(Photo: Allianz Insurance)

JAKARTA (TheInsiderStories) – Indonesia has enacted regulation on Foreign Ownership of Insurance Companies, which came into force on 18 April 2018 and confirms a maximum threshold for foreign ownership of an Indonesian insurance company of 80 per cent.

Insurance companies that are currently subject to foreign ownership in excess of the 80 per cent limit will be exempt from this requirement, provided that their respective existing foreign ownership percentages will amount to the maximum individual cap on foreign ownership of each of the relevant insurers.

If insurance companies fail to comply with the rules, they will be subject to administrative sanctions by FSA ranging from written warnings to business licence revocation.

The new regulation provides welcome clarification of the law relating to ownership and foreign participation in the Indonesian Insurance Industry. However, as the Financial Sevices Authority (FSA) has already been applying many of the features of the new regulation in practice in recent years, no material impact is anticipated as it amounts to an affirmation of existing policy.

There is a key exemption provided in the regulation, which permits insurance companies with foreign ownership in excess of the 80 per cent threshold to maintain their existing shareholding structure provided that there is a complete prohibition on any further increase of such existing percentage by the foreign insurer.

The regulation explains that where this exemption applies, the existing foreign ownership threshold in the relevant domestic insurer will amount to a maximum individual cap on foreign ownership of each of the relevant insurers.

This cap may be subject to change in the event that the relevant foreign shareholder reduces its percentage ownership or sells out completely to a third party.

For example, if as of April 2018, a foreign insurer owns 88 per cent of a domestic insurer, it may continue to maintain its 88 per cent interest, although it may not increase this percentage. If they sell down their interest to, for example, 84 per cent then this new percentage will become the new upper limit for foreign ownership in that insurer

The impact of the regulation is likely to be limited given that it is effectively an express statement of the existing unwritten policies applied by the FSA in recent years to interpret the Indonesian Insurance Law of 2014 (the “Insurance Law”).

However, notwithstanding that it maintains the status quo, it gives much needed clarity to the Insurance Law and greater certainty to existing and prospective foreign investors into the Indonesian insurance industry.

This includes all cumulative and affiliated interests and the FSA will look through the chain of legal and beneficial ownership to established the precise threshold proposed to be acquired.

In practice, ever since the Asian Financial Crisis of 1998/9, a number of foreign insurers had assumed ownership positions in domestic insurers in excess of the 80 per cent cap under the 1992 Law, as where emergency capital was required to keep their investee companies afloat, they had diluted local partners who had been unable to fund their equity proportions.

This non-compliance with the 1992 law was tolerated and had continued until very recently, with the FSA turning a blind eye to dilutive capital increases by foreign insurers in order to support capital requirements.

Email: elisa.valenta@theinsiderstories.com