A comprehensive new insurance law passed by Indonesia's
parliament could have major consequences for joint venture
companies operating in this rapidly growing insurance market. On
September 23, 2014, the Indonesian Parliament passed a new law on
insurance (New Insurance Law) which came into effect on October 23
replacing Law No. 2 of 1992 on Insurance Business (Old Insurance
The New Insurance Law sets out a comprehensive regulatory
framework for Indonesia's insurance sector. It applies to all
insurance business companies (IBCs), whether insurers, reinsurers,
brokers, agents or loss adjusters.
In addition to providing greater regulation of insurance
business, the new law also has an underlying nationalistic
sentiment, evidenced by the approach to foreign ownership. Whilst
any change to maximum foreign ownership levels (currently 80 per
cent) has been held over until an implementing Government
Regulation is issued, which will happen within 30 months, the New
Insurance Law does introduce several fundamental changes that
foreign investors need to consider carefully.
Indonesian shareholders of IBCs must be fully owned by
Under both the Old Insurance Law and the New Insurance Law,
Indonesian shareholders must hold at least 20 per cent of the
issued capital of any joint venture IBC, while foreign shareholders
can hold up to 80 per cent.
Under the Old Insurance Law, the Indonesian shareholders of an
IBC could be Indonesian citizens and/or Indonesian legal
entities fully owned by Indonesian citizens and/or Indonesian
legal entities. The New Insurance Law has removed the italicised
words meaning that an Indonesian corporate IBC shareholder must now
ultimately be fully owned by Indonesian citizens in order to
qualify as Indonesian. This now makes unlawful the use of the
dual-layer PMA structure1 which foreign entities have
utilised to ultimately own 100 per cent of an IBC.
Insurance companies have five years in which to either:
ensure that the shares that must be held by Indonesian
shareholders are all directly or indirectly held by Indonesian
conduct an initial public offering, we presume with a minimum
free float of 20 per cent.
Since many joint venture insurance companies operating in
Indonesia are currently fully controlled by foreign investors
through utilising a dual-layer PMA structure to own shares in
excess of the foreign direct investment limit of 80 per cent, this
change in law could have a major impact.
Single presence policy
The new law also introduces a single presence policy for the
insurance sector. Under the new regime, a person or other legal
entity can, at any time, only be a controlling shareholder in one
life insurance company, one general insurance company, one
reinsurance company, one sharia life insurance company, one sharia
general insurance company and/or one sharia reinsurance company.
Such restriction will not apply to the Indonesian Government.
Shareholders with controlling interests in more than one such
insurance company have three years to comply. It follows that
several prominent global insurers presently operating in Indonesia
will need to sell or merge their Indonesian operations in order to
comply with this requirement.
Other noteworthy developments flowing from the New Insurance
Insurance and reinsurance companies must separate into a
stand-alone entity all sharia divisions within ten years from the
enactment of the New Insurance Law, or when the sharia component
exceeds 50 per cent of the total insurance portfolio, whichever is
The insurance for any asset or risk located in Indonesia must
be placed with a local insurer, irrespective of ownership of that
asset or responsibility for a risk, unless no local insurer is able
or willing to underwrite the risk. This removes the previous
concession that allowed foreign entities to purchase insurance from
A new policy assurance programme replaces the existing
mandatory guarantee fund, with the aim of providing protection to
policyholders in case their insurer is liquidated or has its
Insurance and reinsurance companies must optimise domestic
capacity. In other words, domestic insurers and reinsurers must
provide local reinsurance coverage 'as far as possible'.
The intention is to encourage all insurers and reinsurers (both
conventional and sharia) to assist with the expansion of the local
1The dual-layer PMA structure relied on
Article 8(1)(a) of the Old Insurance Law. The rationale is that (a)
being a limited liability company incorporated in Indonesia, a PMA
company is recognised as an Indonesian legal entity under
Indonesia's Constitution and Company Law, and (b) a dual-layer
PMA structure satisfies the requirement of an 'Indonesian legal
entity fully owned by an Indonesian legal entity' (i.e.,
another PMA company). Accordingly, a dual-layer PMA structure is
adequate to qualify as an Indonesian shareholder of an insurance
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The failure of a party to call a witness does not necessarily give rise to an adverse inference being drawn in accordance with Jones v Dunkel (1959) 101 CLR 298. An unfavourable inference is drawn only if evidence otherwise provides a basis on which that unfavourable inference can be drawn.
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