arrangement, levy structure, and supervisory oversight. - Recommendation: authorities should develop funds with sufficient contributions and flexible operations, while avoiding any moral hazard to the insurance industry. - Note: Indonesia’s significant conglomeration and interconnectedness with banks may require larger size and more flexible design (e.g., interim continuation of policy coverage on the life side or temporary liquidity facility to pay claims on the non-life side) than typical policyholder protection funds, with appropriate design to avoid creating moral hazard. ### Public infrastructure, financial markets, and actuarial capacity - Accounting, auditing, and legal infrastructure: - Indonesian accounting and auditing standards have been developed in line with international best practices; clear commitment to full convergence to IFRS. - 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; independence of the judiciary is respected. - Financial markets: - Financial markets are growing but money markets are not very liquid and financial access is limited. - Authorities are deepening monetary and capital markets via initiatives including reserve requirement averaging and OJK’s launch of the Global Master Repurchases Agreement. - The small share of government and corporate bonds in insurers’ investment allocation suggests fixed income markets need further development. - Actuaries and human capital: - The number of fellows of the Society of Actuaries of Indonesia is around 200. - OJK committed, in coordination with relevant associations, 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. - Internationally active insurers are using actuaries from home countries and third party actuarial services seem to be readily available. *International Monetary Fund. Financial Sector Assessment — Indonesia (chapter excerpt).* ### 28. A framework of actuarial standards is being established. The Society of Actuaries of ### 28. A framework of actuarial standards is being established. The Society of Actuaries of Indonesia (PAI) ### Summary finding on actuarial standards - The Society of Actuaries of Indonesia (PAI), as the organization of the actuarial profession in Indonesia, is committed to maintaining the profession’s integrity and high standards of practices through its discipline procedures and its constant review. - PAI’s 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. ### ICP observance summary (key statistics) - Total ICPs assessed: 26 - Observed (O): 6 - Largely observed (LO): 13 - Partly observed (PO): 7 - Not observed (NO): 0 ### Selected substantive findings by Insurance Core Principle (excerpted) - ICP 1 - Objectives, Powers and Responsibilities of the Supervisor — LO - The Law does not recognize the protection of policyholders as the primary function of the supervisor; this needs to be addressed to ensure policyholder protection is paramount if conflicts arise with other roles such as promoting market development. - ICP 2 - Supervisor — PO - OJK, its Commissioners and staff do not have adequate protection from actions by third parties for acts performed in the proper performance of duties; Law needs to provide non-liability for acts within scope and done in good faith and indemnification for defense costs. - ICP 3 - Information Exchange and Confidentiality Requirements — LO - Arrangements in OJK for exchange of information and protection of confidentiality are ad hoc; Law should reflect that information exchange should not be subject to reciprocity; OJK should develop processes and policies. - ICP 4 - Licensing — O - Construction of the main Insurance Law poses doubts as to which entities require licensing; OJK lacks explicit powers in law to impose conditions, limitations and restrictions on licenses although it does so in practice. - ICP 5 - Suitability of Persons — LO - Suitability requirements are detailed and effective but do not cover all parties required by ICP; Law should extend fit and proper requirements to Senior Management and define “Key Persons in Control Functions”. - ICP 7 - Corporate Governance — PO - Regulation requires reorganization and expansion to set out duties, functions, roles, obligations, and reporting lines for parties setting entity direction and risk management framework; specific gaps include obligations of directors and commissioners, functions in setting objectives and risk appetite, role and reporting lines of Senior Management and Key Persons in Control Functions, relationship with external auditor, and reporting framework to supervisor. - ICP 9 - Supervisory Review and Reporting — LO - OJK has made significant progress in implementing an effective risk based supervision system but needs to supplement information collection and formalize a risk rating framework to improve consistency and usefulness. - ICP 11 - Enforcement — LO - OJK in some circumstances applies a “three strikes and out” process; this should be reviewed to ensure it does not hinder timely supervisory action as required by the ICP. - ICP 12 - Winding-up and Exit from the Market — PO - OJK can revoke a license and form a liquidation team but there is no clear timeline after an insurer breaches the minimum capital level (which is 40 percent); policyholders of a recently failed company experienced significant delays in settlement. - ICP 14 - Valuation — PO - Discount rate methodology (3-year average) may materially deviate from current conditions when rates continue to drop and does not capture cash flow characteristics; MOCE required only for premium reserve and not for claims reserves; mark to market was suspended for several months in 2015, potentially creating moral hazard. - ICP 15 - Investment — PO - Investment limit based on total investments is so high it does not prevent excessive concentration risk; intragroup transaction limit is 20 percent of the portfolio and could permit excessive concentration to intragroup affiliates. - ICP 16 - Enterprise Risk Management for Solvency Purposes — LO - ORSA and part of ERM requirements have been recently implemented; actual implementation in practice is yet to be seen. - ICP 17 - Capital Adequacy — PO - Catastrophe risk is not yet included though OJK is working to include it; capital add-on can be imposed without a transparent framework; no evidence of OJK validations of asset and liability components and guarantees related to unit-linked products. - ICP 18 - Intermediaries — LO - Intermediaries must provide certain information to policyholders but no disclosure requirement about terms and condition, relationship with insurers, or information related to remuneration. - ICP 19 - Conduct of Business — LO - OJK requires protection of private customer information; given increasing internet and mobile sales, OJK should work with industry to mitigate operational risks such as cyber risk. - ICP 20 - Public Disclosure — LO - OJK requires detailed disclosures of investments, but disclosures relating to technical provisions and ALM are not sufficient; no requirement about risk management practices and corporate governance. - ICP 23 - Group-wide Supervision — LO - OJK’s coordination with home supervisors is mainly through participation in supervisory colleges; information exchange with home supervisors is not yet active enough to define scope of group supervision effectively. - ICP 24 - Macroprudential Surveillance and Insurance Supervision — LO - Vulnerability analyses focus mostly on individual entities or groups; no exercise captures interconnectedness among sectors and conglomerates; interconnectedness between banks and insurers and through reinsurers could have systemic implications. - ICP 26 - Cross-border Cooperation and Coordination on Crisis Management — LO - MoUs with relevant regulators are still missing, which may prevent effective cross-border supervision and crisis management coordination. ### Key recommendations (selected) - ICP 1 - Amend the principal Insurance Law 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. - ICP 2 - Work with MoF to amend Law no 21 of 2011 to ensure OJK, its commissioners and staff are protected from legal actions for acts done in good faith and that legal defense costs can be met; review adequacy of expert resources, in particular actuaries. - ICP 3 - Remove or clarify balanced reciprocity requirements in Law no 21 of 2011; develop policies and processes for safe information exchange; expand MoU scope (for example joining the IAIS MMoU) and share analysis with home supervisors. - ICP 4 - Work with MoF to review the Insurance Law to provide transparent licensing requirements and explicit power for OJK to impose conditions, restrictions and limitations on licenses. - ICP 5 - Extend suitability requirements to Senior Management and define “Key Persons in Control Functions” and extend suitability requirements to them. - ICP 6 - Amend OJK regulation to include definitions of “associate” or “related party”. - ICP 7 - Revise and amend regulation no 02/POJK.05/2014 to better reflect ICP 7 requirements. - ICP 8 - Establish a dedicated risk management and