News Reinsurance13 Apr 2018

Indonesia:European insurance association highlights restrictions in Indon market

| 13 Apr 2018

Insurance Europe, the European federation representing insurers and reinsurers, has expressed its strong concerns over restrictions on market access and trade barriers faced by foreign insurance players in Indonesia.

Insurance Europe, in a recently published factsheet, cites the following arguments to back up its assertions:

1.(Re)insurance retention limits

Local compulsory cessions diminish the possibility to diversify a risk, creating high local exposure in the event of, for example, a natural disaster.

• As of 1 January 2016, Indonesian insurers are required to place all reinsurance of motor, health, personal accident, credit, life and surety business (“simple risks”) with domestic Indonesian reinsurers. The Indonesian regulator (Otoritas Jasa Keuangan, OJK) specifies only a few limited exceptions to this restriction.

• For other insurance business (“non-simple risks”), a minimum of 25% of the (re)insurance must be placed with domestic (re) insurers.

• “Non-simple risks” and exempted “simple risks” must run through a tiered declinature procedure before they can be placed with foreign (re)insurers.

2.Establishment of a new national reinsurer, Indonesia Re

Over the past two years, the government has established Indonesia Re, a new national reinsurer, and has indicated that it will further increase its capitalisation. With this increased capacity, there is the potential that the government may seek to further increase mandatory cessions.

3.Restrictions on foreign employees

An OJK Regulation on the Business Organization of Insurance, Sharia Insurance, Reinsurance and Sharia Reinsurance Companies came into effect on 28 December 2016. It limits the positions and functions that foreign employees of insurance companies are permitted to hold.

The maximum period of employment of a foreign employee is further limited to five years.

4.Current and possible measures: foreign ownership limit for (re)insurance companies

On several occasions in the past, the OJK publicly stated its intention to lower the foreign ownership limit of currently 80%. Although this initiative was later dropped, it remains possible that the call from legislators to lower foreign ownership will return. Such a measure would have a significant negative impact on foreign-owned companies and could prompt other countries in the region to consider adopting similar restrictions. At a time where Indonesia is looking to increase foreign investments in the country, continuity in the regulatory and investment framework is key and potential forced divestures from local (re)insurance companies would trigger negative consequences for the Indonesian economy.

5.Data transfer restrictions

The OJK regulation of 2016 also required companies to establish data centres and disaster recovery centres in the territory of Indonesia by 12 October 2017. This is of significant concern to (re)insurers, given that the flow of data across borders is a central part of their business model and is necessary from a compliance and legal perspective. International (re)insurers collect and analyse a significant amount of different kinds of data, some of which is transferred between countries that are not the country of main establishment of the (re)insurer through branches or subsidiaries.

Action being sought

Insurance Europe urges the EU authorities to seek to overturn protectionist regulation that hinders competition and creates an uneven regulatory playing field. It would like to see Indonesia’s restrictions on cross-border (re)insurance lifted.

The association believes that the ongoing negotiations over a free trade agreement with the EU (launched in July 2016), would represent an appropriate platform for the EU authorities to raise the industry’s concerns, with the aim of eliminating current barriers and supporting the business potential of European (re)insurers in Indonesia.


 

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Recent Comments

Anirudh

Having more than 150 insurance companies offering PnC, Life, Takaful, Re-inusrance, i think the question should be what value new insurance companies plan to bring. Yes there are certain challenges for new entrants but at the same time what benefits customers are getting if new companies are offering the same sub std products, no innovation, or improved service? There are many overseas insurance companies that have JV's in Indonesia but so far there are very few who have taken risk in terms of digitization, new products, better service. Even if these companies have had success overseas, not many want to replicate those success in Indonesia. So unless insurance companies are willing to be different or offer great value to the customers, then the question should not be on what barriers to entry they face but how them entering makes insurance industry in Indonesia better?

13 April 2018

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