internal control regulation obliging insurers to have adequately resourced, independent risk management, compliance, internal audit, and actuarial functions. - ICP 9 - Review quarterly reporting information against ICP 9.5 and require submission of missing items; develop written policies and processes for updating risk ratings. - ICP 11 - Revise the “three strikes” approach to ensure supervisory actions can be effected timely. - ICP 12 - Develop and publish guidance to ensure timely revocation of a license; clarify roles of financial restructuring plans for insurers breaching target capital levels (120 percent) and those below 40 percent; establish policyholder protection (industry wide) funds with sufficient funds and flexibility while avoiding moral hazard; ensure winding-up and exit procedures are clearly outlined in law and identify a legal point at which an insurer may no longer operate. - ICP 14 - Work closely with the actuarial association on guidance for key assumptions; impose enhanced prudential standards (stress testing, business continuity planning) on firms that relied on the 2015 temporary suspension of mark to market; apply more market consistent discount rates using the entire yield curve; apply MOCE consistently over all insurance reserves. - ICP 15 - Enhance investment requirements to mitigate excessive concentration and contagion risk from affiliates or related entities; conduct thematic reviews on investment practices; monitor concentration of single counterparties by aggregating all exposures. - ICP 16 - Enhance communication with industry about objectives of new regulations; conduct thematic reviews and formulate clear expectations for stress tests and risk tolerance statements. - ICP 17 - Adjust capital adequacy ratios at solo level if an entity provides capital to financial entities within the group; conduct thematic reviews of schedules in the risk based capital requirement (B, E, H) to ensure appropriate capital charge calculations. - ICP 18 - Continue and enhance coordination with insurance association on training and examination; require intermediaries to disclose status and remuneration to customers. - ICP 19 - Conduct informal exercises (horizontal self-assessment) and enhance dialogue with industry to improve resilience to cyber risk. - ICP 20 - Implement recommendations related to ICPs such as ICP 14 and 16 before amending disclosure requirements; encourage voluntary improvement in disclosure of risk management and corporate governance. - ICP 23 - Establish more active participation in supervisory colleges and IAIS activities (including IAIS MMoU); analyze intergroup transactions in detail to cooperate with home and other supervisors on scope of group-wide supervision. - ICP 24 - Integrate conglomerate-level analyses to identify contagion among conglomerates and sectors; conduct contagion analysis from domestic reinsurance concentration (stress testing with catastrophe and failure of a large domestic reinsurer); consider suppression of mandatory reinsurance programs if they could cause contagion. - ICP 26 - Expand MoU scope (for example by joining the IAIS MMoU) and share inspection analyses with home supervisors to enhance cooperation. *Source: IMF assessment excerpt (Indonesia, Insurance Core Principles) contained in the supplied content.* ### 29. We thank the assessors for taking time to understand the non-bank financial sector in ### cr1874 - 29. We thank the assessors for taking time to understand the non-bank financial sector in ### Overview and response - Paragraph 29: Expression of thanks to the assessors for taking time to understand the non-bank financial sector in Indonesia and for the detailed assessment report. - Paragraph 30: Agreement with many ICP comments, but concern that some comments do not fully reflect the proportionality principle given the nature and scale of the insurance sector which is still developing in Indonesia. OJK notes progress in: - adopting the risk-based supervisory regime; - advancing good corporate governance requirements and internal control mechanisms; - implementing an integrated and strengthened regime for financial conglomerates to support confidence in the financial sector. - Paragraph 31: OJK looks forward to implementing most of the recommendations in due course. ### DETAILED ASSESSMENT — Table 4: Indonesia: Detailed Assessment of Observance of the ICPs #### ICP 1 Objectives, Powers and Responsibilities of the Supervisor - 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: - a. implemented in an organized, fair, transparent and accountable manner; - b. able to realize the financial system that grows in a sustainable and stable manner; and - c. capable of protecting the interests of consumers and the society.” - Article 8 of the same Law outlines the authority of OJK with regard to supervised entities, stating responsibilities including: - a. Establish implementing regulations for this Law; - b. Establish rules and regulations in the financial services sector; - c. Establish OJK rules and decisions; - d. Establish rules regarding supervision of the financial services sector; - e. Establish policies regarding the implementation of OJK duties; - f. Establish rules concerning procedures for issuing a written order to financial services institutions and certain other parties; - g. Establish rules concerning procedures for appointing statutory managers in financial services entities; - h. Establish organizational structure and infrastructure as well as to manage, maintain and administer assets and liabilities; and - i. Establish rules regarding procedures for imposing sanctions in accordance with the provisions of legislation in the financial services sector. - Article 9 provides further authorities including: - a. Establish operational oversight policies for financial services activities; - b. Oversee the implementation of supervisory duties performed by the Chief Executive; - c. Conduct supervision, inspection, investigation, consumer protection and other actions directed at financial services entities, players and entities performing supporting activities as defined under the laws and regulations concerning the financial services sector; - d. Provide written orders to the financial services entities and/or certain parties; - e. Appoint statutory managers; - f. Establish the use of statutory managers; - g. Impose administrative sanctions on any party that violates the laws and regulations in the financial services sector; and - h. Issue and/or revoke: - 1. Business licenses; - 2. Individual licenses; - 3. Effective registration statements; - 4. Registered license letter; - 5. Approval of business in activities; - 6. Ratification; - 7. Approval or determination of liquidation; and - 8. Other confirmations. - Statement: “In general, the objective of supervision in OJK law is implemented equally with consideration of linkages between one objective and another. As an example, if insurance industry is not stable, it will have an impact on policyholders protection.” - 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. - Assessment: Largely Observed - 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. - Recommendation: 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. #### ICP 2 Supervisor - Standard expectations: - The supervisor, in the exercise of its functions and powers: - is operationally independent, accountable and transparent; - protects confidential information; - has appropriate legal protection; - has adequate resources; and - meets high professional standards. - Description: - No provisions in either Act 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. - Assessment: Partly Observed - 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. - Recommendations: - work with MoF to amend Law no 21 of 2011 to ensure that OJK, its directors and staff are protected from legal actions for any acts done in good faith; and - work with MoF to amend Law no 21 of 2011 to ensure that OJK has the power to meet the legal expenses of any director or staff member who is defending an action where the director or staff member has performed his or her duties in good faith; and - Review the adequacy of its expert resources, in particular actuaries. #### ICP 3 Information Exchange and Confidentiality Requirements - Standard: The supervisor exchanges information with other relevant supervisors and authorities subject to confidentiality, purpose, and use requirements. - Description: - Article 22 of Law no 40/2014: “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 external uses of information obtained in Article 22, stating: “Certain reports and analysis as referred to in Article 22(1) cannot be disclosed by OJK to another party, except to: - 1. The police and prosecutors for the purpose of investigation; - 2. Judges in the interest of justice; - 3. Tax officials for taxation purposes; - 4. The Bank of Indonesia for the implementation of its duties; or - 5. Other parties based on legal requirements.” - Article 47 of Law no 21 of 2011: “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: - Institutional capacity building including training of human resources in the field of regulation and supervision of financial services institutions; - Information exchange; - Cooperation in the framework of the examination and investigation such as prevention of crime in the financial sectors.” - Sub-articles (4) and (5) provide: “OJK may cooperate and provide assistance in the framework of the examination and investigation conducted by the supervisory authority of the financial services institution of other countries based on written requests; the cooperation and assistance in the framework of the examination and investigation as referred to in paragraph 4 could be performed in the financial service supervisory authority of the other countries have reciprocal agreements of cooperation with OJK.” - 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. - Assessment: Largely Observed - Comments: - The requirements for reciprocal arrangements need to be removed to comply with ICP *Source: cr1874 - 29. We thank the assessors for taking time to understand the non-bank financial sector in* ### 3. It is recommended that OJK develop internal policies and processes for information ### 3. It is recommended that OJK develop internal policies and processes for information ### Information exchange — recommendations and processes - Recommendation: OJK should develop internal policies and processes for information requests, particularly for those regulators with which OJK does not have a Memorandum of Understanding. - Policies and processes should cover: - who receives and approves requests; - how the recipient organization is bound by confidentiality; - that the recipient is 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. - Specific recommendations: - the requirements for balanced reciprocity be removed from Law no 21 of 2011 or clarified to ensure appropriate and smooth exchange of information; - OJK develop policies and processes for the proper and safe exchange of information; and - OJK expand the scope of MoU, for example by joining in the IAIS MMoU, and offering its analysis (such as key results of inspection results) to the home supervisors to enhance the cooperation with home supervisors. ### ICP 4 Licensing — description, requirements, and observations - Legal basis: - Article 8 (1) of Law no 40 of 2014: “every party conducting insurance business shall firstly acquire a business permit (license) from the OJK.” - Article 1(14) defines “insurance business” broadly to include insurance, risk management, 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. - Article 9 makes OJK solely responsible for the licensing function. - Article 6 limits legal form of entities that can obtain a license to limited liability companies and cooperatives; a collective business that was an insurer before Act no 20 of 2014 may maintain its license. - Application documents required under Article 8(2) of Law 20 of 2014: - Articles of association; - Organization structure; - Paid up capital; - Guarantee fund; - Ownership details; - Appropriateness of shareholders include significant owners; - Fit and proper information relating to Board, actuary and internal auditor; - Expert resources; - Business plan; - Risk Management framework; - Products; - Affiliations and group structure; - Framework for reporting to OJK; - Confirmations from home supervisors that there are no reasons that the license should not be granted; and - Other information at the discretion of OJK. - Timeframes and scope: - Article 9 allows OJK 30 days to approve or decline an application. Where an application is declined it must be done so in writing with relevant reasons supplied to the applicant. - Licenses remain in force until surrendered or revoked by OJK. - OJK does not have explicit legal powers to impose conditions, limitations or restrictions on licenses, nor explicit legal power to impose a scope on the license, although it effectively limits scope by product authorisation under the business plan. - OJK maintains a register of licenses on its website. - Foreign participation and ownership: - Only a company registered in Indonesia can obtain a license. - Article 7 of Law no 40 of 2014 limits ownership: - a. an Indonesian citizen and/or Indonesian legal entity that directly or indirectly is fully owned by an Indonesian citizen; - b. an Indonesian citizen and/or Indonesian legal entity as referred to in letter a. together with a foreign citizen or foreign legal entity that must be an insurance company which owns a business of the same type or a holding company one of whose subsidiaries runs its business in the field of insurance business of the same type. - The level of foreign participation is limited to 80 percent. - A foreign insurer cannot operate a branch in Indonesia but can operate a subsidiary provided it meets the local ownership criteria. - Exchange of information with home supervisors: - OJK has the power under Article 47 of Law No 21 of 2011 to exchange information with home supervisors and reports that it does so. - Penalties under Article 73 of Law No 40 of 2014: - 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. - Assessment: Observed - Comments and recommendations: - 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: - work with MoF to review the Insurance Law in order to provide transparent licensing requirement; and - work with MoF to review Iinsurance Law no 40 of 2014 in order to provide power to OJK to impose conditions, restrictions and limitations on licenses. ### ICP 5 Suitability of Persons — scope, tests, and recommendations - Principle: supervisor requires Board Members, Senior Management, Key Persons in Control Functions and Significant Owners of an insurer to be and remain suitable to fulfil their respective roles. - Legal basis and regulated persons: - Article 12(1) of Law no 40 of 2014: specified persons “shall at any time fulfill the ability and appropriateness requirements.” - Regulation 4/POJK.05/2013 applies the fit and proper test to: - Members of the Board of Directors; - Members of the Board of Commissioners; - Members of the Sharia Supervisory Board; - Members of the members’ representative Board; - Controlling shareholders; - Expert staff; and - Foreign staff. - POJK Number 27/POJK.03/2016 (POJK 27/2016), effective 22nd July 2016, replaces POJK Number 4/POJK.05/2013 and applies fit and proper requirements to key persons which consist of: - Controller; - Member of the board of directors; - Member of the board of commissioners; - Member of the sharia supervisory board; - Internal auditor; and - Corporate actuary. - Definitions and tests: - “Controller” defined (Article 1(19) and elsewhere) as a party that directly or indirectly determines or influences the board or equivalent. - Quantitative control level set at 25 percent in Regulation 4/POJK.05/2013; persons with less than 25 percent can be controllers if they have power to influence direction or appointment/dismissal of directors. - Fit and proper criteria for parties other than controlling shareholders: - competence; - integrity; and - financial reputation. - For the Controlling Shareholder: - integrity; and - financial reputation. - Competence has four limbs: adequate knowledge relative to the position, understanding of relevant legislation, experience and expertise in the relevant industry, and strategic management experience. - Integrity tests include multiple disqualifiers such as: - Not have committed an offence relating to a financial institution or the economy; - Not have been indicted for a criminal offence in the previous five years; - Never have violated a commitment to a financial institution or a supervisor of such an institution; - Never acted in a way that has unfairly created a benefit for shareholders or directors at the expense of policyholders; - Never have violated a prudential standard; - Not have been on the disqualified register; - Never have acted beyond one’s authority; and - Never have been declared incapable. - “Good financial reputation” defined by never declared bankrupt, never been involved in an enterprise as shareholder or director that has been declared bankrupt and never been guilty of money laundering. - Ongoing obligations: - Fit and proper requirements applied on an ongoing basis by Article 12 of law no 40 of 2014. - Article 38 of Regulation No. 2 of 2013: an insurer must notify OJK if it is of the view that one or more relevant persons appointed to the licensee is or are no longer fit and proper. - Article 60 of Act no 40 of 2014: OJK has authority to remove individuals from their position if incompetent, do not fulfil required qualification, are inexperienced or have violated insurance regulations. - Assessment: Largely Observed - Comments and recommendations: - The ICP applies fitness and propriety requirements to Senior Management and Key Persons in Control Functions; in practice most key persons in control functions are members of the board of director. - It is recommended that: - the suitability requirements be extended to Senior Management; and - “Key Persons in Control Functions” be defined and the suitability requirements be extended to these persons. ### ICP 6 Changes in Control and Portfolio Transfers — framework and requirements - Principle: Supervisory approval is required for proposals to acquire significant ownership or an interest in an insurer that results in control, and for portfolio transfers or mergers. - Definitions and scope: - Under Article 13 of Law no 40 of 2014 an insurer or reinsurer must identify at least one “controller”. - Article 1 (19) defines “Controller” as a party that directly or indirectly has the ability to determine the board or influence actions of the board. - Regulation 4/POJK.05/2013 sets quantitative control level at 25 percent; persons with less than 25 percent can be controllers if they have influence. - Prior approval requirements: - Article 40 of Law no 40/2014 requires prior approval from OJK for any changes of ownership except changes facilitated through the stock exchange that do not constitute a change of control. Prior approval required for any changes in ownership not just changes in control. - OJK seeks input of home supervisors in cases involving foreign owners or shareholders. - Controllers must be fit and proper; OJK can remove and replace persons not fit and proper. - Merger and acquisition prerequisites (MoF regulation No. 426/KMK.06/2003, Article 45 and 46): - Mergers or consolidations require prior approval from OJK. - Prerequisites for approval include: 1. Acquisition by taking over entire or majority shares transferring control; 2. Minister's approval required to implement acquisition; 3. Acquisition must fulfill conditions: a. company implementing acquisition has similar scope of business; b. acquisition does not reduce the rights of the insured; c. acquisition must consider restrictions of admitted assets in the form of investment so that acquisition will not affect financial condition of acquiring company. 4. Documentation required for approval: a. Transfer of rights and obligation agreement (written in bahasa) that does not reduce policyholder rights; b. Audited financial reports from each party; c. Proforma financial reports after acquisition that fulfill solvability requirement; d. Draft of changes of the articles of association from the acquired company. - Portfolio transfers: - Article 23 of MoF regulation no 422 of 2003: 1. Assignment/transfer of part or entire insurance portfolio may only be performed after obtaining prior approval from the Minister. 2. Assignment must comply with: a. does not reduce the rights of the policy holder, the insured or heirs; b. is conducted with an insurance company or reinsurance company; and c. does not cause the accepting company to violate prevailing regulations in the insurance business. - Assessment: Largely Observed - Comments and recommendation: - It is recommended that OJK regulation be amended to include definitions of “associate” or “related party”. ### ICP 7 Corporate Governance — structure, gaps, and expectations - Governance structure: - Indonesian insurers primarily have two Boards: the Board of Directors and the Board of Commissioners. The Board of Commissioners functions as a supervisory board responsible to shareholders. - Both Boards are bound by regulation no 02/POJK.05/2014 “Good Corporate Governance for Insurance Companies.” - Gaps and observations: - Roles of Senior Management and other parties involved in control functions are not defined in the regulation. - Chapter XII addresses strategic plans, corporate plans, and business plans but the regulation does not explicitly assign the Board of Directors responsibility for setting corporate culture, business objectives and strategies or oversight in development of risk management functions. - The concept of Key Persons in Control Functions is not addressed. - Regulation stipulates number of directors and commissioners, obligations to remain fit and proper and limited role descriptions, but obligations focus mainly on avoiding conflicts of interest and do not require directors to act in the best interests of policyholders, act in good faith, or exercise due care and diligence. - Relying on Corporations Law obligations (which require directors to act in interests of shareholders) is generally not sufficient because directors of insurance entities have a primary obligation to act in the best interests of policyholders. - Key implication: - Governance rules should explicitly require boards and senior management of insurance entities to recognise and protect the interests of policyholders and to set and oversee risk management and corporate culture. *Source: cr1874 - 3. It is recommended that OJK develop internal policies and processes for information* ### Chapter IX of the regulation requires insurance companies (presumably the Boards) to ### cr1874 - Chapter IX of the regulation requires insurance companies (presumably the Boards) to ### Requirement summary - Chapter IX of the regulation requires insurance companies (presumably the Boards) to set and implement remuneration policies and practices. - The remuneration policies and practices are designed to curb excessive risk taking. ### Scope and targets - Policies and practices are directed at: - the members of the two Boards, and - all employees. ### Policy intent - The primary intent specified is to curb excessive risk taking through remuneration design and implementation. *Source: cr1874 — Chapter IX of the regulation.* ### Chapter XIII of the regulation refers to disclosure to the shareholders, auditor and ### Chapter XIII of the regulation refers to disclosure to the shareholders, auditor and supervisor ### Corporate governance (Chapter XIII and ICP 7) - Assessment: Partly Observed - Findings: - Regulation requires insurance and reinsurance companies to have reliable financial reporting systems that meet reporting obligations, but provides no specific requirements on how to meet these obligations. - Regulation provides a starting point for good corporate governance but needs reorganization and expansion to achieve ICP compliance. - Areas needing greater detail: - Duties, functions, roles, obligations, and reporting lines for parties setting entity direction and maintaining risk management framework. - Obligations of directors and commissioners to act in the interests of policyholders, to act in good faith and with due skill and care. - Functions of directors and commissioners in setting objectives, corporate culture, risk appetite, and risk management framework. - Role of Senior Management, its function, and relationship with the Board. - Identification of Key Persons in Control Functions, their roles, duties, functions, and obligations. - Reporting lines of Key Persons in Control Functions to the Board of Directors or Commissioners. - Relationship of the Board and the external auditor. - Further details about the framework for reporting to the supervisor. - Recommendation: - OJK revise and amend regulation no 02/POJK.05/2014 to reflect better the requirements of ICP 7 as above. ### Risk Management and Internal Controls (ICP 8) - Assessment: Partly Observed - Findings: - Legal framework spans Law, regulations, and circulars. - POJK 1/POJK.05/2015 (non-bank financial institutions) Article 2 requires a risk management function. - POJK 2/POJK.05/2014 Article 66: “an insurance company is obliged to apply risk management to identify, assess, monitor and manage the business risks effectively.” - Article 67 requires insurers to establish an effective and efficient internal control framework; role assigned to the board of directors. - Article 4 requires compliance function, internal audit, external audit, risk management and internal controls. - Article 12 requires a director in charge of compliance; function defined as “to assist the Board of Directors to ensure that the company is in compliance with existing regulations in the field of insurance and other related regulations.” - Article 17(2) of Law no 40 of 2014 requires sufficient numbers of actuaries; MoF regulations require actuaries to provide annual reports covering pricing, profitability, distributions, adequacy of capital, calculation of technical resources. - Internal audit references exist but no direct requirement; can be inferred. - Recommendations: - OJK establish a dedicated risk management and internal control regulation that: - Defines risk management. - Identifies main players: risk manager, internal auditor, compliance officer, actuary. - Creates an obligation to have each functionary and defines roles, reporting lines, independence, and resourcing requirements. ### Supervisory Review and Reporting (ICP 9) - Assessment: Largely Observed - Findings: - Onsite review requirements in regulation No 10/POJK.05/2014; rights, processes, outcomes publicly available. - OJK has progressed to risk-based supervision with assistance from APRA; power found in regulation no 11/POJK.05/2014. - Risk measured across four categories: asset and liability risk, governance risk, strategic risk, operational risk; inherent risk reduced by governance, risk management, capital, and access to additional capital. Based on APRA’s Probability and Impact Ratings System. - Supervisory matrix with four stances: - Routine supervision: onsite reviews no less than once every two years for low impact entities with low to medium risk ratings. - Effective monitoring: increased reporting and onsite reviews for low to medium impact/high risk and medium impact/medium or high risk institutions. - Two higher stances for higher risk/higher impact entities, up to license withdrawal for high or medium impact with high net risk. Model based on APRA’s SOARS. - Insurers required to self-evaluate at least once a year using OJK's risk identification and scoring model; circular letter no. 3/SEOJK.05/2015 provides detailed explanations and is binding. - Risk ratings checked and input into system by responsible supervisor; reviewed at least annually and after onsite reviews or offsite analysis if needed. - Reporting cadence: monthly, quarterly, annually; OJK can require more frequent/different data (e.g., if capital ratio falls below 120 percent OJK asks for a plan and specific data). - OJK performed 40 onsite reviews in the last year and at this rate may not meet objective of reviewing each entity at least once every two years with current staff. - OJK does not currently require reporting of off balance sheet exposures, material outsourced functions and activities, significant changes in corporate governance, or prompt reporting of material changes/incidents—these are requirements of ICP 9.5. - Centralized data is checked and insurers must resubmit corrected data; annual financial statements are audited and reconciled with quarterly returns at supervisors’ discretion. - Market monitoring unit exists but supervisors do not routinely use its findings to revise risk ratings. - Recommendations: - OJK review routine information submissions against standard 9.5 and require missing items. - OJK put in place formal policy to ensure supervisors review risk ratings after each offsite review and on receipt of relevant market information. ### Preventive and Corrective Measures (ICP 10) - Assessment: Observed - Findings: - Article 60 of the Law details OJK supervisory functions including licensing, revocation of licenses, obtaining reports, onsite reviews, determining and revoking controllers, requiring audits at insurer expense, determining fitness and propriety, decommissioning boards, appointing statutory managers, issuing written orders, imposing sanctions. - Article 44 allows OJK to arrange liquidation. - OJK has ladder of preventive/corrective powers from warnings to liquidation. - Regulation requires remediation plan when capital falls below 40 percent; OJK requires financial plan when capital falls below 120 percent (not included in legal framework). - OJK installed early warning system and uses written orders to address identified problems. - Comment: Supervisory powers cover ICP requirements. ### Enforcement (ICP 11) - Assessment: Largely Observed - Findings: - OJK uses directions (enforceable despite being termed “recommendations”); non-compliance can lead to removal for lack of fitness and propriety. - Practice: OJK issues sanction letters, typically a sequence of up to three letters before license revocation; time limits given for required actions; supervisors required to follow up and escalate. - OJK can impose conservatorship, take control, appoint officials/receivers. - Limited use of financial penalties; generally limited to late reporting and late supervision levies. - Appeals are possible but OJK decisions are executory and not stayed by appeal. - All sanctions/supervisory actions are taken and approved at senior level by one person to ensure some consistency. - Recommendation: - OJK revise the “three strikes” approach to ensure timely effect of supervisory actions. ### Winding-up and Exit (ICP 12) - Assessment: Partly Observed - Findings: - OJK can revoke license if directions cannot/will not be met; can bypass sequence of administrative sanctions if company situation endangers policyholders. - If solvency ratio drops below 40 percent OJK can revoke license after requiring financial restructuring plan and issuing sanction letters twice; discretion exists on timing. - Post-revocation: company must hold shareholders meeting within 30 days to decide dissolution and form liquidation team; if not, OJK will dissolve company, form liquidation team, register dissolution and announce publicly, and order liquidation team to carry out liquidation. - Policyholder rights have priority over other parties. Unit-linked related investments lack custodianship requirement but funds can only be used to pay liabilities to policyholders concerned. - No industry-wide guaranty fund currently. Insurers required to set aside a fund up to 20 percent of initial paid up capital or own equity, plus certain percent of premium reserves: 2 percent for unit-linked product, 5 percent for other life products, 1 percent for non-life, and 0.25 percent for reinsurance—held in bank deposits or Indonesian government securities and cannot be transferred/encumbered without OJK approval. - OJK coordinating with MoF to develop policyholder protection funds; current fund requirement will be replaced by new policyholder guarantee funds once established. - Comments and Recommendations: - No clear timeline after insurer breaches minimum capital level (40 percent); insurers may continue business and policyholders can suffer material losses and delays. - Recommendations for OJK: - develop and publish guidance to ensure timely revocation of a license and clarify purposes of the two different financial restructuring plans (breach of target capital level 120 percent and solvency level below 40 percent); - establish industry-wide policyholder protection funds with sufficient funds and flexibility while avoiding moral hazard; - ensure winding up and exit procedures are clearly outlined in law; - identify and document a point in law when an insurer may no longer continue operating. ### Reinsurance and Risk Transfer (ICP 13) - Assessment: Observed - Findings: - Regulation no 02/POJK.05/2014 Article 68 requires insurers to have a strategic plan including a reinsurance plan submitted to OJK. - Article 6 of POJK 14/POJK.05/2015 reinsurance plan must consider: profile of borne risks; capital adequacy and access to capital increases; volatility of past/estimated claims; profitability by business line; retention scale; use of proportional and non-proportional reinsurance; environmental/disaster-prone conditions; automatic reinsurance capacity; optimization of reinsurance quality/use/costs; impacts if domestic reinsurers with automatic reinsurance portion become insolvent; domestic reinsurer ratings; reinsurance market condition. - Article 5 requires reinsurance strategy matters: diversification benefits and counterparty eligibility; system for electing and monitoring programs; process of own retention establishment and monitoring; persons in charge and their control. - Submission timing: reinsurance plans due by 15 January if program starts in January; otherwise within 15 days of commencement; revisions within 10 business days. - Domestic reinsurers given priority; if insufficient capacity, international reinsurers permitted if rated BBB or greater from reputable agency. - OJK supervises reinsurance plan performance as part of routine offsite annual/quarterly reviews; initial review considers liquidity impact. - No specific legal requirements on documentation of treaties but OJK can require documentation during inspection. - No new Alternative Risk Transfer arrangements permitted; one prior arrangement grandfathered. - Comment: Supervision and requirements observed. ### Valuation (ICP 14) - Assessment: Partly Observed - Findings: - Two accounting systems: Indonesia GAAP (SAK) and Statutory Accounting Practice (SAP). SAK relevant for solvency/insolvency and distributable dividends; SAP determines solvency ratio and regulatory triggers. Assessment refers to SAK. - Assets: - Investment assets (shares and bonds) valued at market value; mutual funds valued at net asset value; non-investment assets valued at economic value. - Premium receivable, reinsurance receivable and coinsurance receivable recognized only when remaining balance is due within 2 months. - Real estate valued by appraisal or tax valuation. - OJK suspended mark to market valuation in 2015 for several months; suspension lifted at time of assessment. - Liabilities: - Technical provisions based on gross premium method. - OJK prescribes discount rate but provides no guidance on other parameters and relies on expert judgment of companies and actuaries. - General principles for methods/assumptions include consistency across products, reasonable recognition of liability for all policyholders, accordance with promised benefits, and applicable actuarial standards (actuarial association still developing practices). - Discount rate: - Maximum discount rates specified as the 3-year average of Indonesian government bond yields; companies can increase discount rate by up to 0.5 percent if better investment performance than 3-year average yields. - OJK plans to change 3-year average calculation to options including current or 6-month average. - Insurers determine average duration of technical provisions and refer to government bond yield with same duration rather than applying entire yield curve; for FX policies discount rate set to yield of Indonesian government bond denominated in USD. - MOCE: - Technical provisions generally valued based on central estimate plus margins for adverse deviation with at least 75 percent confidence level on company level over entire policy period. - If total premium reserves < total cash value, company must increase premium reserve to at least equal cash value. - Non-life and reinsurers must set aside reserves for catastrophic events. - Appointed actuary must explain changes in methods/assumptions and effect on reported technical provisions and solvency margin. - Comments and Recommendations: - 3-year average discount rate may deviate materially from current conditions when rates persistently drop; restriction to government bonds may prevent application of better discount rates, especially for FX policies. - Single discount rate by average duration does not capture cash flow characteristics; OJK appears not to actively monitor or challenge assumptions. - Suspension of mark to market in 2015 may have created moral hazard. - Recommendations: - work with actuarial association to establish guidance around key assumptions; - impose enhanced prudential standards (stress testing, business continuity planning) for firms that relied on 2015 suspension; - apply more market consistent discount rates by applying entire yield curve of most relevant securities; - apply MOCE consistently over all insurance reserves. ### Investment (ICP 15) - Assessment: Partly Observed - Findings: - Law No. 40/2014: asset management based on prudent person principle and asset-liability matching; insurers required to have admitted assets plus bank deposits at least equal to liabilities to policyholders; mismatches subject to additional capital requirement. - Framework requires written investment policies and an investment committee; types and limits of admitted assets; higher risk investments like derivatives prohibited unless for hedging. - Insurers with 50 percent or more investment into capital markets must: - hire an investment expert; - establish unit staffed with experienced persons to perform analysis, implement, monitor/report on investment management, and implement internal controls. - Derivatives: - Allowed only for hedging, pre-approved by insurer director and reported to OJK within 7 days. - Counterparty must have at least BBB rating from reputable agency. - No procedure for unwinding upon downgrade below BBB; no requirement for derivatives within mutual funds. - Investment limits (MoF Decree No 53/2012): - 15 percent of total investment to deposits of one bank; - 10 percent to one share issue; - 40 percent to entire share portfolio; - 15 percent for one issuer of corporate bonds; - 50 percent for corporate bonds portfolio; - Bonds, asset backed securities and REITs need minimum BBB ratings. - Limits are for admitted assets calculation; insurers can invest above limits. No group-level requirement; no concentration limit across different types of investments in same entity. Mutual funds not looked through for limits. - OJK minimum government bond investment currently 20 percent of assets; to be increased to 30 percent by December 2017. - Intragroup transactions/investments: - Limited to maximum of 10 percent and 20 percent of total investment for subsidiaries and affiliates (outside insurance group), respectively; affiliated transactions must be at arm’s length. - Insurers can invest another 10 percent via private placement. - Some groups have intragroup transactions about 8 percent of total investment in practice. - Comments and Recommendations: - Investment limits based on total investment are high and do not prevent excessive concentration risk; intragroup limits may be generous. - Recommendations for OJK: - enhance investment requirements to mitigate concentration and contagion risk from affiliates within or outside group; - conduct thematic reviews and challenge aggressive investment strategies; - monitor concentrations of single counterparties by aggregating all exposures (equity, bond, mutual funds, loans, deposits, derivatives, receivables, etc.). ### Enterprise Risk Management for Solvency (ICP 16) - Assessment: Largely Observed - Findings: - Solo requirement: Article 23 POJK requires identification, measurement, monitoring and control of risk in integrated manner; risk limits in line with risk appetite, tolerance and corporate strategy. - ALM and underwriting: circular letter specifies risk management policy should include asset and liability management and relationship among product development, assessment, investment management, and underwriting risk. - Investment: Article 57 (3) POJK requires investment policies/strategies to include maximum allocation limits, minimum liquidity levels, authority limitations for each management level. - Group requirements: Article 34 POJK requires principal entity ensure capital adequacy of financial conglomerate, effective liquidity management, integrated monitoring of intragroup transactions, effective risk management of provisions including large exposures, and integrated governance. - Article 6 (1) and (3) POJK requires Non-Bank Financial Institution Risk Level assessment including strategic risk, asset/liability risk, management risk, governance risk, fund support risk, and insurance risk; lead entity must have authority to collect information from group. - Reporting: OJK requires insurers submit risk assessment level report at least once a year for year-end. - Board involvement: Article 12 (1) POJK requires board to develop comprehensive written integrated risk management policy; Article 2 POJK requires effective risk management implementation including active board supervision, adequacy of policies/procedures, monitoring and control process, RMIS, and internal control. Article 59 POJK requires board analyze investment risks and countermeasures. - ORSA: Own Risk and Solvency Assessment effective April 2016; first report due in 2017; requires stress tests and actuarial report including 5-year forecast of financial soundness and capital adequacy, assumptions, and analysis of access to capital resources. - Comments and Recommendations: - ORSA and part of ERM recently introduced; implementation yet to be seen though frameworks appear established in some firms. - Recommendations: - enhance communication with industry about objectives of new regulations; - conduct thematic reviews to compare industry practices; - formulate clear expectations for key requirements such as stress tests and risk tolerance statements. ### Capital Adequacy (ICP 17) - Assessment: (implicit from context) requirements in place with observations: Partly/Largely Observed - Findings: - Regulation: insurer must meet Solvency Level of at least 100 percent at any time, and 120 percent annually of risk-based capital. Insurers below 120 percent prohibited from distributing dividends or rewards to shareholders. If insurer fails to meet minimum solvency ratio of 40 percent, required to formulate a Financial Recovery Plan. - Capital requirement risk modules: - Schedule A: asset default risk (equity charge 16 percent; bonds 2 to 16 percent depending on credit quality). - Schedule B: cash-flow mismatch risk (4 percent of difference between asset and liability in same duration bucket). - Schedule C: foreign currency mismatch risk (20 percent allowance; beyond that 30 percent capital charge if liabilities in FX are higher than assets; 10 percent if assets higher than liabilities). - Schedule D: claim risk with 95 percent confidence level. - Schedule E: premium risk (differences between reserves discounted by risk-free rates and accounting reserves). - Schedule F: reinsurance risk. - Schedule G: operational risk. - Schedule H: investment fund’s default risk (0.1 percent of investment fund) and risks associated with unit-linked products (guaranteed or non-guaranteed benefits). - Separate solvency ratio calculation for guaranteed unit-linked funds using similar Schedules A–C as above. - Group capital: Article 2 POJK Number 26/2015 requires financial conglomerates to provide aggregated capital minimum of 100 percent of combined ratio using building block method (simple summation of individual entity capital requirements); capital resources aggregated similarly. Bank parent capital provided to subsidiaries is deducted from bank. If insurer solvency < 120 percent and bank parent is expected to provide capital, bank capital deducted accordingly. Intragroup investments may be made up to investment limits without capital deduction at solo level. - Capital add-on: OJK can impose capital add-on for firm risk characteristics but no internal guidance on when/how much. - Capital resources: defined as total admitted assets minus total liabilities (except eligible subordinated loans). Subordinated loans recognized as capital resources only when solvency ratio drops below 120 percent and loans meet conditions: - payment of principal only if it does not breach capital requirement; - term of loan amortization is not limited; - interest rate at maximum one fifth of the interest rate of Bank Indonesia at the time when the agreement was signed. - No collateralization requirement; OJK has not seen collateral in practice. - Admitted assets specified (see investment limits above). - Comments: - Calibration based on expert judgments and comparison with Canada, Australia, Singapore. - Some components require duration estimates for cash-flow mismatch. - No internal guidance for capital add-on calibration. *Source: cr1874 - Chapter XIII of the regulation refers to disclosure to the shareholders, auditor and supervisor (IMF assessed text).* ### 15. If an insurer invests more than the limit, the amount beyond is not recognized as ### 15. If an insurer invests more than the limit, the amount beyond is not recognized as ### Admitted assets / Investment categories - If an insurer invests more than the limit, the amount beyond is not recognized as an admitted asset and effectively reduces the amount from the capital resources. - Listed investment categories: - cash; - time deposits in banks; - shares both listed on the stock exchange and non-listed; - bonds, ABS and CPs; - mutual funds, real estate investment trust; - real estates, gold, policy loans; - claims of co-insurance, reinsurance and investment; and - direct overage premium claims. ### Guaranty Funds - Each insurer is required to set aside a fund of up to 20 percent of its initial paid up capital or its own equity, plus certain percent of premium reserves into bank deposits or Indonesian government securities: - 2 percent for unit-linked product; - 5 percent for other life products; - 1 percent for non-life; - 0.25 percent for reinsurance. - Reference: For more detail, refer to the description of ICP 12. ### Capital framework — assessment and key comments - Assessment: Partly Observed - Key comments: - An important risk component (catastrophe risk) is not yet included; OJK is working to include it in the capital requirements. - Capital add-on could be imposed without a transparent framework. - Asset and liability component, guaranteed benefits associated with unit-linked products, and premium risk need sophisticated calculation and judgment. - Evidence of validations conducted by OJK was not seen. - Group capital is required and appropriate adjustment would be made, but incentives remain for a group to generate internal capital from an insurance company to inflate solo legal entity capital positions due to non-existence of adjustment of intra-group transactions from insurance entities and/or within insurance entities. ### Recommended actions on capital (OJK) - Adjust a capital adequacy ratio at solo level if an insurance entity provides capital to financial entities within the group to reduce the incentive to improve the capital positions of the solo entities. - Conduct thematic reviews of some schedules, such as B (ALM), E (premium) and H (minimum guarantee of unit link), to make sure that insurers calculate the capital charges appropriately. ### ICP 18 Intermediaries — licensing, governance, disclosure, supervision - Licensing and registration: - Insurance and reinsurance brokers require a license under Article 8 of the Insurance Law. - OJK issued a circular letter prohibiting the use of unlicensed brokers. - Applicants are asked about prior misdemeanor convictions, felony convictions and involvement in administrative proceedings; individuals convicted of crimes involving “dishonesty or breach of trust” are prohibited unless they obtain a waiver from OJK. - Agents must register with OJK after passing an examination conducted by industry associations; registration terms: 2 years for non-life agents and 1 year for life; ongoing studies required for renewal. - Certification required for marketing unit-linked products (Indonesian Life Insurance Association); bank officers marketing insurance need certification and product training. - Integrity and corporate governance: - Fit and proper tests for directors, commissioners, and shareholders of brokers. - On-site examination covers fitness and propriety of directors, commissioners, controllers, and experts of brokers. - OJK regulation of good corporate governance (2014) requires brokers to implement corporate governance consistently. - Disclosure and client money protection: - Article 31 requires truthful, non-misleading information to policyholders. - Article 17 of MoF Decree: premium retained by brokers must never exceed the equity of the broker; comparison shown in periodic reports. - Article 9 (2) requires brokers to have professional indemnity insurance. - Insurance Law deems premium paid to agent as paid to insurer. - Supervisory review and sanctions: - Brokers subject to on-site inspection; OJK off-site team analyzes annual reports; on-site at least once every 3 years. - Article 70 authorizes administrative sanctions against intermediaries; OJK has actively taken actions. - Assessment: Largely Observed - Comments: - No disclosure requirement about terms and conditions, relationship with insurers, or remuneration-related information. - Recommended actions (OJK): - Continue and enhance coordination with insurance associations to improve training and examinations to meet increasing product sophistication. - Require intermediaries to make disclosures to customers of the conditions under which they are doing business, and how they are remunerated. ### ICP 19 Conduct of Business — consumer protection, claims, information - Legal and regulatory framework: - Article 27 (2): brokers, reinsurance brokers, and agents must have sufficient knowledge, ability and good reputation. - Article 20 (Government Regulation): premiums should be adequate, not excessive and not applied in a discretionary manner. - Article 2 OJK Regulation: consumer protection applies principle of equal treatment. - Article 26 (1) Act Number 40: insurers fulfill business conduct standards including distribution and marketing. - Article 16 OJK Regulation: match consumers’ needs and capabilities of agents. - Article 13 OJK Regulation: insurers to establish product development committees and consider consumer needs in product approval. - Information and advertising: - Article 31 (2) Act Number 40/2014 prohibits untrue, false, or misleading information; penalties include imprisonment for five years and a maximum fine of IDR 5 billion. - IV OJK Circular Letter Number 12/2014 requires advertisements to be accurate, fair, clear and not misleading. - Cooling off allowed to policyholders over a certain period (about 2 weeks). - Claims and complaints: - Article 31 (3) requires a fast, simple, accessible, and fair claims and complaint process. - Article 27 of MoF Decree Number 422/2003: insurer must pay the claim within 30 days of agreement. - Article 35 OJK regulation number 1/2013: insurers obliged to resolve a complaint no later than 20 working days after receipt. - OJK uses Customer Relationship Management (CRM) to monitor complaint settlements. - Complaints received by OJK about settlement arrangements (conditions apply, e.g., damage not more than IDR 500 million). - Number of complaints: 2014; 445, 2015; 162, and 2016; 20. - Personal information and disclosure by regulator: - Article 31 OJK Regulation Number 1/2013 prohibits provision of data to third parties and requires written policies on personal data use. - OJK provides education and consumer protection pages and workshops. - Assessment: Largely Observed - Comments: - OJK requires protection of private information, but with increasing internet and mobile sales, OJK should work closely with industry to mitigate cyber risk. - Recommended action (OJK): - Conduct informal exercises, such as horizontal self-assessment, and enhance dialogue with industries to encourage insurers to improve resilience to cyber risk. ### ICP 20 Public Disclosure — financials, investment, ALM, risk management - Disclosure requirements: - Articles 43 to 45 (Insurance Law): insurers must publish audited annual financial statements and unaudited quarterly financial statements on official websites. - Contents and format standardized by OJK circular letter: balance sheet, P&L, cash flow, RBC ratio calculation, ultimate reinsurers backup. - Supervisor publishes statistical reports (monthly, quarterly, annually) and the Annual Insurance Statistics Book (publicly available) with individual company data. - Shortfalls identified: - No disclosure requirement about key assumptions used for valuation of technical provisions. - Insurers required to disclose RBC ratio calculations with schedule decomposition. - SE-02 year 2013 annexes require disclosure of investments by category; detailed information including issuer names is published, but no ALM disclosure. - No requirement about material risk exposures and risk management or corporate governance disclosure. - Assessment: Largely Observed - Comments: - Investment disclosures are detailed, but disclosures on technical provisions, ALM, risk management and corporate governance are insufficient. - Recommended actions (OJK): - Implement recommendations related to relevant ICPs (such as ICP 14 and 16) before amending disclosure requirements. - Encourage insurers to improve voluntary disclosure of risk management and corporate governance and identify best practices balancing cost and benefits. ### ICP 21 Countering Fraud in Insurance - Framework and regulation: - Insurance Law specifies actions considered insurance fraud subject to criminal sanctions. - OJK requires insurers and brokers to implement fraud risk management as part of operational risks. - Fraud incidents are reported to OJK; off-site team analyzes reports regularly. - Understanding and collaboration: - OJK monitors fraud as part of operational risk; higher risk noted in life insurance sector (e.g., premium cheating by agents). - OJK enhances off-site monitoring and on-site inspections when high operational risk detected. - OJK coordinates with police and industry associations to exchange information and provide trend analysis. - Assessment: Observed ### ICP 22 Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) - Institutional roles: - PPATK is responsible for STR stipulations and conducts on-site inspections focused on reporting compliance. - OJK is a designated AML/CFT authority regulating and supervising NBFI, publishing PMK and POJK guidance on KYC and AML/CFT (e.g., Minister of Finance Regulation No. 30 / PMK.010 / 2010; PER / 01 / BL / 2011; POJK.39/POJK.05/2015). - Requirements for insurers: - Insurers (life and non-life) required to conduct Customer Due Diligence (CDD), including source of funds for prospective customers/beneficial owners. - OJK conducts off-site monitoring and on-site inspections relating to AML/CFT. - Supervisory activity: - In 2013, OJK reviewed 125 insurance companies for AML/CFT implementation, checking: - work unit or officer responsible for CDD; - CDD training program; - acceptance form with attached data, identity, and source of funds; - update of customer data. - OJK actively uses sanctioning power to improve compliance. - Regulatory actions: - 2015: 34 sanctions imposed on 24 general insurance companies and 10 life insurance companies. - Part year ended April 2016: 22 sanctions imposed — 14 to general insurance companies and 8 to life insurance companies. - Coordination: - OJK has an MoU with PPATK covering cooperation, information exchange, coordination of on-site inspections, education, research, and information system development. - PPATK shares STR summaries with OJK annually and exchanges views occasionally; on-site inspection reports by PPATK are sent to OJK. - OJK and PPATK regularly arrange AML/CFT seminars. - Assessment: Observed ### ICP 23 Group-wide Supervision - Framework: - OJK conducts integrated supervision across banking, capital markets and non-bank institutions. - OJK has identified 38 conglomerate groups with at least one insurer; among them, only one group is led by an insurance company; no groups have insurance operations outside Indonesia (no home supervisor role for OJK). - Articles 4, 5 and 6 POJK Number 17 regulate financial conglomerate structure; criteria based on ownership and control; nonfinancial influence considered in group risk analysis. - Assessment: Largely Observed - Comments: - OJK coordinates with home supervisors mainly via participation in supervisory colleges, but information exchanges with home supervisors are not yet active enough to define group supervision scope effectively. - Recommended actions (OJK): - Establish relationships with home and other relevant supervisors through more active participation in supervisory colleges and IAIS activities (including IAIS MMoU). - Analyze intergroup transactions in detail to cooperate effectively with home and other relevant supervisors to determine the scope of group-wide supervision. ### ICP 24 Macroprudential Surveillance and Insurance Supervision - Data collection and analysis: - OJK collects monthly, quarterly, and annual data and conducts analysis including financial highlights and stress test analysis. - OJK publishes an annual statistical insurance book with detailed individual and industry-wide data. - Process in place for regular market analysis weekly and monthly; outputs provided to Board meeting. - Financial System Stability Committee (KSSK): - Financial System Crisis Prevention and Mitigation Law approved March 2016 creates KSSK comprising Minister of Finance, Governor of Bank Indonesia, Chair of Board of Commissioners of OJK, and Chair of Board of Commissioners of Indonesia Deposit Insurance Corporation. - Industry-wide stress tests in 2015 with assumptions of 20 percent drop of shares, 10 percent drop in bonds identified significant impacts on several large insurers; resulted in temporary suspension of mark-to-market requirements in insurance sector. - Horizontal reviews: - Two horizontal reviews: 1) top 10 non-life insurers selling motor insurance, 2) top ten life insurers selling unit-linked products; primarily desk-based with day-to-day supervision follow-up when issues identified. - Systemic identification: - KSSK has an assessment methodology aligned with FSB process; designated a few conglomerates (list not disclosed); OJK imposed enhanced fit and proper tests, risk-based supervision, increased on-site inspections on designated groups. - Assessment: Largely Observed - Comments: - Vulnerability analyses focus mostly on entity or group level; no exercise captures interconnectedness among sectors and conglomerates. - Interconnectedness between banks and insurers and through reinsurers could cause concentration and contagion with systemic implications. - Recommended actions (OJK): - Integrate conglomerate analysis across group levels to identify possible contagion among conglomerates and sectors. - Conduct analysis of contagion caused by domestic concentration of reinsurance coverage, e.g., stress testing assuming failure of large domestic reinsurance companies. - Consider suppression of mandatory reinsurance programs if they could cause contagion among domestic insurers and reinsurers. ### ICP 25 Supervisory Cooperation and Coordination - Legal framework and cooperation: - Article 47 of Law No 20/2011 permits OJK to cooperate with other countries and international organizations on: - Institutional capacity building including training of human resources in regulation and supervision of Financial Services Institutions; - Information Exchange; - Cooperation in examination, investigation and prevention of crime in financial services. - OJK has MOUs with domestic and international organizations; confidentiality of shared information is guaranteed under MoUs. - Relationship with Bank of Indonesia and LPS subject to separate legal provisions. - OJK internal coordination via information flows, communication, periodic meetings, and comprehensive group assessments. - Cross-border participation: - OJK participates in cross-border supervision by attending invitations to supervisory colleges, but has not actively cooperated and coordinated with supervisors from other jurisdictions. - OJK typically does not act as head supervisor given industry size and absence of internationally-headquartered insurers. - Assessment: Observed ### ICP 26 Cross-border Cooperation and Coordination on Crisis Management - Crisis coordination framework: - Financial System Stability Coordination Forum (KSSK) established November 2011 under Article 44 of Act Number 21/2011; consists of OJK, Bank Indonesia, MoF and Indonesia Deposit Insurance Corporation; monitors and evaluates financial system stability using crisis management protocols. - KSSK designated domestic systemically important groups; OJK participated in crisis simulation exercises and requested insurance entities to develop recovery plans for exercises; OJK provided plans and feasibility views. - Cross-border cooperation: - OJK can share detailed information (e.g., intragroup transactions from/to Indonesian entities) under existing MoUs with some supervisors; current MoUs with Japan, Dubai, Korea, etc.; OJK applied to IAIS MMoU. - No insurance groups are internationally active for which OJK is home supervisor. - Assessment: Largely Observed - Comments: - MoUs with relevant regulators are still missing, which may prevent effective coordination in cross-border supervision and crisis management. - Recommended actions (OJK): - Expand scope of MoUs, for example by joining IAIS MMoU. - Offer analysis (such as key results of inspection results) to home supervisors to enhance cooperation with home supervisors. *Source: cr1874 - 15. If an insurer invests more than the limit, the amount beyond is not recognized as* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr1874.pdf_